Sony (SNE) PS3 And Microsoft (MSFT) Zune: Does Cutting Price Matter?

Sony’s (SNE) PS3 and Microsoft’s (MSFT) Zune both have the same problem. They substantially under-sell the market leaders. In the case of the Zune, that is Apple’s (AAPL) iPod which has a huge lead. In the case of the PS3, its foe is the Nintnedo Wii. Its lead is only substantial.

Sony (SNE) has cut the price of the PS3 and added new features. The unit will now cost $299 instead of $399. That is a lot of margin to give up in the hopes of getting new sales.

Sony is desperate in a way that Microsoft is not. The PS3 is part of the company’s gaming division which was the flagship of the firm when the PlayStation 2 was it primary product. Sony let Microsoft and Nintendo beat it to the punch with their new consoles. That has cost Sony the respect of a lot of shareholders and analysts. The Zune is quite a different matter. It sales are a very modest part of the “device” division of the world’s largest software company, the division that also sells the Xbox 360. Expectations for the Zune were always low.

Sony cannot take a casual approach to pricing the way that Microsoft can. U.S. video game equipment and software sales fell 29%  to $849 million in July. By product,  Wii sold with 252,500 units, the Xbox 360 202,900 units, and the PS3 sold 121,800 units.

Sony has to cut prices. It is too far behind in the race and has no other options. Microsoft can bring down prices because it has little to lose. The new 16-gigabyte model of the Zune HD will be priced at $219, which is $80 below the comparable iPod. The 32-gigabyte model will be priced $110 below its iPod competition. If Microsoft losses money on each unit and picks up market share, it will be no different than the approach it took to get market share for the Xbox.

Douglas A. McIntyre