Microsoft today unveiled a new business model for its Xbox 360 console, subsidizing the hardware at just $99 by requiring purchasers to sign a two-year contract to Xbox Live for $15 per month. The idea to subsidize a video game console is potentially good, but this initial pricing may be too blatantly a "sucker deal" for some consumers, analysts said.
"Microsoft could gain some additional market share and Xbox LIVE Gold subscribers with a deal like this, but the offer doesn't hold up for consumers who do the math," Billy Pidgeon of M2 Research told us. "At current prices the offer would save the buyer about $200 on the hardware, but XBL Gold is currently $5 per month. Increase the subscription price by $10 a month and the consumer pays for the hardware break in the first year, but is tied into the service at the same high rate for an additional year. Great for Microsoft, not so great for consumers."
He continued, "I think subsidizing hardware with a subscription service can be a great business model, and I'd like to see Microsoft, Sony and Nintendo experiment with better offers for consumers. Online network platforms are a primary value differentiation for hardware, and provide an essential transition bridge between hardware cycles. Renting hardware with value-added subscription services linked to cable or satellite television providers would be a more radical end-cycle subsidized play."
"As a consumer the prices being talked about look like a sucker deal to me"
Michael Pachter of Wedbush Securities agrees. "Maybe I'm just a finance geek, but the $99 360/Kinect with a 'subscription' looks a lot like a full priced sale financed at around 10% to me," he said.
David Cole of DFC Intelligence concurred with the sentiment. "As a consumer the prices being talked about look like a sucker deal to me. However, there definitely is going to be a consumer type out there that would go for it. Especially it may appeal to college students on a budget."
Overall, though, Cole thinks there's a future in subsidizing. "I have been fascinated by the possibility of subsidizing a console with a subscription for some time. Sega has already done that with the Dreamcast... Really any console could do it, it basically just a financing plan and if you structure it right the consumer pays more in the long run," he said. "It is really an interesting marketing play... I think you will see more creative type marketing packages coming in the future from all the manufacturers."
Scott Steinberg, CEO and lead analyst for business consulting firm TechSavvy, definitely sees the appeal in subsidizing a video game console as well, but Microsoft will need to find the right approach if it wants to succeed.
"It's a potentially far-reaching and clever move that...possibly sets [MS] up well to usher in the next generation of online experiences and set-top platforms at a marked advantage"
"Product subsidies have been used to tremendous effect in consumer electronics and services businesses such as telecom and mobile connected devices, and are slowly creeping into other verticals such as eReaders and tablet PCs, making it little surprise that similar strategies might be experimented with in the video games industry. Given the tremendous success of both the Kinect and Xbox Live, and the duo's ability to work in tandem as software playback and original content delivery platforms that potentially boost user engagement and revenues, it would be a relatively organic brand extension for Microsoft to attempt to move in this direction - and a potentially wise one, given the growing importance of needing to maintain a captive audience and migrate it to digital platforms," he remarked.
Ultimately, if Microsoft plays its cards right with the subsidizing business plan, the company could exert great pressure on its rivals while also using subscriptions to effectively transition consumers into the next-gen Xbox with relative ease.
"Tremendous efforts are currently being placed around feature differentiation and user acquisition as relates to first-party manufacturers' online efforts. Subsidized goods that put more product in players' hands, enmesh consumers' more in the manufacturer's product ecosystem, and simultaneously offer greater perceived value would put tremendous pressure on Nintendo and Sony to respond in kind, and up the ante for those hoping to create steadfast brand loyalty," Steinberg said.
"Which is to say the ultimate play here isn't just to sell hardware - it's to offer shoppers increasingly compelling reasons to play in manufacturers' worlds, and ensure they have less ability or desire to leave in the face of competing offers and outings. From Microsoft's perspective, it's a potentially far-reaching and clever move that takes tremendous advatange of the company's strengths, and possibly sets it up well to usher in the next generation of online experiences and set-top platforms at a marked advantage."