Next-Gen Price War Breaks Out

This month is something of a landmark in the lives of the next-generation consoles - with Microsoft's slashing of Xbox 360 prices in Europe on Friday 14th March representing the first straightforward price cut of the generation.

Certainly, there have been price movements before now - but for the most part, they have been obfuscated by the introduction of new hardware bundles to disguise the drops. Microsoft's prior cuts have been minor and largely unheralded, while Sony's big drop shortly after the launch of the PS3 was covered up with a major new hardware bundle and, subsequently, with the launch of the 40GB model - sans backward compatibility, much to the annoyance of many vociferous consumers.

Only Nintendo hasn't budged an inch on price since the launch of the Wii - but even taking into account the various shifts and adjustments we've seen in the SKU plans and associated prices of the next-gen machines, prices have stayed remarkably stable thus far in the generation. It's fair, then, to make the assertion that this week's cut is the first straight-out shaving of pounds and Euros off the price point of a next-gen machine.

Cutting Back

The psychology behind price cuts in general is fairly straightforward. By knocking money off the asking price, consoles open up new segments of the market - consumers who wouldn't have previously considered investing in the hardware, but who will now be enticed by a combination of lower prices and a more mature line-up of software. Indeed, the inevitability of console price cuts has created a whole group of savvy consumers who recognise that the best value for money won't be had until a couple of years into a console's lifespan, and are willing to wait for the price drops before handing over their money.

As such, price cuts inevitably bring about a spike in sales - something Microsoft will certainly be hoping for after a somewhat slow start to the year. Looking back at historical chart data, it's obvious that well-timed price drops tap into a pent-up demand in the market, leading to weeks of high sales from consumers who had been holding off on their purchase until the cut.

This effect, when timed especially well, can lead to a somewhat longer-term snowball effect that drives console sales for some months. It's for this reason that Sony has traditionally cut its hardware prices around September - the flood of "Now Only...", "Reduced To..." and "Save..." tags on its stock at retail, just as the Christmas shopping season starts to rumble into gear, has unquestionably helped consoles like the PS2 to achieve their record holiday sales.

March, by comparison, is a bit of an off-season - but that's not to say that a similar reasoning doesn't underlie Microsoft's decision. Certainly, the company will be feeling that it needs to open up new consumer demographics for the console in order to prevent any slowdown in sales - that's not in question, and it's the main motivation behind these cuts. Putting an SKU (the Arcade console) onto the market that undercuts Nintendo's Wii is also a canny move, although it's probably optimistic to expect that it's going to eat seriously into Nintendo's market, especially with peerless mass-market products like Wii Fit on the horizon.