Price cuts work. In September, Sony’s (NYSE:SNE) PS3 outsold the Microsoft (NASDAQ:MSFT) Xbox 360 and Nintendo Wii for the first time in recent memory.

Industry research firm NPD said that the video game industry which includes both consoles and games, had sales of $1.28 billion in September, up 1% from a year ago.

Sony shipped 491,800 PS3 units in September, moving ahead of Nintendo’s Wii which shipped 462,800 units, and Microsoft’s Xbox 360 which dropped to third place with 352,600 units shipped.

Microsoft and Sony both cut the prices of most of their consoles by $100 in August. That helped sales of the PS3 move up by more than 100%  from September 2008.

Sales of consoles are higher, but are profits? The component costs for video game consoles have probably dropped over the last year, and certainly have dropped since  the current generation of players was introduced. But, the price wars among the three major companies in the industry look eerily similar to the e-book prices wars among Amazon (NASDAQ:AMZN), Wal-Mart (NYSE:WMT), and Best Buy (NYSE:BBY) Price discounts may help drive up holiday sales but the concept of losing money on every sale and making it up on volume by definition never works.

It will not be long before investors know how much price cuts have hurt the bottom lines at the three companies because they are all publicly traded. Shareholders won’t be happy if revenues for gaming move up sharply but margins fall apart.

Douglas A. McIntyre

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