May 14, 2002 8:50 AM PDT

Sony shaves price of PlayStation 2

Sony blinked first.

The electronics giant responded Tuesday to growing price pressure in the video game industry by cutting the North American price of its PlayStation 2 game console by $100, a move that had been widely expected to happen around next week's Electronic Entertainment Expo trade show.

Effective immediately, the PS2 will sell for $199, the company announced. The move puts further pressure on Microsoft to cut the price of its Xbox, which had been equal to the PS2 at $299.

Nintendo said in a statement that it had no plans to lower the $199 North American price of the GameCube. "The Nintendo GameCube was launched at a price point attractive to the mass market, and the system and software continue to experience strong and growing sales," the statement said.

Sony will be better able to absorb the cost of a price cut, according to analysts. The PlayStation 2 has been on the market for almost two years, with worldwide sales totaling 30 million units. Analysts have said that the electronics giant has been able to significantly reduce manufacturing costs during that time.

The Xbox is less than 6 months old and was expensive to manufacture in the first place, meaning a price cut would likely add to the significant subsidy Microsoft pays to have the console on the market.

Microsoft said in a statement that it would wait until next week to make any announcements on Xbox strategy.

"It is interesting that Sony has chosen to make such a major announcement when we are so close to E3," the company said in a statement. "They appear to be changing strategy mid-stream, having just denied plans to drop price last week. As for Microsoft, all announcements regarding the state of the Xbox business, platform, games and more will be made at the scheduled media briefing in Los Angeles on...May 20."

Gartner research director P.J. McNealy predicted that Microsoft will quickly match the price cut. "Microsoft will try to remain competitive in the U.S.," he said. "We've already seen they're willing to eat the cash."

Matt Rosoff, an analyst for research firm Directions on Microsoft, said manufacturing costs are unlikely to deter Microsoft from cutting prices.

"If they sell between 9 (million) and 11 million units and take a $150 loss on each box, overall that's still not that big a hit for them," he said. "I think at this point the impact on their bottom line is minimal, and that's not what they're concerned about. What they're really paying attention to is building up the installed base."

Sony extended the price cuts to other hardware items. The PS One, the remodeled original version of the PlayStation, will now sell for $49, down from $99. The prices of PS2 accessories were also reduced. The most popular add-ons--memory cards for storing game data and extra controllers--now go for $24, down from $34.

Game publishers are counting on hardware price cuts to boost software sales this year.

"I think most research shows $199 is the right price for consumers to really start opening their wallets," said Brian Farrell, CEO of game publisher THQ. "It'll get the market moving to...where everybody thinks it should be. When Sony cut the price last fall in Europe, that moved the needle quite a bit; sell-through almost tripled the first few weeks."

 

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