Pricing the Next Generation Xbox – Premium

With a surprise announcement in January, the Xbox Series X promotional campaign has already begun. While details are still sparse, we do know some of the specs of the hardware like an AMD Zen 2+ CPU, SSD, Ray Tracing and more features.

We have also been hearing a bit about the PS5 as well and during the past couple of weeks, details about CPU specs for what Sony may be using have surfaced. To build on this, Richard Leadbetter did a fantastic deep dive in to the specs and how they may influence pricing; this post is worth a read if you care about the components that will make up the next generation consoles.

The short version of the lengthy post is that, based on the limited available information, it looks like the Series X will be a beast of a console and that Microsoft is going to push console expectations to the limits with its hardware. The other side of the coin is that Sony has a solid build as well but it looks to be balancing price and performance.

While raw Tflop performance is great for headlines, consumers have shown to be extremely price-sensitive where even $25 can sway buying decisions when it comes to comparing ‘like’ items. Which means for Microsoft, more horsepower, means more dollars; is having the ‘best’ console worth the premium over the well-established PlayStation brand?

Microsoft, much like Sony, has a couple of options when it comes to pricing the console. The first option is to make a profit on the hardware, the second is to break-even, and the third would be to subsidize the hardware (take a loss) with expectations of making up on royalties of future game sales.

In the console world, it’s not uncommon for vendors to take a small loss or break even on hardware, at the time of its release. For Microsoft, his has been true in previous years and Sony the same, Nintendo is often the exception to this rule. But under Phil Spencer, Microsoft has revamped its Xbox org and what was true yesterday, is not always true today.

For example, Microsoft historically would announce new consoles in the first half of the year and it would be released with a slow drip of information later that same year, but Microsoft has been talking about Scarlett/Series X for more than a year publicly at this point. And with the design, name, and some of the specs known, we are lacking pricing information.

And Microsoft is either preparing for the most expensive console ever or they are going to be subsidizing the hardware. When the Xbox One launched, it was priced at $499 and I think it’s a given that the Series X is at least that amount, if not higher. Granted, the Xbox One was bundled with Kinect which was a mistake.

The PlayStation 4 was released at $399 and expectations are that the PlayStation 5 will be around that price point as well.

When you look at what Sony is including with its hardware-based on Ledbetter’s deep dive and what Microsoft is including with its console, Microsoft is targeting a much higher threshold for performance which will come at a price. I would not be surprised to see the Series X starting at $499-599 price and it being marketed as the ‘ultimate gaming console’.

Which is why Microsoft is also working on Lockhart. While the specs and performance are still unknown, insiders continue to say that it is a scaled-down version of the Series X. For Spencer and all of Xbox, launching a console that is $100 or possibly $200 more than the PlayStation 5 would likely sink the brand without a companion device.

But if Lockhart can offer solid performance, think 1080P and locked/min of 60FPS, at a price that is $50 to $100 less than the PlayStation 5, it would give Microsoft a viable path to releasing the Series X at a higher price point.

Looking at the price of the Xbox One X today, which is somewhere around $350 and the Xbox One S (Digital Edition), which is the lowest-priced console in the Xbox family, at about $150, there is no way that Lockhart will be a $199 console. I would expect it to be around the $3-400 price at release.

Microsoft does have a few other tricks up its sleeve, such as bundling GamePass/Live/xCloud offerings with its console to help improve the perceived value. Meaning, ‘Buy the Xbox Series X for $599 and have access to 100+ games for 1yr, all included’ – you get the idea.

The Series X pricing may sound quite high but I think there is some evidence to support this path forward. When Microsoft initially released the Elite controller for $150, insiders were saying that most executives thought it would flop as who would pay that much for a controller? These executives were proven wrong and we know that because the Elite Series 2 was released with an even higher price at $179.99.

We likely won’t find out pricing for a few more months, hopefully around E3 as historically, and again this isn’t perfect precedence, the console should go up for pre-order around that time. For those who are starting to save today, if you want a Series X, it may be wise to aim higher than previous generations.