Xbox made big waves today by announcing a cheaper version of Xbox One sans Kinect slated to go on sale for $399 on June 9. Unbundling the camera wasn't entirely unexpected, as numerous industry observers had speculated that Microsoft would make such a move to close the price gap with Sony's PS4, but the fact that Microsoft unbundled Kinect so quickly after last fall's launch did surprise some. And now that it's happening, Xbox One hardware sales could jump considerably.
IDC had already forecast Xbox One to emerge in North America with the largest installed base by 2016 (factoring in a likely Kinect unbundling) but because Microsoft acted so quickly, IDC research manager Lewis Ward told GamesIndustry International that he now believes Xbox One will surpass PS4 in the US by next year.
"This change will be enough to push the Xbox One installed base higher than PS4 in the U.S. and Canada in 2015 rather than 2016. It kind of reminds me of Microsoft's evolution on Windows and IE. The initial design needs some serious help (i.e., last summer's DRM 'Xbox 180') and then improves to point of being a serious contender (this Kinect unbundling) and then vies for market share dominance (although I continue to believe PS4 will have the largest global installed base of any console at the end of 2016)," he explained.
RW Baird analyst Colin Sebastian agrees that Xbox One sales should start ticking upwards now. "We note the Xbox One pricing action is early, by historical standards, for a relatively new video game console. However, we estimate that price cuts on the Xbox 360 in August 2007 and September 2008 each drove more than 100k incremental monthly unit sales," he said.
"Sony will need to re-group to maintain its momentum in the market with the E3 press events taking on even more significance for both companies now"Piers Harding-Rolls
Former EEDAR analyst and current Tilting Point exec Jesse Divnich noted that consumers are still evaluating the new consoles this early in the cycle, and that Xbox One should gain some momentum from the price drop. "Early in a console's cycle, pricing has shown to correlate with install base. Later in a cycle, the strength of the software library, digital offerings, and social influences tend to have a stronger weight in the consumer decision process. As we witnessed with the PlayStation 2 to PlayStation 3 transition, being the market incumbent doesn't always give you an advantage at the start of a new console generation. It's almost as if consumers hit the reset button at the start of every cycle and re-evaluate their gaming needs from a home console," he said.
Independent analyst Billy Pidgeon added, "This is a good competitive move for Microsoft. Price is an important factor at this point in the console cycle and in the consumer market, and Kinect lacks strong value for most gamers. Xbox One without Kinect should sell strongly at $399 and could out-perform PS4 at the same price on a month to month basis, although I think market share competition between Xbox One and PS4 will remain tight for most of the cycle."
Pidgeon also expects sales of the $499 SKU to "steeply decline," meaning that fewer Xbox One owners will have a Kinect in their living room. So the question has to be asked: does Kinect really have a future? Well, maybe... unbundling certainly diminishes the importance of the camera currently. IHS analyst Piers Harding-Rolls commented, "In effect, Microsoft has reverted to its Xbox 360 Kinect strategy and with a likely drop in interest from third-parties, Kinect for Xbox One has suddenly shifted from central to the Xbox vision to the periphery. However, later in the cycle when adoption is more mass market aligned and entertainment functionality is more heavily built out, Microsoft will be hoping that the value of Kinect will be more easily demonstrated and in demand."
The unbundling of Kinect also has deeper implications for the Xbox business. Perhaps most important of all is that it could make it more profitable for Microsoft, IHS said. "A de-coupled strategy may be more profitable to Microsoft: The cost of the Xbox One Kinect peripheral is well documented, with IHS' teardown team pegging the bill of materials at around $75. By charging separately for Kinect at a similar price point to the original Xbox 360 Kinect - $149.99 - it's conceivable that this may deliver more profitable sales to Microsoft in the long run," Harding-Rolls said.
Furthermore, unbundling the camera gives Microsoft more room to maneuver and stay competitive with Sony. "With two SKUs in the market, Microsoft has reverted to its Xbox 360 strategy. This gives the company some better flexibility with pricing, bundling and product positioning. Microsoft has already described the Xbox One with Kinect as the premium offering," Harding-Rolls noted.
Ultimately, the move sets the stage for an even more heated battle at E3 and the months ahead in 2014. "Sony will need to re-group to maintain its momentum in the market with the E3 press events taking on even more significance for both companies now," Harding-Rolls added.