Will 360 Warranty Extension Come at the Expense of a Price Drop?

With news today of Microsoft's admission of widespread defects acknowledgment of an "unacceptable number of repairs" for the Xbox 360, current 360 owners can finally rest assured knowing that if (when?) their 360 sees red, the problem will be rectified. This news may also be the spurt of confidence that many waiting buyers needed who have refused to purchase the system due to the hardware problems.

But what about the potentially millions of gamers who are waiting for the much rumored price drop that has been speculated for almost one year? As part of the warranty extension announcement, Microsoft noted it will take a “$1.05 billion to $1.15 billion pre-tax charge to earnings for the quarter ended June 30, 2007 for anticipated costs under its current and enhanced Xbox 360 policies.” This brings us, surprisingly enough, to Sony.

Late rumors today circulating the net suggest that Sony is poised to announce a $100 price drop for the Playstation 3 at next week's E3. If there's been one resounding criticism of the PS3 (and there's certainly been plenty), it's that the console simply costs too much. A quick visit to most any video game forum or blog confirms that there are countless gamers who are willing to purchase the PS3 once the price drops. Sony knows this, but so does Microsoft.

Upon hearing this rumor, many wishful gamers are predicting a counter-price drop by Microsoft to maintain the apparent price advantage the 360 has over the PS3. But are they being realistic? Can Microsoft afford to incur the astounding loss they announced today AND cut the 360's price (which is already incurring a loss per unit)? What about the $50,000,000 spent on exclusive episodic content for Grand Theft Auto IV? What about the unknown amounts of money some have suggested Microsoft paid to bring previous Sony exclusives to the 360?

As part of the warranty extension announcement, Microsoft's Robbie Bach stated "[o]ur goal has been to have Xbox profitable in the coming fiscal year 2008 . . . We don't think this changes that in any way." Fair enough, but surely a price drop would make such a goal that much more difficult to achieve. In fact, Bach's statement could still be true as the actual console could turn a profit per unit (meaning no price drop) while the Xbox division overall incurs losses. I know it's a play on words, and I'm sure that's not what he meant, but one never knows when shareholder confidence is at stake.

Obviously, as with all major corporate decisions, nothing is as simple as just choosing one option or the other. And I'm well aware of the deep corporate assets Microsoft has as a whole. But, at the end of the day, can anyone realistically believe that taking a $1 billion loss is not going to have at least some impact on when the inevitable price cut occurs? I imagine we'll never know, but if the rumors of Sony's price drop next week turn out to be true, I wouldn't hold my breath for a retaliation from Microsoft - something which seemed very reasonable just hours ago.