Update: It’s Official! Xbox 360 $99 On Contract

Xbox 360 on Contract for $99–What Does It Mean?

Updated 5/8/12: In a stunning act that surprised just about no one, Microsoft has announced that last week’s rumors are in fact true. Starting now you can get an Xbox 360 with Kinect for just $99 upfront on a 2 year contract that includes Xbox Live service.

The Verge has an interesting rumor, citing some “trusted sources”: apparently, Microsoft will begin offering the Xbox 360 4GB bundle, including a Kinect sensor, for $99 upfront and $15 a month on contract. According to the story, the contract bundle will include a full 2 year warranty for the system and an Xbox Live Gold membership covering the life of the console.

Now, whether this is a good deal or not is a question that’s very much up for debate, and you’re already pretty busy with that, so have at it. The bigger and more interesting question is: why this deal, and why now? I have some thoughts you might want to consider after the break.

The most obvious question is just this: Why Xbox 360, and why now? Let’s face it: the console isn’t exactly a spring chicken; it’s inching up on its 7th birthday and one might reasonably expect its appeal to start fading. But looking back over the past year or so, it seems the opposite is actually true: following the introduction of the slim version and the much celebrated, often hated but still under-utilized Kinect Sensor, sales of Xbox 360 have remained brisk, even lacking a price drop. The increase in popularity of the Xbox 360 following these events hasn’t been hampered much by the competition, even following price drops on both Nintendo’s Wii and Sony’s PS3, a truth which has no doubt emboldened Microsoft to keep its price at the current level for longer than one would normally think.

But the truth of the matter is that every price range has a limited number of potential buyers, and the first quarter of 2012 has seen the Xbox 360, though still on top in monthly sales, drop significantly from the same period in 2011. Without a doubt, Microsoft is looking for ways to put the system into the hands of even more people, selling more Xbox Live memberships and getting more Kinect sensors in front of more people. The surprise, though, is that normally about this time we’d be talking price drop. Sony’s already done it several times, as has Nintendo, and both have met with some level of success with that strategy; but while that’s true, it’s also true that for whatever reason, the measure hasn’t allowed either vendor to overtake sales of Xbox 360 at a higher price in the US.

Still, the fact remains: only so many people are going to pay $199 for a 4GB 360 or $299 for the same unit plus Kinect. So what to do? Maybe the best place to look is to the smartphone model. In years past–by which I mean, prior to the iPhone 3G–smartphones were prohibitively expensive, generally starting in the range of $300 and going up from there. If you went off contract, you were (and still are) looking at prices in the $500 range, which, let’s face it, not too many people are going to pay. When carriers began offering smartphones with deep subsidies, adoption literally went through the roof. Now, we could argue about the value proposition–after all, even at $500, you’re paying less for the smartphone than you will on a contract–but the truth is that whether buying outright is a better value or not, there is simply a giant swath of the population–especially in a down economy–who cannot or will not drop that kind of bread, no matter how cool the device is.

But there’s something special, something magical (yes, that’s hyperbole from a can) about a price in the $99 range, even if it comes with the associated payment each month. We buy smartphones buy the tens of millions even knowing we’ll pay a $30 per month premium to have some quantity of data usage we probably won’t use all of anyway, but there’s something comforting about knowing it’s there. I guess. Now here comes Microsoft with an idea: $99 upfront nets you a device that normally runs for $300, and includes one of the hottest gadgets around–Kinect–plus the online services you’ll need to really enjoy it, and a 2 year warranty, and they’re only asking for $15 extra per month. Whether it truly is or not we’ll lead you to decide, but for a lot of people it will sure seem like a good deal. And, truth be told, it could be a worse deal. If you’ve been pining to get online and play some games with your friends, or use your Netflix subscription on something bigger than your computer monitor, but can’t really afford to pony up $300 plus an Xbox Live membership, it could be pretty tempting–and I suspect it might just work.

Perhaps more importantly, though, it’s also a test of these waters for games consoles. If it’s successful and broadens the adoption rate of Xbox 360 and Live without a price drop, it’ll pave the way for similar deals on next-generation consoles. Imagine, for a moment, if Sony had done this with Playstation 3 at launch, and you could walk into a store, sign a contract, and walk out with a $499/599 PS3 system, brand new with a warranty and access to services, with a low $15-20 monthly fee. Perhaps the adoption rate of PS3 wouldn’t have taken so many years to finally catch up (well, mostly) to Xbox 360. Perhaps it would have even seen adoption rates closer to that of the Wii–who knows?

What we do know, conclusively, is this: high cost of entry is a barrier that forces many people to wait on purchases they’d otherwise have made sooner, and it forces manufacturers to drop prices to sell more devices, often at the cost of obliterating what cost savings and profit margins they’ve built up over time through reduced manufacturing costs. This could be a solution to both problems, and it could be a path that lets Microsoft deliver its next console after Xbox 360 to a much broader audience, far more rapidly than their competitors.

Will it fly? I have no idea. Maybe. It’s certainly worked in other areas, from smartphones to cable providers offering advanced equipment in years past. If it does work, it could change the way we play–and how soon we Jump In.