Microsoft (MSFT) has decided that it would rather be the video game market share leader than make a buck at the business.

Redmond cut the price of its Xbox 360 to $199. That drops it from its previous sticker of $279. The action may take some business away from the Sony (SNE) PS3, but it is more clearly aimed at market leader Nintendo which has remained in the front spot for months with its $250 Wii.

According to MarketWatch, "This is a smart move by Microsoft ahead of the holidays, as this makes them the price leader," said Colin Sebastian of Lazard Capital Markets.

There is also a very good chance that the move will put the Microsoft device division back into the red. It struggled for years to make money.

In the fiscal year ending in July, Microsoft made $426 million on $8.1 billion in revenue in the unit it calls "entertainment and devices". It lost a total of $2.3 billion in the operation over the previous two years.

Some of the improvement in revenue at Microsoft’s Xbox empire came from games, primarily Halo 3. It is not at all clear that this income can offset such a huge price drop for the Xbox game console.

Microsoft has never been against losing money to weaken competition. With the holidays coming, it has a chance to best it two large rivals.

The move puts Sony in a tough spot. It has been counting on a resurrection of its games division to help improve the company’s multi-year lackluster earnings performance.

With cash still pouring from its software operations, Microsoft can afford to wage a price war in the video game market.

Douglas A. McIntyre

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