Microsoft may be huge and it may be relatively older than many tech companies. Don’t let its size or age fool you. It is hardly the old and slumbering behemoth that is too set in its ways some of its detractors would like to imagine it to be. Beneath the size of this Redmond Washington giant is a company that thinks for the long haul and can move quickly. Case in point: it is quickly becoming apparent that this software giant is looking to bring the business model of smartphones to the video game space. In smartphones, you gain marketshare by selling phone units for cheap. In fact, the phones are loss leaders. The real money is in the long term service contract. Microsoft recently dropped the price of the Xbox to very attractive levels. This move transforms the Xbox from just one device among many you use to play game titles to Microsoft’s own corporate foothold in your living room. The Xbox, through ubiquity, is quickly transforming into an alternative device to satellite or cable services. In exchange for an Xbox 360 4G with Kinect add-on for the rock bottom price of $99, consumers have to get tied to Microsoft’s Xbox Live Gold membership which costs $14.99 per month.
From a purely numerical perspective, Microsoft is not getting much by doing the bundle this way. In fact, if you buy the Xbox separately and take out a two year subscription to Xbox Live Gold for two years, you save only $40 from the current bundle. Surely, Microsoft is not doing all this for $40. Looks can be deceiving, Microsoft needs a “hook” to get people to adopt the Xbox ecosystem. And a $99 price tag is a good hook. Plus the $14.99 monthly fee is low enough for a mass base to swing. Once it has such a massive base subscribed to its gaming network, it can then upsell to other content being streamed through the Xbox-as evidenced by Microsoft’s recent deals with HBO, SyFy, and Bravo. By pricing the Xbox at $99, Microsoft is making great inroads in taking out consumers’ cable boxes. The end goal might possibly involve replacing cable and offering a low unified price. Of course, this is all bad news for Microsoft’s competitors Google and Apple since the Xbox can already be found in millions of homes. The upstarts have to start from scratch.