Microsoft Corporation (NASDAQ: MSFT) has recently followed the lead of major retailers Wal Mart, Target, and Best Buy in dropping the price of the Xbox One console and game bundle from $500 to $450. The move appears to be a permanent reduction on the part of the major retailers, but Microsoft has declared the price cut temporary on their online store. With Microsoft Corporation making this $50 price cut so reluctantly, investors are wondering how Q3 sales figures of the Xbox One may affect revenue.
Even though sales of the Xbox One have lagged behind that of the console’s adversary, the Playstation 4, the Xbox One still accounts for a large chunk of Microsoft’s revenue. With 3.9 billion units sold during Q2, the Xbox One accounts for approximately $1.5 billion in revenue for Microsoft. The aging Xbox 360 is also still equally high in the sales figures. The Devices and Consumer Hardware Division, home of the Xbox One, reported $4.7 billion in department revenue during Q2. That accounts for about 22% of Microsoft’s $21.46 billion in Q2 revenue.
With the reluctantly made $50 price cut from $500 to $450, Microsoft Corporation’s Xbox One falls into a similar price range as the Playstation 4. Price alone, however, does not sway gaming consumers. Many video gamers are devoted to one console or the other, and price may have little to do with it. The games are obviously a leading point of difference. For instance, many gamers who are fans of Japanese role-playing games might flock to the Playstation 4, since Sony clearly has the upper hand. Microsoft has also been adding micro transactions (small in-game fees for perks) to many of their titles, which can anger gamers enough to switch consoles permanently.
At the present time, Microsoft has reported 3.9 billion Xbox One units sold compared with the more than 6 billion units of the Sony Playstation 4 sold. Microsoft’s Q2 figures seem to have pleased investors enough, because the share price has been locked into an upward trend since the beginning of Q3 in January. Since then, Microsoft’s share price has climbed from a low of $34.98 to $39.79, an increase of 4.81 points. The price to earnings ratio is currently at 14.69, so the stock stands as a decent value to investors. Microsoft shares are even rising despite a downtrend in the overall NASDAQ index during March.
Overall, Microsoft’s choice to drop the price of their Xbox One units appears to be a good idea. Even if Microsoft returns their online store units to the $500 price tag, the major retailers will likely still be offering the bundled console at $450. The Xbox One comes bundled with Titanfall in this package, a game which many are likening to the original Halo. Halo is often credited as solely making the original Xbox a success.
If console sales figures for Q3 increase, the revenue may offset inconsistencies with sales of Windows 8 and the new Surface RT. A good Q3 report may herald some subtle increases in Microsoft’s share prices, but the stock is already trading in a price range that hasn’t been seen for around 15 years. The reluctant decision from Microsoft Corporation to cut the price of the Xbox One by $50 on its online store might lead to the increased sales revenue that investors look for. Investors should wait for the Q3 report before jumping in.
By Luke Sargent