Microsoft's foray into the console market has opened a Pandora's box of problems for the company as it struggles with poor sales and an unruly channel. So much so, Microsoft has reduced the price of its Xbox by nearly 40 per cent in a bid to compete in an aggressive market.
Effective from last Friday, Microsoft slashed $250 from the retail price of its console, from $649 to $399. To compensate people that had already purchased the Xbox, Microsoft offered a $250 gift voucher entitling customers to two games and an Xbox controller.
Alan Bowman, Microsoft's regional director of Xbox, said the decision to reduce the price comes from competitive pressure from rival console PS2, which he says has been an obstacle to promoting the whole Xbox "experience".
"We wanted to take away any potential barriers for purchase and enable more consumers to enjoy Xbox," he said.
According to channel research firm Inform, PS2 has been out selling Xbox by a ratio of 3:1 in the past three weeks.
Meanwhile, speculation in the channel suggests Microsoft has turned a blind eye to its initial plan to exclude the majority of its independent dealers, with some resellers previously ineligible now actively selling the console.
As reported in ARN on February 27, Microsoft elected to use seven mass merchants, with All Interactive Distribution (AI) to supply around 40 independent retailers. At the time, Microsoft's argument was that its traditional reseller base did not suit the console market.
"When I finished my conversation with [Microsoft] in January, I put it to them that we would see what happens in 12 months time as I expected they would see the error of their ways. Faint hope I had at the time," said Greg Williams, proprietor of Lincoln Computer Centre in Adelaide.
"[Microsoft] could not see how that could happen as they had a five-year plan, which did not include resellers like us. I wonder if the plan included an embarrassing price slash a month after release."
Lincoln Computer Centre has since started selling the console and is enthusiastic about its prospects.
Sherard Kingston, managing director of All Interactive Distribution, said it has not thrown the doors open to all resellers around the country and denies that Microsoft's plans have changed a month after the console's launch.
"Absolutely, categorically no. I would disagree with that 100 per cent," he said.
Kingston denies the original number of "around 40" dealers has significantly increased. Instead "a certain flexibility" has been introduced, which has seen particularly "passionate" resellers, along with resellers that have had a prior relationship with AI, eligible to sell the product.
Although adamantly denying that AI has taken an open-slather approach, Kingston conceded that "some have slipped through the net" and are now selling the product.
Regardless of the number of independent dealers now selling the product, Kingston said the independent channel has "out-proportionally" sold Xbox compared to mass merchants. He said independents usually account for around 4 per cent of this type of market, but in the case of Xbox sales the figure is 20 per cent.
"Apparently their Xbox sales have been poor - perhaps they should have embraced resellers in the first place. It works for every other product they sell," said Lincoln's Williams.
"For all their marketing nous and squillions of advertising dollars, they still went into battle in enemy territory. The existing console stores don't care whether they sell brand X, P or N," Williams said. "They felt that their traditional reseller base wasn't familiar enough with the console market, which may be so, but we are familiar with our customers."