Xbox 360 at $99: "Great for Microsoft, not for consumers"

Analysts described the pricing scheme from Microsoft as a "sucker deal"

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"

David Cole

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"

Scott Steinberg

"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."

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Latest comments (24)

Dave Herod Senior Programmer, Codemasters5 years ago
Absolutely no different from a mobile phone. If you work out how much a smartphone will cost you on a contract it's vastly more than the phone itself is actually worth. And people are quite happy to pay it.
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Richard Gardner Artist, Crytek5 years ago
Bah, I'm disappointed in Microsoft's first take on this payment model. Although I should have expected it to be what it is, once Sony and Nintendo get involved I'm sure Microsoft will then play there other cards and start adding value. Until then I assume it would be pointless to undercut before you even have competition on the model. This I assume will really swing into full speed on the next generation and I would assume that right now this will be to test the market and set-up the infrastructure.

The worrying thing for Nintendo is how do they compete with this sort of model? As a platform they have always being about games and less about services. What value could they provide?

Sony on the other hand are getting there but I would still say Microsoft walk all over them when it comes to online services, even though at some points Sony can offer more options (they had ITV and BBCI way before Microsoft) they just don't seem to have the community and online power of Microsoft.

Edited 1 times. Last edit by Richard Gardner on 8th May 2012 8:28am

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Bruce Everiss Marketing Consultant 5 years ago
So Xbox 3 will use mobile phone pricing models. Why not, it works?
Next generation consoles will have an uphill task justifying their existence and need all the help they can get to overcome customer resistance.
So this could be a stroke of genius from Microsoft.
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Show all comments (24)
Felix Leyendecker Senior 3D Artist, Crytek5 years ago
I wouldn't compare it to phones. An iphone 4s costs between 650 and 850eur off contract, a 360 can be had for about 220. Plus for the phone you need a contract anyway, while you don't necessarily need it for a console.

It doesn't seem like a very good deal, and I can't see it take off unless the new consoles will be north of 500 euro.
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Morville O'Driscoll Blogger & Critic 5 years ago
Yeah, the phone analogy only works up to a point. People need phones, in one way or another, but a console is purely a luxury. Subsidizing a phone on contract is a way to absorb the costs over time, coupled with being given extras (free texts/minutes/data usage) that you'd use anyway. People may use XBL anyway, but a console is not a personal requirement like a phone, so people aren't going to think "I'm getting all this stuff I'd use anyway for 15 bucks", they'll think "I might use this stuff, I might not. Why do I have to pay for it if I only might use it?"

It's quite dumb, really, because they could've priced the "contract" at $7.50, or maybe even $10, and had the best of both worlds - a higher take-up of consumers and a good (but not great) profit margin.
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Dave Herod Senior Programmer, Codemasters5 years ago
No one "needs" a £500 phone. You can buy a pay as you go mobile for about twenty quid, and that takes care of every function people "need". A smartphone on a contract is just as much a luxury as a console.
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James Prendergast Research Chemist 5 years ago
I suppose it depends on where they have this offer. If it's US-only then that's not a terrible thing. Not a particularly good deal but not terrible. If it's worldwide then it's a really rotten offer given the regional differences in quality and offerings on Xbox live.
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Morville O'Driscoll Blogger & Critic 5 years ago
@ Dave

Not to be too argumentative, but it depends. :p For one thing, not all smartphones are £500. You can get decent smartphones for the equivalent of £200 over a 2 year contract, so the price for a phone is more manageable than a console is. (The more manageable the price, the more the consumer deems something a necessity, I've found.) For another thing, it's surprising how much you do "need" a smartphone - even jobseekers need something to quickly check emails relating to job applications, or check Google maps on-the-fly on the way to an interview.
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Thomas Dolby Project Manager / Lead Programmer, Ai Solve5 years ago
I don't think 10% is terrible, but I think Microsoft might have missed an opportunity here. They seem to have just based the costs on the assumption that the consumer would have used a gold membership for two years anyway. If they priced the per month cost lower, and thus the customer actually saved on the Xbox and 2 year gold membership, I think there would be a lot more uptake, and could tip customers that weren't sure about the gold membership into using the service.

But I suppose I don't have the statistics behind Xbox player habits. Maybe there isn't much of an untapped market in the people able to use the gold membership but choose not to.
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Chris Nash QA Engineer 5 years ago
One thing will decide whether this strategy succeeds or fails: can you get a 360 at current price, plus 24 months' Xbox LIVE Gold, for less than the overall $459 that this new plan will cost?
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Thomas Luecking5 years ago
This is a very smart move and one can see it as a test ground for their plan to offer this revenue model to customers of their Nextbox. Mainly students/young workers in their 20s will be among the first "hardcore" gamers feeling the urge to get the shiny new hardware at the beginning of its lifecycle. Usually these kids do not have 500 bucks for a console so this can very much increase the adoption rate when it is most crucial to the success of a new console. Bundled with a service disguises the actual costs of the hardware and makes for a good excuse to actually opt in. I am convinced that Sony will follow that move and will introduce a new pricing structure for PSN usage when they come out with PS4.
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Joe Bassi Managing Director & Business Development, Mertech Data Systems5 years ago
I would like to get some more details about the terms of this subscription. There are interesting questions about who owns the console during these 2 years and if in the event of breaking the contract what happens besides the peanlty fee. Anyway, this is pointing to the future and it can also mitigate the consequences of users been able of hacking the console they would own, thing that keep console makers terrorized. Ok, we already know software as a service, now hardware as a service - a very old practice in the TV business - but what about game as a service? Why buy games if you could end renting the console where it runs?

Edited 1 times. Last edit by Joe Bassi on 8th May 2012 5:53pm

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Feargus Carroll Producer 5 years ago
@ Chris Nash

Not quite that simple. I might not have GBP459 *now*, but I might have GBP99, and be able to afford 15 per month.

BTW, anyone notice that 24 months x 15 quid = 360? Coincidence?

Edited 1 times. Last edit by Feargus Carroll on 8th May 2012 6:19pm

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Dave Chan Product Manager, 3D Interactive Inc.5 years ago
This is such a misleading article. Who pays for Live month to month? You can bet a full year of Live for $35 on sale often. Sure, they could increase it, but they aren't going to do a two tier pricing system for people with and without systems and they would end up penalizing users that didn't buy a subsidized system and the backlash would be huge.
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Art C. Jones Writer / Blogger 5 years ago
With a phone buying with a 2-yr contract doesn't make your monthly bill go up!

If you get XBLA it is normally $5/month, but with this 'deal' it is $15.

There isn't a comparable in phones. If I get a discounted phone on contract my monthly fee is $40. If I *don't* get a phone on contract my monthly fee is $40! I don't pay a monthly fee of $120 if I get the phone on contract and $40 if I don't.

The phone comparison quickly crumbles due to that one point.

This is much more like a "rent to own" contract merged with a cell phone contract. You pay $99 up front and $10 per month, and are required to also pay $5 for a service with a 2-yr minimum commitment.
(though I do wonder if they'll still be getting charged $15/month after the 2 years to keep their Xbox Gold going?)
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It's just a financing deal with ~5% annual interest. If you can't pay the console in cash sounds like a better deal than putting it on your credit card with ~20% interest. Probably a good call from MS to get more sales from lower income households.
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Greg Wilcox Creator, Destroy All Fanboys! 5 years ago
As I said (and speaking as probably the only person here who has been and is back in a low income situation), it's a crap deal, PERIOD. In fact, it reeks far too much of buying ANY electronics from a Rent-A-Center or other "ghetto" rip-off store that lures you in with "low" pricing, but a big catch at the end of that hook. Of course this is for low-income or new console owners who don't know that the STUPIDLY low storage space in that 4GB HDD means they'll NEED to upgrade to a bigger drive once they get connected and realize that streaming doesn't work when you either don't have reliable broadband (or any broadband at all) or again, end up not using that Live account as much as Microsoft thinks (and wants).

Also, has anyone looked at the billing process? Are these potential new users being charged by the month, is there some sort of "installment plan" or is it a one-time lump sum two year payment for everything with NO refunds and a big fat penalty if you cancel? A monthly bill would be a bad deal for those who miss payments (oops, your XBL Gold got cut off!) and I know the sales take for smoothing that credit card out of the wallet when it comes to making poor folks buy something that's not quite the best value, having worked in retail for a while.

The problem (as always) is NO one ASKS these consumers what they WANT. It's just the same old "Well, EVERYONE has a cell phone and a shitty contract, so let's just do the same to these people and they'll suck it up thinking they got a deal!"

If this keeps up, there WILL be a big divide in the next console cycle of people who just can't play ANY games because the industry keeps pissing on the chance to get these folks the EXACT same experiences as those millions who are fully connected and don't see the other side of the fence much (if at all).
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Rod Oracheski Editor, Star News5 years ago
Going by MSRP, it's $300 for the 360, $60 a year for Live, $25 + $30 for the warranties. That's a grand total of $475. This deal is $100 plus $360 over 24 months for a total of $460.

It's not a great deal for people who know where to look for deals on the console and the frequent deals on Xbox Live, but for the casual gamer it's really not that bad.

I don't think gaming enthusiasts would be interested in it at all, but it's not aimed at them. Gaming enthusiasts aren't waiting until this point in the generation to buy a console.

For some reason I'm not at all surprised this eluded the 'expert' analysts we rely on for headlines.
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Dave Herod Senior Programmer, Codemasters5 years ago
@Russell Carroll - If that's the case then your phone providers are ripping you off. Here, your monthly cost is directly tied to the phone you get as part of a deal. Ask for a crap phone, your monthly fee is a lot cheaper for the same number of minutes/texts/data than if you got a top end one. Ask for SIM only and it's cheaper still. The cost of the handset is well and truly buried in your monthly bill. Microsoft are doing nothing different here, they're recouping the discount through making you pay more per month than someone who bought the console outright.

Honestly though, what are people so wound up about? Microsoft are offering an alternative way to pay for a console that works out well for some people and not as well for others. Surely flexibility and choice can only be a good thing? If you don't like the deal, don't buy it! Buy the thing outright like everyone else has up until this point. Seriously, you'd think Microsoft had announced they were putting guns to people's heads or saying they're going to murder kittens for every console sold, the way people react. There's absolutely nothing new here, no secret agenda, just another option.
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Greg Wilcox Creator, Destroy All Fanboys! 5 years ago
Yes, but it's a lousy option, or more precisely, an option that wasn't well thought out. Just because someone comes up with MORE ways to do something (and not do it well), doesn't mean it should be acceptable by any means.

The main problem with all these services is FRAGMENTATION. If you look across the board at what many companies offer in terms of services, there seems to be too little of an overall plan and more of a patchwork nonsense pile of ideas that don't get passed through the filter of any end users who are the target.

Sure, new 360 users may not give a shit and dive onto this offer like it's manna from heaven. But... how many of THOSE users might know a hardcore 360 owner who tells them to skip that "deal" and buy a 320GB system. That would be better for all, but it would leave a bad taste in the mouths of those who thought the company thinks they're not too bright with numbers.

The smarter thing would have been for Microsoft to make a larger HDD option available from the start, as again, 4GB is too little space for content once you get interested in buying more than that drive can hold. UNLESS you're NOT using Xbox Live or some of the services it offers, then. But you'd be wasting money on that higher monthly fee than what a Gold sub normally costs.

That, and if ANYTHING needs subsidizing, it's RELIABLE and CHEAP broadband service in those areas that still can't get it (or areas with connections that drop out when the wind changes direction). I think that's a more urgent need that a fake "bargain" console deal any day. Yes, it's a HUGE (and damned expensive) project, but I'd bet the game company that cracked THAT nut will have fans for life and beyond...
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Dave Herod Senior Programmer, Codemasters5 years ago
@Greg - When did it suddenly become the responsibility of games companies to provide people with broadband? I did wonder why I saw a van full of Valve employees digging up the street laying cables the other day... Your argument for every last thing you don't like that's going on in the games industry at the moment seems to be that you can't get a decent connection. Well, sympathies, but you can't expect the entire world to put all its plans on hold while it waits for your town to catch up. Complain to your telecoms companies or something.

And yes, we know you'll pay more overall for a contract/subscription based business model. Exactly like if you buy a car on finance, or a PC, or pretty much anything. It's called business. You pay a premium for the convenience of spreading payments over time, which works for some people, and not others. And 4GB might not be a lot of storage, but when you can buy 16GB USB drives these days for barely anything, it's not that big a deal.
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Bill Garrison Studying Student, DigiPen Institute of Technology5 years ago
Dave, I saw you say "how much a smartphone will cost you on a contract it's vastly more than the phone itself" further up in the thread. Surly you realize here, that the difference in the cost of a phone contract, and the cost of this subsidized payment plan, is that with the former you're getting access to a cellular network?
Despite the subsidized nature of phone contracts with the subscription you are actually primarily paying for the ability to call, text, mms other people, and access the internet without a wifi connection. Microsoft doesn't offer any service comparable to that.
And contrary to your point here, you can walk into any major electronics retailer and often find financing at 0%, simply as a courtesy to consumers. Hell, you can you use "Bill Me Later" for virtually any purchase online at this point, and achieve the same financial outcome.
The most corrosive element of this Xbox payment plan however is the cost of the purchase relative to the value of the product. The Xbox 360 at this point is a 7 year old console. I seriously doubt it costs Microsoft much more than $99 per unit to produce. There shouldn't be any need for a "subsidized payment plan" to buy such ancient hardware.

Edited 1 times. Last edit by Bill Garrison on 9th May 2012 10:28am

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Andrew Animator 5 years ago
"There shouldn't be any need for a "subsidized payment plan" to buy such ancient hardware."

It's not an Amiga......The 7 year old xbox you refer to is a shadow of what we have now. Of course if you want a 1st gen xbox360 go ahead, I wouldn't touch one with a barge pole....
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Bill Garrison Studying Student, DigiPen Institute of Technology5 years ago
Are you talking about the black 360 redesign? What aspect of that makes the launch 360 "a shadow of what we have now" outside of the fact that it doesn't break as easily? If there is none, then are you aware of the fact that the improved manufacturing methods over time, actually reduces the production cost of game consoles? Or are you referring literally to how the plastic casing is now reflective, and thus doesn't show shadows? Am I unaware of some library of games running on the black 360 that don't run on the white 360?

Edited 2 times. Last edit by Bill Garrison on 9th May 2012 6:38pm

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