X Factor

With last week's US price cut now in force, Microsoft's one-year head-start in the console race has shown itself once again. The Xbox 360 is now far enough into its lifespan for significant price-cuts to start filtering through, and as a result the Xbox 360 Arcade system is now the cheapest current-generation console on the market in both North America and Europe.

Admittedly, the 360 Arcade remains a pretty disappointing prospect for most consumers. With the forthcoming Xbox 360 firmware update set to introduce hard drive installation for games, the drive's importance to the system continues to grow - it's already essential for many game demos, for the Xbox movie rental service, and even for some Xbox Live Arcade titles.

As such, the appeal of the Arcade model is limited - speaking personally, the only people I know who have bought Arcade systems did so in order to replace broken 360s, popping their existing hard drives onto the new machine as soon as it was unpacked. This isn't to say that the system doesn't sell to new consumers as well, of course - simply that it remains disappointingly limited compared to Microsoft's other SKUs, which will restrict its potential audience.

For Microsoft's purposes, however, the Arcade delivers a powerful PR message. The Xbox 360 is the cheapest home console on the market - cheaper than the Wii, whose massive success so far has totally eclipsed the race between Xbox 360 and PlayStation 3. Perhaps it's even cheap enough to pick up some punters from the real budget end of the market, which remains dominated by the venerable PlayStation 2.

The inevitable sales spike from this price-cut is already being hailed, unsurprisingly enough. However, as with any price-cut, the really important aspect is the long term effect, not the immediate spike. The spike simply represents pent-up demand from consumers who were already committed to a purchase, but had waited for a lower price point. The question now is whether uncommitted consumers will be swayed by the new price tag.

With Christmas approaching, that question is absolutely vital for Microsoft's ambitions. 2008 has by no means been a terrible year for the Xbox 360 so far, but to some extent the console's fortunes have been treading water since last Christmas. The Wii's sales lead over the 360 has grown rapidly - there's now a ten-million-unit gap to fill - and despite the dire predictions of some within the industry, the Wii is still constrained by supply rather than demand. The 360's own lead over the PS3, meanwhile, has been slowly eroded - PS3 is between 1 and 1.5 million units closer to the 360's installed base today than it was at the start of the year.

Microsoft will be hoping that the strong retail presence afforded by being the cheapest console on the current-gen market can form the centrepiece of a raft of initiatives designed to drive the Xbox 360 forward once again. The forthcoming Dashboard update, introducing Mii-style avatars and a brand new interface, is part of that drive. So too is family-friendly software like the Lips karaoke game, or Rare's Banjo-Kazooie: Nuts & Bolts - while Gears of War 2 will provide the heart of the console's offering for existing hardcore fans.