$99 Xbox: Microsoft’s Killer Move

Since the Magnavox Odyssey sold for $75 in the late 1970s — the equivalent of $230 and change today — video game consoles have been a pricey upfront investment. If a user wanted the latest cutting-edge hardware, it meant putting down hundreds of dollars. Microsoft may be about to change that.

According to a recent report from The Verge, the Redmond, Washington-based tech giant could introduce a subsidized $99 Xbox 360 package as early as next week, pairing a 4-gigabyte version of its console with its popular Kinect controller. The Kinect motion sensor retails for $149 as a standalone product. The business model would closely resemble traditional cell plans. But instead of a two-year carrier contract, consumers would sign up for a two-year commitment to pay $15 a month for Xbox Live Gold and unspecified additional content. Users who break the contract pay an early termination fee.

Owners will end up paying more in the long run ($459 with a two-year commitment vs. $299 for a similar bundle without a subscription), though a deal like this could drive significantly more sales. Despite the Xbox 360’s long-running streak as the best-selling console in the U.S. — 16 months and counting — sales were actually down 48% during the third quarter of 2012 compared with the year prior. Gutting the upfront price could reinvigorate sales, convincing some consumers who may have been the put off by the Xbox 360’s current costs to splurge. And once they’ve opted in, they’re locked into the Xbox experience for two years — unless they’re willing to pay a penalty.

More importantly, Microsoft’s (MSFT) new strategy could cement its six-and-a-half-year-old console’s position as an affordable home entertainment hub. As the company has matured the Xbox ecosystem, Microsoft has focused as much on expanding its device’s media offerings as putting out new games. The Xbox now serves as many if not more media options than offerings from Roku and Apple (AAPL), not to mention traditional console competitors Sony (SNE) and Nintendo.

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