MAY 13, 2014 • Starting June 9 during this year’s Electronic Entertainment Expo in Los Angeles, Microsoft Corp. will distribute a new $399 Microsoft Xbox One SKU without a Kinect motion and sound input peripheral included in the box. The SKU will be available in all current Xbox One markets, although pricing outside North America has yet to be disclosed. The change provides consumers an Xbox One option at the same price as the PlayStation 4. The Xbox One launched last November at $499 with the Kinect included, and has seen special pricing options such as the $450 bundle with Titanfall last March that worked out to a $399 value. The company will market a separate standalone Kinect sensor later this year. Also starting in June, Xbox One and Xbox 360 owners who are not Gold subscribers will have access to entertainment and sports apps such as GoPro, HBO GO, MLB.TV, Netflix, the NFL, Red Bull TV, and Univision Deportes. Xbox head Phil Spencer made the announcement in a blog post.

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Impact: Price matters. All things being equal, and there are plenty of technical similarities between the Xbox One and PS4, consumers will gravitate to lower priced consoles. While there has been an historical resistance to the $399 launch price point, consumers have an even greater aversion to $499 and $599 payouts. Sony Computer Entertainment clearly found that out during the last cycle with the PS3, and we believe Microsoft has experienced the same lesson with the Xbox One during this cycle. That said the Xbox One has done tremendously well with more than 3 million sold and 5 million shipped. So consumers obviously found a lot of value in the console at $499. Regardless, there are a large number of fence-sitters who do not see a need to own an Xbox One with a Kinect, and resisted paying the extra premium for the sensor. Some of them were happy to continue playing on their Xbox 360s for a while longer, and others purchased a PS4 instead. Even more telling, Sony has had no trouble selling its PlayStation Camera as an option, with the unit often sold out during the last few months. With Sony having moved more than 7 million PS4s since November, it is obvious that Microsoft saw the need to price the Xbox one at $399 without resorting to software bundles, so the Kinect had to go. That the new SKU will arrive concurrently with E3 is not a surprise – providing Microsoft with a strong lead-in story for the convention. None of this impugns the success of the Kinect as a device. According to Spencer, 80% of current Xbox One owners actively use the sensor. Yet we agree that there are a large number of core gamers and consumers who have yet to be sold on needing the Kinect, and $399 is a much better calling card to entice them into the fold.