Microsoft and Sony cut prices of gaming consoles

By Lucas van Grinsven and Bernhard Warner

AMSTERDAM/LONDON : U.S.-based Microsoft and Japan's Sony announced on Wednesday fresh price cuts for their video games consoles in Europe, adding fuel to an already contentious battle for market share. Within an hour of each other, first Sony Computer Entertainment Europe (SCEE), a unit of Sony Corp, and then Microsoft said they would cut the suggested retail price of their consoles to around 249 euros ($244.80), from 299 euros.

A Nintendo spokeswoman said the company had no plans now to change the price of GameCube in Europe, already lower at 199 euros. GameCube is the second-best selling console after PlayStation 2 and before Xbox. "We expected Microsoft to wait for Sony," said Stuart Dinsey, managing editor of trade publication MCV Games Trade Weekly.

Sony, which has a sizeable lead in Europe's video game market with, by some industry estimates, a 65 percent share of all game console sales, is the only manufacturer with the clout to dictate market prices, analysts say. "When you (Microsoft) are not the market leader, you have to stay competitive some way," Dinsey said in explaining its speedy response, the second cut since April in Europe.

Microsoft's Sandy Duncan, in charge of Xbox in the European market, said it had planned a price cut in the run-up to the Christmas holiday season, adding it was a little early. A recent study by industry news letter Games Analyst estimates European video game hardware and software sales will reach $7.5 billion in 2002. Other estimates have placed total global sales for the booming sector at $31 billion.

Retailers cheer

Console makers traditionally lose money on the sales of their hardware, which they make up with some $10 royalty on every game sold. Games sell at between $40 and $50 and gamers typically buy four to five titles a year. The 17 percent price cuts for Xbox and PlayStation 2 will take effect from Friday. Analysts had expected the two firms to drop prices in advance of Christmas.

"It's part of the cycle," said a New York-based consumer software analyst at a major investment bank. Lower console prices spur video games sales, but in early New York trading the world's largest independent computer games producer Electronic Arts fell 1.5 percent to $63.30, in line with the tech-heavy Nasdaq composite index. Microsoft fell 1.1 percent to $50.29.

In Britain, Europe's biggest gaming market, Sony's PlayStation 2 will cost 169.99 pounds ($261.10), while Microsoft's Xbox will be on sale for 159.99 pounds.

The price cuts, which come on the eve of the ECTS video game developers' conference in London, follow 33 percent price cuts for the U.S. market in late May, when Sony and Microsoft reduced the prices of their consoles to $199 from $299. The machines are more expensive in Europe partly because of distribution and "localization" costs. European suggested retail prices also include VAT.

Showmanship

Sony, which is expected to provide an updated sales figure on Thursday at ECTS, will also detail a multi-million euro advertising campaign for PS2. Nintendo, which is not attending the ECTS show this year, will release a trading update on Thursday too.

Microsoft launched the Xbox in November last year in the U.S. market and then in March introduced it in Europe for 479 euros. One month later it cut the price to 299 euros in an attempt to boost tepid sales. Sony has shipped 33 million PS2 units worldwide since its Japanese launch in March 2000. By comparison Microsoft said last month it had sold 3.9 million units worldwide in the 7-1/2 months to June 30.

Due to advanced graphics chips, a built-in broadband modem and a hard drive, the Xbox is relatively expensive to produce compared with PS2. Though economies of scale are improving, Microsoft still loses money on each console sold and it aims to make up the difference in higher-margin video game sales.

Analysts in May estimated that Microsoft was losing between $76 and $105 on every Xbox sold. Microsoft has since concentrated production and is buying cheaper components, but analysts view it as less competitive than Sony or Nintendo.

© Reuters