• Chart: Xbox 360 Pricing and Peripherals

In its effort to make Xbox profitable by mid-2007, Microsoft will release Xbox 360 in a bare-bones edition without a hard drive at the same price as the first Xbox when it was released (US$300 in the United States), and a full-featured edition that costs significantly more (US$400). Microsoft is also selling a wide array of peripherals at fairly high prices, opening further opportunity for profit. Although necessary to make Xbox a profitable business, this pricing strategy could make the console a hard sell to the casual gamers and home entertainment enthusiasts whom Microsoft hopes to reach.

Learning from History

When Microsoft launched the first Xbox in Nov. 2001, Sony's PlayStation 2 (PS2) was already well established. To be competitive, Microsoft had to release Xbox at the same price as PS2 and cut prices when Sony did (as of July 2005, both consoles retail for about US$150). At the same time, because Xbox includes a built-in hard drive and PS2 does not, Microsoft was never able to break even or turn a profit on the hardware and has had to rely on software sales and Xbox Live subscriptions to take up the slack. As a consequence, Microsoft's Home and Entertainment division (in which Xbox is included) has lost more than US$3 billion since the launch of the console.

This time, by beating Sony's next console to market, Microsoft has a chance to set the price point at a level that will cover the console's costs and could eventually allow the company to turn a profit on each hardware unit. In addition, the wide array of peripherals available for both consoles—particularly the bare-bones edition—offers further opportunities for profit.

Two Consoles

In Aug. 2005, Microsoft announced that the console will be available in two editions in North America and Europe when it launches later this year.

Xbox 360 will ship with the following components:

• Detachable 20GB hard drive
• One wireless game controller
• Wireless headset for voice communications
• Remote control for accessing its digital media functions, such as DVD playback and Media Center Extender functionality (which lets users access digital audio, video, and pictures on a Media Center PC over a home network)
• Component video cable for connecting the console to high-definition TVs (the cable will also work with standard-definition TVs and composite inputs).

Other peripherals, such as wireless network adapters and flash memory drives, will be available separately, but many are priced higher than their equivalents for the PC. (For a list of all Xbox 360 products available at launch and their suggested retail prices, see the chart "Xbox 360 Pricing and Peripherals".)

This version of the console will retail for US$400 in the United States, €400 in most European countries, and £280 in the United Kingdom.

Xbox 360 Core System will ship with only one wired (not wireless) controller and a cable that lets it connect to a standard television—no hard drive, headset, or remote control will be included. These peripherals, all of which will be manufactured by Microsoft at launch, will also be available for purchase separately. Microsoft might eventually allow third parties to manufacture these peripherals, but it is requiring all peripheral manufacturers to pay royalties and participate in a logo program, which was optional for the first Xbox. Both versions of the console will feature a detachable white faceplate that can be swapped out to customize the console's appearance.

Xbox 360 Core System will retail for US$300, €300, and £210.

Basic gameplay will be the same on either console: all Xbox 360 games will boot from the game disk, and the hard drive will be necessary only for functions such as saving games and downloading new levels. (Users can also purchase flash memory drives for these functions.) In addition, the remote control is not required for digital media functionality—all digital media functions will be accessible with the Xbox 360 game controller. However, because games on the original Xbox required a hard drive, Xbox 360 Core System will not offer backward-compatibility with any Xbox games. In addition, a hard drive or memory drive is necessary to take advantage of the free Xbox Live Silver subscription, which comes with both versions of the console and offers communication and e-commerce features but not head-to-head gameplay.

Microsoft has not announced Xbox 360 pricing or packaging in Japan, but reiterated that the console will also be available there before the end of the year.

Although covering costs is critical, another goal with Xbox 360 is to expand the audience for game consoles to casual gamers (e.g., those who play online games on sites like MSN's Zone) and home entertainment enthusiasts. These users may balk at paying US$400 for the full console. For digital media, Xbox 360 will be competing with many other consumer electronics devices, such as Apple's popular iPod (a high-end 60GB model with a color screen costs US$399 as of July 2005), digital TVs (some smaller models are already available for less than US$400), and next-generation high-definition DVD players (which are expected to be released by the end of 2005). Even so, the full Xbox 360 will probably be price-competitive with Sony's PS3, which Sony Computer Entertainment President Ken Kutaragi has warned will be "expensive" when it's released in 2006.

Xbox 360 is detailed in "Xbox Successor Unveiled" on page 31 of the June 2005 Update.

The official Xbox 360 site is at www.xbox360.com.