Xbox 360 and the power of a $199 pricetag

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Microsoft announced it will chop prices on its Xbox 360 video game systems. While there are several 360 models, the lowest-end Arcade edition will cost $199 starting on Friday, making it the first current-generation console to bop below $200.

This new price packs a serious 1-2 punch against today’s video-game crop: For one, it undercuts the $250 Nintendo Wii, which has enjoyed the title of reigning console champion thanks to casual gamers. The Wii's catalogue of fun, simple games and a competitive price tag has translated to a huge boost in sales for Nintendo. Americans bought more than three times as many Wiis than 360s in June (666,700 units vs. 219,800) and more than twice as many in July (555,000 vs. 205,000), according to NPD research.

The 360 price cut also plugs into a more psychological trend. Consumers set up weird mental hurdles for themselves. For two years, I eyed a particular line of LCD TV but refused to seriously consider buying one until the $1,200 price came down. Two weeks ago, the 32-incher dropped below $700 and now it’s sitting in my living room.

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In today's economy, plenty of Americans have been waiting for a similar price reduction before buying a current-gen system – or, in some houses, before picking their second.

"Microsoft's research showed that 75 percent of the sales of the original Xbox and the PlayStation 2 happened after the price fell below $200," reports The New York Times.

By the way, even with the PlayStation 3 alive and well on store shelves – outselling 360s this summer – the old PlayStation 2 is still close behind with 188,800 units sold in June and 155,000 in July. The PS2 costs only $129.

Of course, price is not the only factor. Xbox 360 came out well before the PS3 or Wii, meaning perhaps it's tapered off because it's reaching a saturation point – after all, only so many people want a video game system. Also, news of 360 units breaking – such as the so-called "red ring of death" syndrome where the systems freezes up indefinitely – might have scared potential customers into the arms of Sony or Nintendo.

But there's a lot to love in a 360. It doubles as a DVD player. The games are top notch. Its online network is perhaps the most vibrant of any gaming console ever – you can download demos, stream YouTube, chat with friends, play against strangers, and – soon – watch Netflix videos.

So, will Microsoft's move force competitors to drop their prices? Probably not, says Lazard Capital Markets analyst Colin Sebastian in an interview with the gaming-industry news site Gamasutra.

"At this point, we do not anticipate either Nintendo or Sony to match the Xbox 360 price cut," says Sebastian.

In fact, Sony just announced a new high-end PS3 model for $500. As for the Wii, when you're selling more than half a million systems a month, why bother dropping the price?

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