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PS3 Price Cut is Just the Start: GameStop Execs

GameStop executives, who led the call for price reductions on the PlayStation 3 earlier this year, say they were a bit surprised with the timing of Sony's actions this week. But now that Sony has capitulated, they're expecting Microsoft and Nintendo to react.

Sony Playstation 3
Source: Sony
Sony Playstation 3

Sony cut the price of the PS3 to $299 Wednesday, simultaneously introducing a redesigned model of the system.

The move put Microsoft in the unfamiliar position of having the industry's most expensive video game machine — the Xbox 360 Elite, which currently sells for $399. (Microsoft still has the lowest priced machine as well, the Xbox 360 Arcade at $200.) Nintendo , meanwhile, has not adjusted the Wii's price since its launch three years ago.

"We were surprised by the early timing of Sony’s announcement," says Tony Bartel, executive vice president of merchandising and marketing for GameStop . "We honestly expected it later. … We do expect price cuts from the other two manufacturers. And we think Sony’s move will drive up the schedule."

The company declined to speculate on how deep the cuts would be. Analysts believe Microsoft will drop the 'Elite' to $299 and Nintendo will lower the Wii's price by $50.

Lower prices on hardware could drive foot traffic into stores, but GameStop is still rather pessimistic about the remainder of the year. The company on Thursday said it expects same-store sales to decline by 4 percent to 8 percent this year. It also cut its 2009 earnings forecast to $2.40 to $2.64 a share. Previous guidance had been between $2.83 to $2.93 a share.

GameStop's second quarter earnings were off 32 percent from a year ago, due to the weak economy and tough prior-year comparisons.

Despite the dire forecast and the economy, the company is looking for a few bright spots during the holiday sales period. Chief operating office Paul Raines said he expects Activision's "Call of Duty: Modern Warfare 2" to be not only the year's best selling title, but also the best selling game in GameStop's history — beating "Halo 3".

Other expected top sellers, he says, are "Halo 3: ODST," Electronic Arts' "Madden NFL 10," Ubisoft's "Assassin's Creed 2" and "New Super Mario Bros. Wii".

He's a bit less enthusiastic than he was four months ago about some of the big music-based games that are due, however. That includes "The Beatles: Rock Band." While GameStop still expects solid sales, Raines says the game's $249 price point is worrisome in the current environment.

Analysts agree.

"Price points always matter," says Ben Schachter of Broadpoint.AmTech. "When you're in this economy and trying to sell a game for $249, I don’t know what sort of success you're going to have. I don't know… maybe the Beatles fans are that rabid, but that’s a lot these days."

GameStop's bread and butter continues to be the sale of used games, which have a much higher profit margin. Sales of those were up 19 percent in the just completed quarter, although the margin was lower than expected due to promotional activities.

The margins have attracted a slew of competitors in the used space, with Amazon , Wal-Mart and Best Buy all currently running pilot programs exploring game trade-ins and used sales.

Gaines says the impact has been — and should remain — negligible.

"We've had lots of competitors jump into the used business," he says. "We've followed them very closely. We have not seen any impact from those companies in the past quarter and don't expect that will change."