Analysts: PS3 Price Cut Puts Nintendo On The Ropes

After facing months of mounting price pressure, Sony at last knocked $100 off the price of its hardware platform with the unveiling of the new PlayStation 3 Slim. As the company strives to regain ground in the console war -- alongside an uncertain outlook for the industry's holiday season -- what ramifications will the move have on the hardware market? EEDAR's Jesse Divnich says Sony is "finally" positioned much more competitively in the hardware space. "In terms of value, the PlayStation 3 is a superior hardware product in comparison to the Xbox 360," he points out. But Divnich says that with so many other factors at play besides equipment comparisons, there won't be a sudden miracle shift in Sony's favor. "Nevertheless, the PlayStation 3 price cut will act as a positive catalyst that will close the sales gap between the PlayStation 3 and Xbox 360," he predicts. Install Base Boost Wedbush Morgan analyst Michael Pachter tells Gamasutra the price cut can break the PS3's depressed trend for the year, but it'll have to do more than that. "Last year, the PS3 averaged around 240,000 per month in the January – October period, while this year, it’s averaging closer to 135,000 for the last several months," Pachter points out. "There is no question that a 25 percent price cut will drive sales way above this 135,000 level, but the acid test is whether sales rise above the 240,000 level," he says. "I think it’s likely that sales go to 240,000, which will look like a 60 percent gain, but am not as sure that sales will go higher than that until holiday." Kaufman Bros. Todd Mitchell expects a modest boost for PS3 sales ahead of the holiday season, as Sony is likely to engage in "aggressive promotions" to flush inventory of the current model PS3. This could raise sales to around 140,000 units per month in early fall, he suggests. How Much Will Software Benefit? Mitchell asserts it's third-party publishers who stand to benefit most from Sony's move. This is particularly true for core titles like Madden and FIFA's current-year editions, and the major holiday release of Modern Warfare 2 "could see an even larger benefit," thanks to its Christmas timing. EEDAR disagrees, however, and doesn't think price cuts will trigger significant software sales increases for the holiday -- certainly not enough to meaningfully impact the industry's present negative growth trend. "Even if the price cuts from both systems increase hardware sales by over 1 million units through the next six months, that would likely add an additional $200 million to the software bucket and would only increase 2009 sales by about 2 percent over current trend; hardly a significant boost," says Divnich. "The true benefit to software sales from a hardware price cut are typically realized in the long-term, [not] over the short-term." What Will Sony's Rivals Do Next? Pachter says Microsoft will take a wait-and-see approach. "Last year, they sold around the same 240,000 per month, so if they see sales drop to 150,000 or below, I think that they will likely respond with a $50 cut in mid-November," he predicts. "If they continue to sell more than 200,000, they will probably wait till early next year, maybe even until E3." On the other hand, EEDAR's Divnich expects Microsoft to announce very soon -- possibly "in the next week," that it will take the widely-rumored step of eliminating the $299 Xbox 360 Pro SKU in favor of offering the Elite SKU for the same price. This, however, is a "pseudo price drop" in Divnich's view: "It is no different from Lexus introducing their 2010 models at the 2009 prices and clearing out their 2009 inventories," he says. A Threat To Wii? Analysts universally agree that Nintendo is the one most at risk. Mitchell says the company is "struggling to keep the Wii relevant," and Pachter expects the pressure to increase on the company now that the two next-gen consoles, at $299, represent a better consumer value than the Wii -- which is now only $50 less. "I think that they may see sales suffer, and certainly will see sales down year-over-year," says Pachter. "So we have to see if they cut, unbundle and cut, or rebundle (with Wii Sports Resort plus Wii Motion Plus). They’re hard to figure out." "While the target audience for the two platforms varies greatly, some consumers will face a tough decision to purchase the Wii with outdated processing power or the PlayStation 3 with a built-in Blu-Ray player," says Divnich. "However, the market size of those actually debating between a PlayStation 3 and a Nintendo Wii is relatively small." New Industry Standards? Finally, EEDAR's Divnich thinks this price cut has wider-ranging implications for the way consoles will compete going forward, calling $299 the "new standard" for next-gen console pricing for at least the next year. "Both Sony and Microsoft are acting like 12th round boxers, so exhausted (in this case, financially exhausted) over the three year battle for next-generation supremacy that neither are likely to deviate from the $299 price point for some time," he says. "It is possible that both consoles may reach a $249 price point 12 months from now, but that will likely be the lowest prices will get in the next two years." With price parity largely achieved among the console contenders, the focus for each platform-holder will naturally become differentiating from one another and creating additional value adds through services, Divnich says. "Both will continue to increase the size of their hard-drives and likely add additional hardware and software features to appeal to consumers," says Divnich -- for example, one possibility is for the platform-holders to include their respective next-stage motion control schemes as standard pack-ins for hardware sold beginning in 2011.