Sony May Spring a Holiday Surprise on Microsoft's Xbox

Speculation is rife that the Japanese consumer giant will cut prices on the PlayStation 2.
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Sony

(SNE) - Get Report

may welcome

Microsoft

(MSFT) - Get Report

to the world of console gaming with a price cut. Over the past week, speculation has increased that when Microsoft introduces its Xbox console Nov. 15 with a $299 price tag, Sony will have already lowered the now-identical U.S. price tag on its market-dominant PlayStation 2 by up to $50.

The Japanese consumer giant has dropped the price of its game console in Europe, but Sony denies it will do the same in North America, at least for the present. "We don't see any changes to our pricing structure for the foreseeable future," says Darren Horwitz of Sony Computer Entertainment of America. But that's to be expected. If the company telegraphed a discount, consumers would keep their cash until they saw the prices drop.

It's a time of big questions for video gaming. Will what was to be the hottest Christmas in five years stay hot? And will video-game software makers, who have seen share prices hold up well this year despite the

Nasdaq's dive, recover from a post-Sept. 11 decline?

Microsoft will kick off a $500 million marketing campaign for Xbox in October, launching the console Nov. 15, a week

later than planned. One week after that, Japanese gamemaker

Nintendo

will introduce its console, the $200 GameCube, aimed at the younger gamer. In the face of considerable skepticism, Microsoft insists it will be able to offer between 1 million and 1.5 million Xboxes by the end of the year.

The marketing hoopla about the Xbox aside, this holiday season is still expected to be PlayStation 2's real coming-out party. After supply glitches spoiled last year's debut, it has sold about 4.2 million without much competition. Sony expects to sell up to 3 million new PS2s by the end of the year. But will it still sell in an environment of frightened consumers? Some analysts have checked with retailers since Sept. 11 and reported that sales remain strong.

And the thinking is that sales will get even stronger, despite retailing fears, because it's the type of gift that fits well into the kind of holiday America will have this year. This is going to be a Christmas centered around home and hearth, rather than travel plans. "I think the tendency is going to be that they

consumers are going to want to stay home and be entertained. They'll watch DVDs and play games," said Gartner analyst P.J. McNealy. As it happens, the $299 PS2 plays both DVDs and games.

Sony's protests aside, the sentiment is strong that PS2 won't stay $299 for long,.

"I believe it's always been Sony's plan to steal some thunder from Microsoft," said James Lin, who covers gaming software for Jefferies and who foresees a price cut. But the attacks and subsequent upset in consumer confidence might be all the motivation the Japanese consumer electronics giant needed. "If they were on the cliff looking down, it might have pushed them over the edge." Banc of America Securities analyst Gary Cooper predicted price cuts in a Sept. 21 note upgrading video-game maker

Electronic Arts

(ERTX)

, leading game supplier for PS2, to buy from market perform. Lin made a similar upgrade five days later. Neither company has done underwriting for EA, although Banc of America makes a market in the stock.

Cooper wrote that he expects Microsoft will have to follow a Sony price cut -- he predicts Xbox will fall at least to $250. And those price cuts should help sales.But they won't help the bottom line, at least not at first. Analysts estimate that at $299, Microsoft loses more than $100 on each console. A price cut of $50 means a 50% increase in losses for each box.