By Ian Sherr and Steven D. Jones
Microsoft Corp. (MSFT) plans to boost the number of outlets offering its subscription plan for the Xbox, an effort to attract more users by lowering upfront costs of acquiring the game console.
The company, which had previously only made the offer available through 17 of its own stores, plans to extend its $99 offer--which combines a Xbox 360 and Kinect motion sensor with a two-year service contract--to all U.S. Best Buy Co. (BBY) stores and a "select" grouping of GameStop Corp. (GME) stores.
Microsoft said it still regards the program as a pilot, adding that the stores will offer the deals to a limited number of users for a short period of time. If there is enough interest in the program, it may once again expand, the company said.
The subscription approach upends typical pricing models for videogame consoles, under which customers typically purchase the device for a higher price and would choose whether or not to pay for additional services. The Xbox and Kinect package retails for $299, while the company's Xbox Live Gold online service regularly costs $60 per year.
Under the $99 subscription offer, customers agree to pay $19.99 per month for two years of access to the Xbox Live network, which allows gamers to play games with one another, watch streaming videos and access Netflix Inc.'s (NFLX) service, among others.
Don Mattrick, head of Microsoft's gaming business, said customers have so far responded well to the new pricing program, though it's still in its pilot phase.
"So far we're pleased with the result," he said, noting that sales have risen among both core gamers and more casual customers as well. "It's been great."
Xbox has been a bright spot amid Microsoft's mixed record in consumer electronics, which includes such short-lived efforts as the Zune music player. The Xbox 360 and Xbox Live online service have enjoyed escalating sales for years; the device currently leads hardware sales with about 42% market share.
Microsoft's subscription pricing, introduced last month, was considered part of an effort to sustain the momentum in a market that has weakened. Console sales are expected to fall 13% this year, according to Gartner, with no dramatic increase expected until 2014, when both Microsoft and Sony Corp.'s (SNE) next-generation consoles are expected to have hit the market. Nintendo Co.'s (NTDOY) new "Wii U" console will be launching later this year.
In the interim, John DiFucci, an analyst at J.P. Morgan said Microsoft is "trying to spur sales into a market that is softening dramatically."
Microsoft's pricing efforts could also serve to test as a model for the company's next-generation console, said Lewis Ward, an analyst at IDC.
"They realize that the best days of the Xbox platform are behind it," Ward said, noting that even if the pricing program helps buoy sales for the next year, it will also show Microsoft whether a similar pricing model could be successful in the future.
Microsoft said it has taken a slow approach to rolling out the subscription program in part because it has had to set up a credit-checking system for customers. The company has also had to train retail partners on how to sell the product. Microsoft said it is still unsure if the program will ultimately be a success with customers.
While the subscription-scheme offer lowers the immediate cost of buying the console and controller, customers end up paying slightly more for the device and subscription over two years than paying the full upfront price for both at once. The model is a familiar one in the mobile-phone market, where carriers subsidize the cost of smartphones in hopes of generating more revenue over time through service fees.
Discounting the upfront revenue from Xbox sales isn't likely to be material to overall revenue in Microsoft's entertainment and devices division, said Rick Sherlund, an analyst with Nomura Securities. The division generated $7.8 billion in revenue in the first nine months of fiscal 2012 off the Xbox console, licensing of games and other items.
More important, Sherlund said, is generating a larger audience for the Xbox Live service--especially now that Microsoft has announced Xbox Live will appear as an application in Windows 8 for both PCs and tablets when it is released later this year.
Microsoft has already said it plans to offer Xbox Live services, such as streaming music, through Windows 8 tablets and computers in addition to a new program called "SmartGlass," which will effectively allow tablets and smartphones to stream content to the Xbox. The technology, which will come in the form of a free mobile application for devices made by Apple Inc. (AAPL) or powered by Google Inc. (GOOG) or Microsoft's software, that can also augment media being played on the game console, such as showing formations in sports games, for example. SmartGlass will launch this fall, likely around the same time as its Windows 8 operating system.
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