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Bad Economy Means Price Freeze For Gaming Consoles

A lot of people were looking for some good pricing news to come out of this year's Electronic Entertainment Expo in Los Angeles.

Developers, publishers, analysts and consumers. Everyone was hoping to hear Sony announce the long awaited price cut for the PlayStation 3. And more than a few were hoping Nintendo might play a wildcard and drop the price of the Wii.

Neither happened — and because of that, we’re unlikely to see any improvement in industry sales figures or publisher earnings in the immediate future.

Sony Playstation 3
Source: Sony
Sony Playstation 3

While a price cut by Sony leading in to the holiday period is now a virtual certainty, the lack of an immediate price cut now takes the wind out of the industry’s sales, after gaming companies have spent the past week trying to revive enthusiasm.

“It’s our view that a price reduction is good for every one, because it gets more hardware into people’s hands and that sells more software,” says Strauss Zelnick, chairman of the board at Take Two Interactive Software. “Look, this is a razor and razorblades business. You want the razor to be as inexpensive as possible.”

Graham Hopper, executive vice president and general manager of Disney Interactive Studios, agrees.

“I would have liked to have seen [a price cut], but I didn’t necessary expect one,” he says. “I would be shocked if there’s not a price cut by the end of the year.”

Typically at this point in the console cycle, prices have already been cut on all systems. This generation, though, is different in a couple of ways.

For Sony, the PS3 is still an incredibly expensive system to make. The company loses a reported $40 for each PS3 it sells. Increasing that loss to $140 (if the company were to capitulate to the loud calls for a $100 — rather than $50 — price cut) would outrage shareholders, who are not happy with the company’s recent net loss.

For Nintendo, the Wii has proven so popular (with retailers unable to keep it on store shelves nearly two years after its release) that is has had no incentive to lower the price. Unlike Sony, the company does not lose money on its hardware sales. It’s only recently that sales momentum has started to lag.

To date, the only console maker to have cut prices is Microsoft, which lowered the base model of the Xbox 360 to $199 last year. Sales of the system immediately surged.

Sales of the PS3, meanwhile, have been sluggish. And Wii sales have dropped off considerably in recent months.

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Nintendo’s president Satoru Iwata says the company has no current plans for a price cut, as it is confident its software lineup in the back half of the year is sufficiently strong to reengage sales. He also rejects the traditional thinking that price cuts should be expected after a system has been on store shelves for a couple of years.

“I have to say that if there is some common sense in this industry that game consoles are supposed to cut [their] price regularly, I have some qualms about that,” he says.

The situation is a bit different at Sony, where the PlayStation 3 has failed to repeat the successes of its predecessor. Analysts attribute the company’s third-place status to the PS3’s price.

The new favorite thinking about a possible price cut window for the company is sometime in August, just before the launch of Electronic Arts latest “Madden” NFL football game.

Sony, as you might guess, denies an imminent price cut.

“I can’t remember a day that people who have no stake in the profitability of our company have called for a price cut,” says Jack Tretton, President and CEO of Sony Computer Entertainment of America. “I think everybody but us would love to see it for free. … But we know how to manage product lifecycles.”

Another reason Sony has so adamantly denied a price cut: Acknowledging one in advance would flat line sales of the system until the cut came.

Microsoft, meanwhile, is unlikely to further reduce prices. Still, it says, it’s expecting price wars to erupt before the end of the year.

“We expect Sony will have to reduce prices at some point,” says Shane Kim, corporate vice president for strategy and business development at Microsoft's game division. “Whether it’s this fall or earlier, we’re prepared for it.”

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