Analysis: PlayStation Price Cut A Win For Some, A Threat For Others

So the PlayStation 3 price cut we all suspected was coming at some point this year has finally been announced, and immediately implemented to boot. Now things are going to get interesting. Sony's $50 reduction, positioned as the exclamation point to their Gamescom press conference, will have reverberations throughout the industry over the next couple of months. Let's take a look at some of the ripple effects. First up: Sony itself. Seeing as it had been two years since the company last adjusted the PS3's price, there was almost no question a cut was coming this year. Given the anti-Sony sentiments that were floating around during the PSN hacking incident, there was even some chatter that the company might consider a $100 cut to win back goodwill. That proved unnecessary, thanks in part to a tremendous E3 from the company. And with a holiday lineup that's arguably its strongest in years, the PlayStation is well positioned to (somewhat miraculously) end 2011 on a very high note -- something no one would have thought possible in early May. The move also puts pressure on Microsoft, which has been enjoying king of the hill status for over a year now (with the exception of last December), thanks to the redesigned 360 and the addition of Kinect. July, in fact, was the first month Microsoft saw a year-over-year sales decline since December of 2009. Normally, a company in that position wouldn't feel a lot of pressure to lower its price -- but with the critical nature of momentum this console generation, Microsoft may end up having to cut. The most likely scenario is that, rather than simply lowering the price of a standalone Xbox 360, any price reduction will come to Kinect bundles. Expect a cut of $50, just like Sony. The big question is what will happen with standalone Kinect units? Does Microsoft take this opportunity to try to expand the distribution of its hit peripheral to more of its legacy customers by shaving $25 or $50 off of those as well? Or does it keep its focus on new customer acquisition? Of course, the first -- and best -- action for Microsoft to take is to do nothing. Its 2011 lineup of exclusive titles isn't exactly lacking. And if sales stay steady or are driven higher by those games, it could conceivably push back a price cut until early next year. Still, I wouldn't bet on that. A price cut either coinciding with the release of Gears of War 3 or Halo: Combat Evolved Anniversary seems more likely. Nintendo, meanwhile, has already cut Wii prices -- to a resounding "ho hum" by consumers. (And, let's face it, anyone debating whether to get a Wii or PS3 likely made his or her decision long ago.) The real winners of the price cut are the retail community and third-party publishers. Anything that boosts foot traffic at GameStop, Best Buy and Amazon is a good thing, and such traffic is certainly going to jump as word of the price cut spreads. Meanwhile, shoppers picking up these new systems are likely to grab a legacy title or two in order to build up their catalog of games, especially those past hits that are discounted. Edward Williams of BMO Capital Markets notes that Take-Two and Electronic Arts could be the biggest publishing beneficiaries of the action, since both rely heavily on the PS3 in their revenue models. EA, for instance, has generated 29 percent of its revenues from PS3 titles in the last 12 months, while Take-Two has generated 38 percent of its income from games for the system. Other publishers, like Activision, THQ and Ubisoft hover closer to the 20 percent range. As Nintendo inadvertently demonstrated earlier this year, price cuts don't guarantee a rush at retail. But that momentum I mentioned earlier seems to have shifted in Sony's favor in the past few months – perhaps due to the game lineup and perhaps as a snap-back from the pounding the company took in the spring. What's going to be interesting to see is what sort of impact this has on Sony's overall performance this generation. Will it be able to recapture the glory days – or will Microsoft pull out whatever stops are necessary to maintain its lead? In any event, the console wars are certainly about to get a lot more lively.