The video game console makers need to cut their hardware prices if they want to turn around declining retail sales in the U.S., Wedbush analyst Michael Pachter said in a Monday research note.
"In order to sustain a rebound to sales growth, we think it is imperative that the console manufacturers cut price," he stated. "... We expect Microsoft to announce a price cut at this year's E3 Expo in June, and expect Sony and Nintendo to rapidly follow suit."
Currently, the core models for Sony's PlayStation 3 and Microsoft's Xbox 360 are $299, and the Nintendo Wii is $199 in the U.S. Pachter said he believes all three console makers are profitable on hardware sales currently, and are wary of incurring losses by cutting prices further.
"The current price structure has been in place for 18 months, and prices remain at historical highs this far into a console cycle," Pachter said.
If a price cut across all three major consoles doesn't happen in June, the analyst expects all three consoles to be "at least" $50 cheaper by holiday compared to current prices.
Pachter also said demand for the Wii "appears to us to be fading," and that a "price cut is long overdue." The Wii has new motion control competitors, but with the PlayStation Move off to a "very tepid start," it's Microsoft's Kinect, with 8 million shipped in its first three months, that has the advantage.
"We believe that Microsoft is in the driver's seat on pricing, and believe that the company may consider a price cut for the core console plus Kinect to under $300 in June, which could allow it to extend its monthly sales lead throughout 2011," Pachter said.
He added that console price cuts alone could add 5 percent to overall software sales levels. However, he adds, "overall U.S. packaged software sales declined 5 percent last year (including PC), and an incremental boost of 5 percent would take sales only to roughly flat."
Ahead of NPD Group's February U.S. video game console software sales data this week, Pachter also forecast monthly sales of $595 million, down 6 percent year-on-year. If the forecast is correct, February would be the third consecutive month of negative growth at U.S. video game software retail.
The analyst expects Xbox 360 to lead monthly home console sales with 385,000 units on strong demand for Kinect, and 310,000 for PS3 and 305,000 units for Wii. Top games will include new releases Marvel vs. Capcom 3: Fate of Two Worlds from Capcom and Killzone 3 from Sony, Pachter predicted.
Pachter reminds me of a old saying about rain dancers, i forget the details, but the saying basically stated that they would keep dancing until it rained. And this caused them to believe that their dancing had cause the rain.
If Pachter keeps predicting prices cuts, eventually they will happen, and i get the feeling that he will believe that he correctly predict them based on the fact they happened (eventually, even if it takes years of saying it).
This is the one prediction of his that might come true, based on the data I have, but yeah he's been saying this for how long?
For what it's worth, Amazon saw Wii sales increase dramatically when they cut it to merely $179 and held it there for a couple weeks. It's back up to $199, but it's clear even something as saturated as the Wii can benefit from a price cut.
Here's my reaction in longer form, for what it's worth:
It doesn't seem like Michael Pachter is really speaking to anyone within the industry or people remotely aware of what's going on (like gamers). I think the people who find his forecasts useful are investors without a clue.
Price cuts in a mature and heavily competitive market where production costs drop year-on-year thanks to Moore's Law? Whodathunkit?
E.g. Nintendo. In 2009, their manufacturing costs were estimated as being around $88 per Wii, from an original cost of approx $160 in 2006. Now we're in 2011, it's not unreasonable to posit costs have dropped further - though given the law of diminishing returns (and the relative obsolescence of the parts may actually result in prices going up, as companies move away from the 90nm manufacturing process and low-density flash memory), I'd wouldn't expect them to drop below $65 per unit. but still: even with the strength of the yen, Nintendo could potentially go as low as $100 at retail and rely on the old razorblade model to claw back revenue via peripheral and game sales.
If nothing else, it'd be interesting to see what this'd do to Microsoft and Sony...
Still, I have to agree with Michael on one point. A price cut for the Xbox 360 seems relatively unlikely; instead, I'd expect them to focus more on heavily discounted Kinect bundles.
Though I can see Pachter's point, selling more consoles isn't the goal for these companies so much as maximizing profit is. And unless they can be convinced that they'll get more cash overall through a price cut, they're probably going to keep their prices as high as possible, since price cuts tend to be irreversible for consoles.
If we're already going for these kinds of predictions, here's one of my own. Console companies will offer consoles at discounted rates by offering special sales at different retailers for any number of reasons, such as holidays and seasons. Once they realize that they simply aren't selling any consoles above a certain price anymore they will lower the price, by which point there will be steady news of the next console, or at the very least an "update" system (i.e. PS2 Slim).
If Pachter keeps predicting prices cuts, eventually they will happen, and i get the feeling that he will believe that he correctly predict them based on the fact they happened (eventually, even if it takes years of saying it).
For what it's worth, Amazon saw Wii sales increase dramatically when they cut it to merely $179 and held it there for a couple weeks. It's back up to $199, but it's clear even something as saturated as the Wii can benefit from a price cut.
Here's my reaction in longer form, for what it's worth:
http://www.huliq.com/10177/analysis-do-major-video-game-consoles-need -price-cut
E.g. Nintendo. In 2009, their manufacturing costs were estimated as being around $88 per Wii, from an original cost of approx $160 in 2006. Now we're in 2011, it's not unreasonable to posit costs have dropped further - though given the law of diminishing returns (and the relative obsolescence of the parts may actually result in prices going up, as companies move away from the 90nm manufacturing process and low-density flash memory), I'd wouldn't expect them to drop below $65 per unit. but still: even with the strength of the yen, Nintendo could potentially go as low as $100 at retail and rely on the old razorblade model to claw back revenue via peripheral and game sales.
If nothing else, it'd be interesting to see what this'd do to Microsoft and Sony...
Still, I have to agree with Michael on one point. A price cut for the Xbox 360 seems relatively unlikely; instead, I'd expect them to focus more on heavily discounted Kinect bundles.
If we're already going for these kinds of predictions, here's one of my own. Console companies will offer consoles at discounted rates by offering special sales at different retailers for any number of reasons, such as holidays and seasons. Once they realize that they simply aren't selling any consoles above a certain price anymore they will lower the price, by which point there will be steady news of the next console, or at the very least an "update" system (i.e. PS2 Slim).