Xbox price to drop tonight

Microsoft is to cut the price of its Xbox games console in a bid to halt declining sales but analysts say Sony's PlayStation 2 has little to fear from the move

Microsoft is to announce a price cut on Monday night for its Xbox games console, though analysts say the cut will not be enough to take market share from Sony's PlayStation 2.

Microsoft Australia confirmed on Sunday the timing of an announcement relating to Xbox, after predictions by US analysts during the weekend that a price cut for the games console was imminent.

Spokespeople for Microsoft Australia remained tight-lipped about the details of the announcement, but according to a source within US retail giant Wal-Mart, the store has been told to prepare for the Xbox price drop on Monday night. "We will feature the Xbox price drop to $149 as a Rollback and the price change will drop Monday night to be done Tuesday," said the source.

The source is backed up by Piper Jaffray analyst Tony Gikas, who predicted on Friday 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. While the price cuts are likely to be implemented worldwide, Microsoft UK was not immediately able to comment on how much the cut would affect prices here, where the lowest UK retail price for an Xbox on ZDNet UK's shopping channel is currently £129.25.

The price after the cut will still be $20 above where the Xbox needs to be in order to build sales momentum and boost the console's user base, according to Gikas.

Sales of Xbox consoles have been declining. In its financial results for the second quarter of 2004, which were released on 22 January, Microsoft said shipments of Xbox consoles were 6 percent below their level for the same period a year earlier, shaving $37m off the revenue of the company's Home and Entertainment division. Increased sales of Xbox games helped raise total Xbox revenue by $15m, or 2 percent, to $175m.

In his research note, Gikas wrote that Xbox management must be under pressure to limit losses on its Xbox hardware system. "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.

Robbie Bach, a senior vice president in Microsoft's Xbox division, told CNET last 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." Abby Dinham at ZDNet Australia and David Becker at CNET contributed to this report.