Cutting The Price Of XBox, PS3, and Wii (MSFT)(SEN)

With a recession in full swing, Microsoft (MSFT), Sony (SNE), and Nintendo may have to cut the prices of the Xbox 360, Wii, and PS3. At least that is what the head of Activision (ATVI), the video game company, thinks. He told Reuters "With the rising costs of fuel and food and housing, it is more difficult to go out and buy a $399 console, and I think it’s going to put pressure on the console manufacturers to reduce their prices."

For the game console people, the idea may not be all bad, but it has significant risks. Nintendo’s stock price rise has been based on both the rapid sales of the Wii and its high profit margins. Its market cap is larges than that of all companies in Japan except Toyota (TM). Microsoft’s device division, primarily the Xbox 360, is making money for the first time, after years of losses. Sony, which still has not dug its way out of its own video game disaster, is finally doing well with PS3 sales.

The saving graces of price cuts are derived from the two facts. Higher unit volumes drive down component costs In addition, the console companies make money from video game licenses. Each time a version of Grand Theft Auto IV from Take-Two (TTWO) is sold, either Sony or Microsoft gets a piece. The Wii, PS3, and Xbox 360 have been in production long enough so that parts suppliers are probably charging much less for the bill of materials.

Ultimately, the three console companies may have no choice. Poor consumers want their games, but they may need a little break to get them

Douglas A  McIntyre