At some point in the next 12 months, Microsoft will realign the Xbox 360 as an offering. This could be in the form of a price-cut, or of a bundle, or an upscaling of the machine; perhaps a larger hard drive. The company's solution could encompass a combination of all these.
Here's the upside. As Microsoft's Robbie Bach said in an article published here yesterday, manufacturing costs have come down sufficiently to make a price-cut a viable option from a purely practical consideration. Bach did not offer hard numbers but iSuppli estimates that the $399 version of Xbox 360 costs $323 to produce, leaving some potential margin for price-cutting.
When it launched, each machine cost Microsoft $525 to produce, so the cost of goods has come down by nearly 40%, and further savings are likely in the year ahead. Microsoft was caught out badly by its inability to easily swallow necessary price-cuts on the original Xbox, a problem which cost money as well as share. This time, it's been smarter.