Sony's nightmare scenario
Reports all across the web have suggested that Microsoft will lower the price of the XBOX 360 game console sooner rather than later. This report claims the reduction will be on the order of $100.00 for the Core edition, bringing the price down to $199.00 for a base XBOX 360 unit (which would imply that the complete package with wireless controller and hard drive would cost $299.00).
Of course, this hasn't been confirmed, but the trends are certainly there, and Microsoft has managed to reduce costs considerably since release. It's not a question of "if" there will be an XBOX 360 price reduction, but "when."
To my mind, though, a Microsoft that is first to the price reduction punch is a nightmare scenario for Sony. Though Nintendo might be the current sales leader (trumping both PS3 and XBOX monthly sales), from a competitive standpoint, XBOX 360 is more the direct competitor (at least outside Japan). Both target hard core gamers, and both offer more performance and graphics capability than the lower-cost Nintendo Wii.
An even lower cost XBOX 360 with a larger selection of games and larger installed base is a situation to which Sony will not be able to respond. Sony is limited in how much it can reduce the price of the PS3. They might try, but the higher cost of the PS3 (partly driven by the costs of the mandatory integrated BluRay player) limits their maneuverability. Sony's PlayStation group has been laying people off, and though PS2 still sells well, that isn't sustainable long-term.
What effect a lower XBOX 360 price has on the relative balance of sales between Nintendo and XBOX is up for grabs. Nintendo, through its innovative controller, has managed to unlock untapped market segments, moving far beyond hard core gamers to include people who normally wouldn't play games very often. On the other hand, XBOX 360 has more graphics horsepower and the leading game play network in the form of XBOX Live. XBOX 360 doesn't have the Wii's motion controller (yet), but the Wii can't manage the high end HD graphics of the XBOX 360. Both approaches have merit, which means that, though the consoles compete, they are more complementary than the XBOX 360 is with the PS3.
Once the price difference is reduced, I think that will become more apparent.
As I've explained in past blogs, this does not bode well for Sony's other battle - HD-DVD vs. BluRay. BluRay's current success rests almost entirely on sales of the PS3. If the PS3 founders as a game console, HD-DVD's prospects are increased considerably.