Microsoft Corp may have achieved a coup by lowering the retail price of its Xbox video-game machine in Europe by a fifth, forcing rival console makers Sony Corp and Nintendo Co to follow, analysts say.
Microsoft, the second-biggest seller of video-game machines in the US, yesterday said it will begin selling the Xbox immediately for 199.99 euros (US$215.50) in European countries using the common currency and £129.99 pounds (US$204) in the UK.
Analysts say the price cut highlights Microsoft's desire to edge out Nintendo Co's GameCube console in Europe and solidify the No. 2 position behind Sony Corp's PlayStation 2. That Microsoft, which had a US$9 billion of profit in the 12 months ending last year, is the first game console maker to cut prices this year is also proof the company is committed to gaining more users, whatever the cost, analysts said.
"Last year, Sony outsmarted Microsoft by cutting prices first," said Soichiro Fukuda, an analyst with Nikko Citigroup in Tokyo. "It will be interesting to see how Sony responds."
Microsoft's price cut comes a month ahead of the Electronic Entertainment Expo, the annual video-game trade show when video-game companies display their latest products. Last year, all three console makers lowered the prices of their machines in the US ahead of the trade show.
Kyoto-based Nintendo's shares pared losses on Thursday after Credit Suisse First Boston analyst Jay Defibaugh wrote a note to clients informing them of the Xbox price cut ahead of the official announcement. Nintendo's shares were down 2.5 percent as of 3pm in Osaka after earlier declining as much as 3.4 percent.
The shares of Sony, whose PlayStation 2 dominates the console market with more than 50 million units sold, may decline in reaction to Microsoft's decision, analysts said. Sony's shares yesterday fell 2.7 percent to ¥3,910 (US$32.59).
Traditionally, console makers have used price cuts to stimulate sales during slow times of the year or to make aging machines more appealing. Sony's PlayStation 2 is more than three years old. Microsoft's Xbox and Nintendo's GameCube will be two years old at the end of this year.
Cutting prices can dent earnings since most of the console makers lose money on each game box they sell, reasoning that higher-margin software sales will offset any hardware losses.
For example, Microsoft loses about US$70 on each Xbox it sells, Banc of America Securities Inc analyst Bob Austrian said in a research note to clients in December.
To cut costs and fatten margins, console makers have been shifting production to countries where labor costs are lower.
Last month, Sony Computer Entertainment Inc, Sony's game unit, said it would start producing all its PlayStation 2s at two plants run by Taiwanese companies Hon Hai Precision Industry Co and Asustek Computer Inc.
Microsoft last year started making the Xbox at a Flextronics International Ltd plant in China. In May last year, Nintendo said it would shift production of its GameCube to China.
Nintendo, whose shares have lost about half their value the past year, makes 70 percent of its GameCubes in China.
Microsoft's price cut in Europe brings the Xbox in line with the official price of Nintendo's GameCube in the UK Nintendo, which earlier this week said console sales lagged its forecasts by about half last fiscal year, may be the first of the console makers to respond to Microsoft's decision, analysts said.
Microsoft has sold more than 2 million consoles in Europe, placing it ahead of Nintendo's GameCube, Microsoft said in a statement yesterday.
Worldwide, Xbox sales are expected to total about 9 million units by the end of June, Microsoft forecasts. On Monday, Nintendo said it sold a weaker-than-expected 5.6 million GameCubes in the fiscal year ended March 31, adding to the 3.8 million sold the year before.
"It will be the two companies going against each other," said Hirotoshi Murakami, an analyst with Mitsubishi Securities Co. "Microsoft doesn't want to see a slowdown in sales momentum."
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