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Microsoft Pares Down Xbox 360 Price

Sony's recent price cut also takes a little wind out of Microsoft's announcement, says Pachter. "Now that the PS3 is $100 cheaper, a $20-to-$50 cut on the Xbox 360 may have a lesser impact than it would have in a vacuum," he says.

Microsoft is also fighting the perception by consumers that they could be buying a flawed device. In June, the company said it will take a pretax charge of up to $1.15 billion to extend its one-year warranty to three years to cover a hardware problem.

But the company never explained exactly what went wrong with the faulty consoles.

"Since Microsoft never quite explained the design flaw, it is not clear to consumers whether they are buying a box built before the design flaw was fixed," says Pachter. "That could dampen the amount of increase in demand."

Meanwhile, the price cut is unlikely to affect the profitability of the company's entertainment devices division, say analysts. "With this price cut, I think it is a combination of production efficiencies and the need to stay ahead of competitors," says Brian O'Rourke, senior analyst with research firm In-Stat.

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