Microsoft's brilliant $99 Xbox plan brings the phone contract model to consoles

A report from The Verge's Tom Warren says that Microsoft will begin offering the Xbox 360, with Kinect, for $99. The catch? You have to sign up for a $15-a-month, 2 year contract. Leaving aside whether this rumors is true, it's worth considering what would happen if the same model that makes smartphones affordable were applied to game consoles.

This idea is, in a word, brilliant. It takes the "subsidized hardware with back-end royalties" model already in use by game-console manufacturers and kicks it up another notch.

Consoles today are already subsidized. Retailers charge almost no real mark-up, and the consoles themselves are for minimal profit, or sometimes below cost. The retailers do this to make money selling games. The console makers (Microsoft, Sony, or Nintendo) make money by charging a royalty on every game sold. Microsoft may lose money selling Xbox 360 consoles, but it makes back money on every Xbox 360 game sold, from any publisher.

The brillance of Microsoft's move is that it cuts the cost of entry even further by applying a service contract the way phone service providers do. The 4GB Xbox 360 with Kinect typically retails for $300. Xbox Live Gold membership, reportedly included with the new monthly fee structure, is necessary to use many of the service's features from online multiplayer gameplay to streaming video and music services. It costs either $10 a month or $60 a year.

So you don't really pay that much more for the new subsidized bundle. $15 a month for two years is $360, so you get the console and Xbox Live Gold for two years for a total of $460. Without the subsidy, the $60-a-year charge plus $300 for the console totals $420. Over the course of the contract, you'll pay $40 more. But in trade, you can get an Xbox for $100! And that's the price most consumers will focus on.

The Verge report says that the new subsidized Xbox 360 deal will be available at Microsoft stores in the U.S. That's a small number of stores, but it wouldn't surprise me if Microsoft made the deal available online, too. There's no word on what additional content or services Microsoft may include in the service plan—the company is said to be working on a Spotify-like music service, which would be a natural fit.

This could be huge for Microsoft's Xbox business. With no new Xbox system due on the market for over a year, Microsoft has to keep interest in its aging console high. The best way to do that is to make it cheap, and get people invested in the all the new premium audio and video content it is adding to Xbox Live. This move accomplishes both of those things, while making sure that customers have an investment in the service that extends into the launch window for the next console. It gives the console the appearance of being as cheap as an Apple TV, with a lineup of video and audio services just as compelling, plus all that gaming stuff. Perhaps most importantly, it takes the Xbox 360's biggest flaw—the cost of a Gold Xbox Live membership—and spins it into an opportunity to offset the cost of the hardware.

I wouldn't be at all surprised if this subsidy structure was incredibly successful, and rapidly copied by Sony and Nintendo.

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