Game Console Prices Expected to Fall

By ALEX PHAM

Feb. 18, 2002 12 AM PT

TIMES STAFF WRITER

An intense price war is expected this year between the three major game console makers that would slash prices by up to a third and increase already cutthroat competition in the video game industry, analysts said.

Although Sony Computer Entertainment of America, Microsoft Corp. and Nintendo Co. would not comment on plans to cut prices of their consoles this year, many industry analysts and top game company executives are expecting such a move as early as May and certainly before the holiday season.

THQ Inc. Chief Executive Brian Farrell last week even staked his 2002 business forecast on a one-third drop in console prices.

“I’d say it’s extremely likely in 2002” that prices will drop, said P.J. McNealy, senior analyst at Gartner Inc., a market research firm in San Jose. “That’s been the historical pattern in this industry.”

Microsoft’s Xbox and Sony’s PlayStation 2 are priced at $299, but many in the industry speculate that their prices will drop to match Nintendo’s GameCube, which is selling for $199.

Though a price cut would be good for consumers, it would be even better for companies that make games for these consoles. Lower prices spur sales of consoles, which in turn create more customers for software companies.

For hardware makers, the move can make sense because they generally make little if any money selling boxes. The real money for Sony, Microsoft and Nintendo is in royalty payments made by software companies for each game sold.

Hence, both sides stand to gain by having as many consoles in as many homes as possible, a strategy often referred to as the “razors and blades” model.

“You give away the razors to make money on the blades,” said Larry Probst, chief executive of Electronic Arts Inc., the world’s largest independent publisher of video games.

Activision Inc. Chief Executive Bobby Kotick anticipates that a price cut could come this fall. Others believe reductions could be announced in May at the Electronic Entertainment Expo in Los Angeles.

Hardware manufacturers must weigh a number of factors in timing a price cut: the pace of sales at current prices, prices of rival consoles, market share of competitors and the cost of making the devices.

Each Xbox, for example, costs Microsoft more than $400 to make and retails for $299. The cash-rich Redmond., Wash., company has been willing to swallow the difference to sell as many boxes as possible.

Over time, manufacturing costs will decline as prices for parts fall and big-ticket expenses are spread over larger console volumes.

Sony, which came out with its PS2 in 2000, has a two-year head start over its rivals in trimming expenses.

For that reason, most industry observers are expecting Sony to strike first with a price cut, forcing Microsoft to follow suit.

“Sony has indicated that it is now making decent profits on the hardware, which suggests they’re in a better position to cut their price,” said Shawn Milne, analyst with SoundView Technology Group in San Francisco.

Simon Price, game industry analyst with International Development Group, a market research and consulting firm in San Francisco, said Sony cut the price of its original PlayStation in 1996, a year after it launched the console.

“This time, they’ve been able to maintain the higher price for much longer,” Price said. “If they wait until the fall to make a move, that would mean hanging on to the higher price for nearly two years.”

In addition to timing, the companies must decide how steep their first round of price cuts should be.

“It’s possible that there will be an interim price cut to $249 this summer,” analyst McNealy said. “That way, they have the flexibility to make the call to go down to $199 if they feel more heat during the second half of the year.”

In the past, however, a drop from $299 to $249 hasn’t spurred many consumers to buy consoles.

“The magic price points are $199 and $99,” Probst said. “That’s where you see the big bumps in sales.”

For consumers, the news gets better. Lower hardware prices generally usher in lower software prices. Premier titles sell for around $50 each.

But as consoles creep toward $99, a low point reached by the previous generation of game consoles, a $50 price tag for software becomes more difficult to justify, Probst said. As a result, some executives expect top software prices to drop to $39 this year or next.

“The first couple of years that a new console is out, software prices are around $49.95,” Probst said. “In year three, it gets down to $39.95. And by year five, prices drop to $29.95.”

For some, console price drops can’t happen soon enough.

“The sooner the better, and the lower the better, as far as we’re concerned,” Probst said.

(BEGIN TEXT OF INFOBOX)

Xbox

Maker: Microsoft

Price: $299

Expected new price: $199

CPU: 733-MHz

Intel chip

Total memory:

64 MB

Hard disk: 8 GB