Microsoft to Slash Xbox Price to $199

Microsoft Corp. today will slice the price of its Xbox video game console by one-third to $199, matching a similar move a day earlier by rival Sony Corp. to lower its PlayStation 2 price.

The announcement officially launches a brutal price war between two well-heeled companies battling for dominance in the ultra-competitive $27-billion global games market.

The Microsoft move also wipes out the edge Nintendo Co. had in marketing its GameCube console, which until Monday was $100 lower than both Xbox and PS2 at $199. Nintendo officials said the Japanese game giant has no plans to change the price of its GameCube.

“Nintendo is in a position of strength,” said Perrin Kaplan, a Nintendo spokeswoman. “Our product is selling very well.”

Microsoft had planned to make its announcement next week at the Electronic Entertainment Expo, the industry’s biggest trade show. But Sony’s move forced the Redmond, Wash., software giant to act quickly.

“Microsoft had to make this move today,” said Michael Pachter, director of research at Wedbush Morgan Securities in Los Angeles. “They can’t let Sony walk all over them.”

The drop in hardware prices benefits game publishers, who stand to benefit from an accelerated spread of consoles into more homes, Pachter said.

“Obviously, it’s great news for all game publishers,” said Brian Farrell, chief executive of THQ Inc., a major game publisher based in Calabasas.

“THQ really shines in the mass market, so this move to $199 will trigger more mass market gamers to buy consoles,” he said.

Consumers also stand to gain from a price war. Drops in hardware prices usually go in tandem with lowered software prices. Currently, top-tier games debut at $49.99.

Many publishers and analysts expect that price to hit $39.99 by this holiday or early next year. Sony already plans to slash the retail price of marquee titles produced in-house to $39.99, said Molly Smith, a Sony spokeswoman. Microsoft said it will not lower the price of its signature games, currently $49.99.

Although the price war squeezes margins for Microsoft and Sony, the two companies ultimately benefit from selling more consoles since each reap royalties on every game sold for their boxes.

The key for Sony and Microsoft is to cut their manufacturing costs as quickly as possible to keep up with the price war.

As a result, Microsoft on Tuesday also said it will shift the production of Xboxes from Hungary to China, where the costs are expected to be “substantially” lower, said Todd Holmdahl, Microsoft’s general manager of Xbox hardware.

Flextronics International Ltd., which makes the Xbox for Microsoft, will move production to Doumen, China, in June, where the cost of transporting parts is far less, said Jim Sacherman, vice president of Flextronics marketing in San Jose.

Microsoft will continue to make Xboxes for the North American market in Guadalajara, Mexico, but will make boxes for the European and Asian markets from China.