Xbox price about to drop, says analyst

Microsoft will cut the price of its Xbox game console to $149 next week, according to an analyst covering the market.

Piper Jaffray analyst Tony Gikas wrote in a research note that Microsoft will introduce the widely expected price cut on Tuesday, shaving $30 off the current Xbox price tag of $179.

But that's still $20 above where the Xbox price needs to be in order to build sales momentum and boost the console's user base, Gikas wrote on Friday.

"Xbox management must be under pressure to limit losses on its Xbox hardware system," he wrote. "We think the $149 price point is a risky undertaking that will limit unit sales without additional promotions or killer applications to drive interest. We had been expecting the $129 price point to drive hardware and ultimately software sales during the next 12 months. We doubt a $149 price point will be enough to drive (2004) hardware unit sales above 2003 levels."

Gikas predicted that Sony would respond in mid-April with an identical price cut for its PlayStation 2 console. Any further drops in price will come next year, he said, as both companies prepare for the launch of new consoles and scramble to boost interest in current hardware. "We think the most powerful hardware price point is $99, and that could come during the first half of 2005," Gikas wrote.

The Xbox entered the market several years ago at $300, but Microsoft has steadily reduced the price, despite ongoing losses in the Xbox division.

Microsoft executives have declined to comment on future price actions. But Robbie Bach, a senior vice president in Microsoft's Xbox division, told CNET News.com earlier this week that its price decisions were guided more by market share goals than by profitability.

"I can change the economics relatively quickly, because our costs continue to come down," he said. "If we wanted to turn a profit quicker, we'd stop lowering the price. What we do is, we look at the business every quarter. We look at: Where we do want the installed base to be? What does that imply for what the price needs to be? What investment (do) we want to make? Right now, it's fair to say we're in a market share mode, and that will probably continue."