End of the Land Grab

The announcement of Sony's new PS3 Slim and consequent price-drop for the entire PS3 range ought to be a decisive and positive moment in the company's hardware strategy. Equally, Microsoft's recent demonstration of its ability to grow Xbox 360 hardware sales through a tough recession ought to give a positive glow to its own efforts. In short, this week both "core" console manufacturers ought to smell of roses.

That's not, however, how much of the commentary about the week's developments has gone. Perhaps the most striking words I've read in the past couple of days belong to EEDAR's director of analyst services, Jesse Divnich, who painted both Microsoft and Sony as "financially exhausted" - "like 12th round boxers", to be precise.

The phrase rings true. Sony's price-cut, long overdue, comes alongside the introduction of new hardware - and the combination probably wipes out much of the benefit of the 70 per cent reduction in PS3 manufacturing costs which the firm was trumpeting only weeks ago. Sony's wider financial problems are well-documented, with layoffs and restructuring defining its recent years. Faced with tough competition from undercutting rivals in core markets like television, Sony can ill-afford continuing losses from its videogames business.

For Microsoft's part, it knows that even despite its much more stable financial position, further heavy losses from the Home and Entertainment Division would cause serious questions to be raised by investors. Stung by years of losses from the original Xbox, and still smarting from the billion-dollar reserve which had to be created to deal with the 360's hardware reliability problems, the firm's money-men know that they need to be seen to be marshaling their resources against threats like Google and Apple - not throwing further money into the Xbox pit.

As a result, this week's new hardware and price drop from Sony, coupled with rumours of a restructuring of the Xbox 360 range from Microsoft, don't feel like heated competition - they feel like an uneasy stand-off. If reports of Microsoft's future strategy hold true, the Xbox 360 Pro will be phased out, and the 360 Elite dropped to USD 299 in its place - competing directly on price with the PS3. In the UK at least, this restructuring will also see the Arcade model getting a small price bump.

The status quo, as we head towards Christmas, would therefore be very even. Both firms would have their main hardware offering priced at broadly the same price point, albeit with Microsoft also offering a slightly crippled lower-end model. For Sony, finally achieving price-tag parity with Microsoft's main offering is something of a victory in itself, but while both firms will eye their rivals warily, further price drops to differentiate the hardware are unlikely.

The intense focus on finances - a far cry from the market-share landgrab of earlier years - can leave a bitter taste in the mouth of consumers. From Microsoft's side of the field, it has caused blatant price-gouging on accessories, with infuriatingly custom-packaged hard drives, memory cards and WiFi adaptors being sold at vastly inflated price points.

Sony, too, has been forced into errors by the need to focus on price - such as the decision to save a few dollars on each console by dropping hardware backwards compatibility with PS2 games, despite the presumed failure of the firm's attempts at creating an alternative software solution. Watching Sony now attempt to claim that nobody is really interested in PS2 backwards compatibility - while with the other side of its face, breathlessly announcing exciting new PS1 games on the PlayStation Network - is beginning to look like a slightly farcical comedy sketch, although most consumers probably aren't laughing much.

Of course, the background to these problems is the enormous success enjoyed by Nintendo with both the Wii and the DS. It has stolen away a huge chunk of the more casual, occasional gamer market, providing an attractive upgrade path for the many households which bought into the PS2 fairly late in its lifespan. Sony and Microsoft had expected to fight tooth and nail over those upgrading consumers - the Wii has swept the rug from under their feet, and Nintendo's rudely healthy quarterly profits are merely an insult added to this injury.

The spectacle we're watching, then, is not just a battle to the death between two financially exhausted gladiators - it's a battle to the death in an arena whose walls are slowly closing in. Fuelled by a combination of determination and sheer hubris, Microsoft and Sony have spent enormous amounts of money on this generation of hardware, and are now desperate to claw it back, even at the cost of some market share. Yet the market they're competing for is in some senses smaller than it was before, hammered by everything from the Wii and the iPhone to casual games on Facebook or the success of World of Warcraft - each of which, in some way, pulls consumers away from the high-end next-gen consoles.

At this point in time, it's impossible to tell where this battle will go. Both sides are unlikely to try to compete on price - the financials simply don't stack up for that kind of land-grab. Similarly, both will find it hard to justify spending millions on securing exclusivity for key titles.

Differentiation through services and first-party games will, I suspect, be the order of the day - but until technologies like Natal and PS3's motion controller start to appear in 2010, it seems unlikely that any serious punches will be landed on either side. The financial realities of the situation rob both Microsoft and Sony of options - until those realities are addressed by rising game sales and falling manufacture costs, the market-share land grab strategies will have to wait.