ZDnets John Carroll:
To my mind, though, a Microsoft that is first to the price reduction punch is a nightmare scenario for Sony. Though Nintendo might be the current sales leader (trumping both PS3 and XBOX monthly sales), from a competitive standpoint, XBOX 360 is more the direct competitor (at least outside Japan). Both target hard core gamers, and both offer more performance and graphics capability than the lower-cost Nintendo Wii.
An even lower cost XBOX 360 with a larger selection of games and larger installed base is a situation to which Sony will not be able to respond. Sony is limited in how much it can reduce the price of the PS3. They might try, but the higher cost of the PS3 (partly driven by the costs of the mandatory integrated BluRay player) limits their maneuverability. Sony's PlayStation group has been laying people off, and though PS2 still sells well, that isn't sustainable long-term.