Xbox One: Just How Much Should It Cost?

Yesterday, Microsoft showed its hand for the next generation Xbox, with the Xbox One. Reactions to the new console have ranged from pure outrage (among gaming enthusiasts) to anticipation (among the mainstream press, who anticipate the One’s iPad like media features for the living room).

The Xbox One is due to hit later this year and regardless of how much we want it to be otherwise, its market performance is not determined yet. You see, arguably the most important component of a console that determines how well it will do- the price- has not yet been revealed.

And yes, price is important. As we argued when speculating on the Playstation 4 price back in February, the performance of a system in the market has been directly proportional to its pricing. The Playstation 3, the Playstation Vita, and the Nintendo 3DS are all proof of what happens when you launch a high priced system. On the other side of the spectrum, the Nintendo Wii and the Nintendo 3DS (post price drop) are proof of what happens when your system is reasonably priced.

It’s not even just absolute pricing that will make or break the Xbox One: one might be tempted to look at the moderately priced Wii U’s dismal performance in the market, and one might therefore be tempted to conclude that anything more than $299 and the Xbox One is pricing itself out of the market.

However, in such a case, one would be wrong. Perceived value also matters. If the system clearly demonstrates more value than the Wii U, then it can command a higher price correspondingly. On the other hand, even while offering more perceived value, it is important to not cross a certain psychological limit, otherwise it will price itself out of the market, like the PS3 did at launch.

It’s confusing. Market dynamics always are. There’s no real way to predict how the market would react to given price points (see also: Apple products). That’s why that’s not what we’re concerning ourselves with here. Here, we will talk about how much the Xbox One should reasonably cost, given its hardware, its feature set, and its value proposition.

Let’s begin by discussing the system itself first: we have here a pretty well specc’d system (albeit one that seems to be lower powered than its immediate rival, the PS4), although nothing nuts or out of this world. The system, much like its two predecessors, seems to be using familiar PC architecture and off the shelf parts, maybe slightly customized and optimized.

And indeed, the Xbox One uses ATI chips for both its CPU and its GPU; whereas the chips it does use are highly impressive, them not being custom made to order means they are not unnecessarily expensive to produce, and it means Microsoft saved up on massive R&D costs, while also ensuring the system would be able to output an adeqaute standard of visual fidelity.

Similarly, when we run through its other range of hardware and specs- 8GB of RAM (we don’t know what kind, although it is likely DDR3, which is cheaper to procure than GDDR5), a Blu Ray drive (no longer and exorbitant expense like it was back in 2006 when the PS3 launched), USB 3.0 ports (more expensive to include than the USB 2.0 ports the Wii U features, but again, hardly anything too expensive), Bluetooth (a standard today), Wifi- we see that the recurring theme is that, even though it is a powerful system, especially compared to Nintendo’s next generation offering, it is surprisingly conservative. Microsoft clearly made an effort to ensure that the console would not be too expensive to produce per unit.

The reason for that becomes clear when you consider the elephant in the room: Kinect, now new and improved, included with every system, mandatory to even operate it. Clearly, the new Kinect, which is in fact rather state of the art, with a 1080p HD camera that can detect up to six people in the room at once, and allows for input with zero latency (or as close to that as we can get), support for 30FPS, a built in microphone that can be used to chat and communicate, and advanced voice and motion recognition, is expensive to produce.

We can’t estimate what its costs are, but suffice it to say, the new Kinect’s BoM is probably at least one and a half to two times that of the original Kinect’s $56. Then, taking into account its own, separate set of R&D and manufacturing expenses, and we see how it is an expensive proposition- probably expensive enough that Microsoft was forced to keep the hardware specs of the console under control to keep the costs in check, ala Nintendo.

In terms of absolute costs, this is clearly a system that’s, in terms of the hardware present in the package, a fair $400. And ordinarily, that right there would be the end of our analysis, but now, there are more things to consider.

The first is competition. The Xbox One will be going up against the Playstation 4 (which we have no idea how much it costs) and the Wii U directly. It is not unreasonable to assume that it will be priced in relation to its competition.

Seeing the distinctly ‘last gen’ Wii U hardware being sold for $350 might lead Microsoft to believe that they can price their system at $499, and get away with it. Conversely, they might go in for the kill, and decide to price their system competitively with the Wii U, say at $399, to deal it the killing blow.

That’s not taking into account the potential Wii U price cuts, and the Playstation 4: how much will the Playstation 4 cost? In our analysis (linked above), we concluded that the system would probably retail at $400 for the higher end model, with a $349 model as a symbolic strike against the Wii U, but we simply don’t know what the PS4 will be priced, because Sony hasn’t told us. It is not unreasonable to suppose that the Xbox One will be priced more in relation to the PS4 than the Wii U, and unless we know about the PS4’s price, it becomes useless to speculate.

Then there is also the question of whether Microsoft wants to sell the system at profit or not. Whereas the original strategy for both, the Xbox and the Xbox 360 was loss leading (sell them at loss to gain marketshare, recoup costs via games and accessory sales), things have changed since then.

Notably, Nintendo’s wild success with the Wii, DS, and 3DS, Sony’s dailed experiment with the PS3, Microsoft’s own hardware like the Kinect selling at massive profits, Apple’s devices retailing at prices that allow them to garner obscene profits, and Microsoft themselves viewing the Xbox One more as a media box for the living room than a gaming console, means that the old strategy might be ditched, and Microsoft might simply sell the system at a price like $599 or $649, because those are comparable price points to an iPad, and they let Microsoft sell the system at profit.

That obviously sounds insane- remember PS3’s $599 debacle? There is no way the Xbox One would sell at that price, right? But Microsoft might have planned for that contingency as well: contracts. They might decide to sell  the console at a subsidized price upfront (say $299- cheaper than a Wii U), and then recoup costs via Xbox Live fees over the next two years (which should not be too difficult, considering the console needs to connect to the internet once every 24 hours anyway). This strategy would allow them to sell the system for a ridiculously cheap price like $299, which would make it seem cheaper upfront to the non discerning consumer, and not make a loss either.

Ultimately, that is the strategy we think Microsoft will adapt- they will either sell the system at a profitable, non subsidized price point (like $599 or $649), and then, to bring the costs back down for the consumer (or at least the perception of costs back down), they will sell contract based subsidized version at price points like $299, which effectively allow them to undercut both Nintendo and Sony.

Of course, this is all speculation. We don’t know how things will go. And even given our predictions of the pricing structure are correct, we don’t know how the market will react. It’s too early to call the shots either way.

What do you think will be the ideal Xbox One price point?