Xbox 360 to be lowest-priced next-gen video game console

One of the the biggest selling points of Nintendo's Wii video game console since its launch nearly two years ago has been that it was the lowest-priced of the trio of next-generation machines, which also includes Microsoft's Xbox 360 and Sony's PlayStation 3.

To date, the Wii costs $249, while the lowest-priced Xbox, the so-called "Arcade," retails currently for $279. An 80GB PS3 sells for $400.

But Microsoft said Wednesday that it will drop the price of the Arcade on Friday to $199, breaking through what some have said is the all-important psychological price level of $200. At that price, industry observers say, the market opens up to mass levels of consumers.

Microsoft will also drop the price of its 60GB Xbox to $299 and its "Xbox Elite," which has a 120GB hard drive, to $399.

"The fact that the Xbox 360 is now cheaper than the Wii is definitely a big shift in the market," said Aaron Greenberg, director of product management for Xbox 360.

The news has been rumored for some time and was first reported as fact Wednesday by BusinessWeek.

For Microsoft, this is a crucial step along its path toward winning the next-gen console wars. At E3 in July, the company said in no uncertain terms that it will win the battle, at least with Sony. It hedged its bets on out-selling the Wii, which has been dominant over the last several months, according to industry analyst NPD Group.

In fact, BusinessWeek reported that Don Mattrick, senior vice president of Microsoft's interactive entertainment business unit (and the person who had been on-stage at E3 and committed to winning the generation), said that he doubted the Xbox could catch up to the Wii at this point.

"I'm not at a point where I can say we're going to beat Nintendo," Mattrick told BusinessWeek. "We will sell more consoles this generation than Sony."

Of course, some have said that the appeal of the Xbox, despite being the first to hit 10 million units sold in North America, is still limited and that over the next few years, the PS3 will eventually catch up to and surpass the Xbox.

Until now, Nintendo has shown little interest in lowering the price of the Wii, and thus its profit margin. And while Sony has effectively lowered the price of the PS3 by offering only an 80GB version for the same price as what was previously a less-powerful version, it has little room to maneuver on price given that it is still subsidizing the PS3 at its current level.

By comparison, because the Xbox has been out a full year longer than both the Wii and the PS3, it has already achieved efficiencies of scale that have allowed it to slowly lower the Xbox's price.

To date, the 60GB Xbox has done about 60 percent of total Xbox 360 sales, said Greenberg, with the Arcade and Elite models each accounting for about 20 percent.

But with the Arcade's price dropping below $200, Greenberg said he thinks that model is "now picking up steam."

"Over 75 percent of all console sales historically were sold below $200," Greenberg said. "We know that there's tens of millions of PS2 owners who bought their systems when (the PS2) hit $199."

In other words, Microsoft is hoping that at $199, the Arcade can become the next PS2 and sell well over 100 million units.