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Xbox 360 price cut vs. cost reduction

Kevin Kelly

The San Jose Mercury News has posted an interview with Robbie Bach, President of Microsoft's Entertainment and Devices Division (a title alone that speaks volumes about the structural problems at MS), that has some interesting tidbits in it. Most notable is when Bach says, "Right now we are thinking about how to cost reduce the Xbox 360. That seems to be the first order of business."

It has been rumored for some time now that the Xbox 360 would see a price cut around the holidays, but now that Black Friday and the PlayStation 3 launch have come and gone, you can kiss that one goodbye. What Bach is talking about here is that Microsoft wants to drop the production cost of the 360, in an effort to make it profitable. There's a big difference between cost-reducing and price-cutting. When a manufacturer costs reduces, they're making it cheaper for them to produce something, usually by switching to different vendors or using cheaper materials.

Microsoft promised that they would cost-reduce the Xbox 360 every year, which they've already done this year. The console was rumored to cost Microsoft between $525 and $715 for each unit produced, vs. the current production price of around $329, giving MS a chance to make a small profit on each premium system sold. As they find more cost-reduction options over the next year, that gap should widen. The only time we'll see a price drop on the console itself is either when the PS3 drops theirs, or when the Xbox 720 II Virtual Gameulator comes out. Of course, you can always take Micro Center's deal and get $100 off, your choice.

Microsoft has repeatedly said that the Xbox division won't turn a profit until 2008, although Bach dances around that with statements like, "
Xbox is on the trajectory we thought it would be on. We feel very good about that." There's a difference between a good feeling and black ink, though. It will be interesting to see how Microsoft not only plans to compete with Sony not only in numbers of consoles sold, but where the profits are coming from.

If Microsoft really wants to make a profit, they might think about buying stock in companies that sell red pens if they keep releasing things like the Zune.

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