Why Microsoft is cutting its Xbox 360 price on Sunday

Microsoft’s plan to cut $50 off the price of its Xbox 360 Pro video game console is all over the web. The company is expected to announce it will start selling the Pro model for $299 on Sunday, July 13, just before the E3 game show in Los Angeles. But not everybody remembers why this happens like clockwork.

A year ago, Microsoft cut the price of the Xbox 360 from $399 to $349. In general, Microsoft says that it continuously cuts the costs of the components in its consoles and passes on the benefits to consumers in the form of price cuts. It never describes its plans more specifically than that to the public and it declined comment for this story.

This works well. Consumers can count on reduced hardware prices. Price-conscious consumers can dive into the market, and more people buy game software. If the price cuts are deep enough, Sony will try to respond with its own cuts. But Sony’s PlayStation 3 is still a higher-cost machine and Nintendo’s machine is so different and in such high demand that it hasn’t changed its $250 price on the Wii since the launch in 2006.

So there isn’t a huge amount of pressure on Microsoft to act more often than it does. Internally, the plan has always been to reduce the costs of the motherboard with a redesign every year. And every couple of years, the company tends to do something major in cost reduction. It hasn’t really stuck to that plan.

One of the things that got in the way was the billion-dollar write-off last year for defective consoles. But Microsoft still managed to introduce a new motherboard, code-named Falcon, which followed Zephyr (which introduced an HDMI connector to the Xbox 360) and which followed the original Xenon board launched in 2005. This board had fewer defects and it included an IBM microprocessor that was cost reduced. Previous IBM processors were built with 90-nanometer circuit widths. By moving to a 65-nanometer process, the company was able to make the same chip with finer circuitry. Such chips were smaller, used less material, and therefore were cheaper to make.

The tech-savvy customers paid attention to this transition because they figured that the Falcon-based machines were more reliable. But with the promise of a free replacement for failures for up to three years after purchase, Microsoft eliminated many consumers’ concerns about defects.

This year, Microsoft is introducing a motherboard with the code name Jasper, which I wrote about last fall. This board has both a 65nm IBM microprocessor as well as a 65nm graphics chip from Advanced Micro Devices. Other folks have written about what is coming next. After Jasper, the next version is Opus, which is a weird character that takes a step backward with a 65nm processor and a 90nm graphics chip. It will fit in the same housing for the original Xenon machines.

Valhalla is the end game. That board will have a single chip that combines both the processor and the graphics chip on a single device. It isn’t expected until 2009 at the earliest. By eliminating a major chip, Microsoft will be in a position to cut prices further. At some point, these improvements will give Microsoft the ability to get rid of a fan or reduce the size of the unsightly power brick in the power cord, further reducing costs. And they should all improve the reliability of the console, which tends to overheat.

Sony, of course, is going to shoot for the same kind of goal, but it’s going to be hard fusing the IBM Cell processor with the Nvidia graphics chip. And Sony still has to deal with the higher costs of the built-in Blu-ray player.

Lastly, here are some other rumored E3 Microsoft announcements:

Joystiq reports that Microsoft is working on a motion-sensitive controller for the Xbox 360.

A leaked memo showed that Microsoft was working on Xbox Live Avatars, which are cute characters that resemble the Mii personalities on the Nintendo Wii. The same memo mentioned that Microsoft will announce games such as racing game “Forza Motorsport 3,” a sing-along game “Lips,” and some kind of social gaming network.