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It looks to me like Microsoft needs a price cut themselves, while not quite in the desperate situation Sony is the XBox360 definitely isn't looking like a marketleader. The sales are pretty steady the last few months, whereas the PS3's sales have been slowly dropping on a weekly basis since launch. But holding steady isn't good enough... it's not going to get them the installed base they've been touting and their still seeing sales that are slightly less that what the Wii's been getting for awhile now.

Without a price drop I can't see the situation improving, especially since the Wii is selling like crazy with almost no 3rd party developer support... and less then stellar reviews for most of the software available. What happens when 3rd parties adopt the Wii in mass as they surely will if it continues to sell at it's current pace... which shows not the faintest signs of slowing.

Beating Sony isn't good enough if it still eaves them a clear cut second fiddle far behind the leader. If I'm Microsoft I cut prices ahead of Sony, make Sony look like the follower that's desperately cutting prices to maintain what little semblance of competition they currently offer.

Further push the perception that Sony is a follower and Microsoft a marketleader that defines the path that market follows.

I'm taking the initiative now.

Looking like the "bad guy" to early adopters isn't exactly what I'd perceive as a huge penalty. The early adopters know price will drop over time, and they knew they were paying a premium to get the latest and greatest at launch. They can do precious little to strike back at Microsoft... stop buying 360 games?  That's cutting off your nose to spite your face.

The hard core gamers that are the early adopters are well aware a price cut would ultimately become a reality, and they knew they'd pay the price premium to play the XBox360 games ahead of those that waited.

Microsoft needs to take the initiative and take control of the situation now. Sitting back and gollowing Sony yields them nothing. The status quo isn't good enough if all it gains them is watching the Xbox360 yield to the Will and become games second choice.

They had that with the XBox trailing the PS2. Microsoft has bet tons of money with little in the way of profits in return on the console market. Beating Sony won't see them getting the profits they want. Becoming the market leader will do that.

Sony isn't much of a threat right now, the PS3's quite possibly too far behind already to win this generation. Microsoft isn't.

Nintendo is the company eating up the profits, and it's Nintendo they need to beat if they want to make the XBox360 a profitable venture and recoup all the expenses put into it and it's predecessor.

Casually sitting back and following Sony's lead only allows Nintendo greater momentum. Nintendo's spent a long time being irrelevant as far as the major competition is concerned. I don't think Microsoft is so foolish to ignore the present market realities however and forget Nintendo.

I dont believe Microsoft is in competition with Nintendo.   Nintendo has effectively forked the market into 2 distinct segments.  Casual Gamers and Power Gamers.

Microsoft has basically already won the next-gen battle for power-gamers.  The install-base and content selection for 360 is reason enough for gamers to continue chosing XBox over PS3.  Microsoft is now in the business of "making money", which is always the goal when you're taking a hit on the initial hardware.

If their market is just starting to level off and produce profit on the game-sales, why would do give themselves a set-back but doing price-cuts?  Even if Sony cuts their price by 20%  (TWENTY PERCENT!!!) they would still be $20 more than the HIGH-END XBox. ...and it comes with a head-set too!

Any buyer (especially parents) will say "wait, this is cheaper, has more games (and more people selling used games!), and more 3rd-party controller options.

Microsoft would be better served to try to nudge it's way into the Nintendo "casual gamers" market with games and accessories to help emulate the Wii-type experience.  This would INCREASE revenue by selling additional products, rather than decreasing their revenue by price cuts.

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I don't think Microsoft can casually afford to ignore Nintendo and happily settle with what they have now. Certainly Microsoft has never been a company that's made themselves content with a small slice of the market.

Their sales have levels off... at a little less then half of Nintendo's weekly sales. And Nintendo's sales are climbing. Whether those sales are going to hardcore gamers, casual gamers or grandmothers is irrelevant. Their stealing consumers that might otherwise buy an Xbox360. If their sales are trending so far behind now... when 3rd party developers are only beginning to take any notice of the Wii and considering developing for it, and the reviews on Wii games are generally mediocre beyond Nintendo's own major releases what happens when 3rd party developers target the Wii as the primary platform for their big titles?  It's bound to happen, naturally the big seller gets the big games first. Their after profits and selling to Wii consumers nets them the most money.

Happily accepting the position as a distant 2nd choice isn't going to yield them a ton of money. Being 2nd best in the console market has never been a lucrative position.

They don't need to emulate the Wii to beat it, that's impossible. The Wii's advantages are clear and nothing Microsoft can really match for this generation. Selling accessories to yield what would likely be a poor emulation of the Wii only implies their followers... desperately trying in vain to match it. Beyond that, seldom have any consoles accessories ever been huge money makers. The console itself and the games are the profit drivers. The Xbox360 has some pretty blatant advantages of it's own, it  doesn't need to copy Nintendo. They need to push the price within the range that those advantages are sufficient to make the premium worth paying. Right now, consumers are clearly voting that the price premium isn't worth it.

The PS3 shouldn't scare them. Sony's pretty much assured themselves of irrelevancy, their too far behind already to be much of a threat. An immature Wii selling at twice the rate of the Xbox360 with things looking increasingly brighter for Nintendo isn't something they can ignore. Quietly watching the Wii sell in droves and happily contenting themselves as the hardcore gamers choices is small comfort when their missing out on tons of potential profits. 2nd best isn't a huge profit maker. And 2nd best isn't something Microsoft has ever been willing to accept, nor should any business be pleased with that.