What will happen if Microsoft cuts XBox One Price by $100

A security analyst from Wedbush securities thinks Microsoft must cut its XBox One price from $499 to $399. The reason? Market share and possible revenue from increased footprint.

“The reason Sony beats Microsoft is solely the price,” Michael Pachter, a technology analyst with Wedbush Securities said.

Speaking at the Game Monetization Summit in San Francisco, the outspoken analyst predicted that the PS4 will go on to sell between 100 and 120 million units, compared with around 90 million Xbox One consoles he says will be sold during the device’s lifecycle.

He added: “Microsoft loses the next generation unless they cut price. If Microsoft drops its price to $399, I expect the sales to be equal to the PS4.”

By his numbers the total market (let us ignore Wii here) is  210 million units (using 90 and high end of 100-120 million estimate). And if his prediction of XBox One  sales equalling PS4 comes true, each would garner 105 million units over their device lifecycle (sic).

With $100 price cut, Microsoft would lose $9 billion in pure profit (that is the $100 per unit lost on 90 million units). It would gain 15 million more units because of the price cut. Let us assume at $399 price tag they are breaking even on the device.

That means those 15 million units need to make up for the $9 billion profits lost from the price cuts. That is $600 in lifetime profit (not revenue) from each of those 15 million units. Let us give a generous gross margin of 50% on games, media, royalties, add-ons and other subscriptions sold from those additional 15 million units. That comes to $1200 revenue per customer over their lifetime.

If an average user holds on to a device for 5 years (generous estimate), that is a $240 per year spend on games and extras. How realistic is that? How about we try to test this by using these numbers to estimate the entire market.

If these 15 million new customers can generate $240 revenue per year so can every one of the 105 million customers. So total incremental sales from games and extra from 115 million Xbox one customers  will be $27.6 billion a year.

$27.6 billion a year for Microsoft alone just from games and extras while the entire video game market including consoles and software is $66 billion a year (growing just 2% a year).  And as a reference Microsoft made $10 billion in total revenues (including consoles, gaming software, accessories and royalties).

Now you tell me if Microsoft should listen to the analyst recommendation of $100 price cut for capturing future bigger profit?