Analyst: $60 Pricing May Not Be Sustainable

January 08, 2007 | By: James Brightman

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Is $60 too much for a game? That's a question that has been asked repeatedly over the last year as the next-gen market has taken shape. Nevertheless, one analyst doesn't think this price point is very sustainable, as recent price drops on some titles (like Madden, right) seem to indicate.

Next-gen gaming sure is expensive—$400 for an Xbox 360, $600 for a PS3, $60 per game and on and on. The next-gen price point for software is something that consumers have had to come to grips with over the last year, ever since the introduction of the Xbox 360. At first, it was just the third-party titles that cost $60, but now Microsoft's first-party offerings like blockbuster Gears of War are $59.99 and the same can be said of Sony's first-party PS3 games like Resistance: Fall of Man.

Top tier publishers like Electronic Arts and Activision among others have repeatedly said that next-gen games "command premium pricing" and that consumers have shown a willingness to pay more for this supposedly vastly better experience that the new consoles can offer. But how long will the market bear a $60 price tag? If recent price cuts on some of EA's Xbox 360 games at retail is any indication, the answer is not long. Games such as Madden, FIFA and Tiger Woods were marked down from $60 to $50 while their current-gen counterparts were slashed by $20.

According to analyst Jeetil Patel of Deutsche Bank, "either the industry is still in transition, or $60 pricing is not sustainable." Patel pointed out that in the past cycle, price cuts on Madden didn't occur until at least April. "In this new cycle, we think it [is] critical that $60 next-gen prices last at least as long as $50 prices did in the prior cycle in order to compensate for steeper development costs, a tougher competitive environment (which requires more marketing spend) and so that EA can replicate the 27% operating margins seen in FY04," Patel said.

So are consumers finally voting with their wallets and purses, waiting for prices to fall instead of jumping on the $60 bandwagon? Patel seems to think so.

"We believe the inability to sustain $60 into April suggests consumer appetite for premium priced titles is questionable. Note the reported reductions include Xbox 360 SKUs of the bellwether Madden game, as well as Tiger Woods & FIFA, the latter two being released this past quarter (all three cut from $60 to $50). Recall that EA also cut Xbox 360 prices in May-06 despite selling into price insensitive early adopters," Patel continued.

"In the past 2 years... Madden did see price cuts in Oct-Nov. However the 2004 reductions were in response to Take Two's competitive NFL game (which no longer exists). The 2005 reduction came amidst a deep industry downturn. In the last cycle, the PS2 price cuts in 2002 (for '01 releases) came in the spring and summer months, whereas Xbox 360 ASPs have been cut within months of launch. While EA could be managing channel supply (in driving unit vols.), we still think it's early relative to historical practice."