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The average price of Microsoft’s (NASDAQ:MSFT) gaming console Xbox is falling, and we expect this trend to continue in light of competition from Sony’s (NYSE:SNE) PlayStation and Nintendo’s (OTCPK:NTDOY) Wii and DS gaming consoles. The upshot is that lower prices combined with new product launches like the Kinect will help market share gains and lift sales going into the holidays.

Xbox and Zune form around 2.5% of Microsoft’s stock price based on our estimates and so a modest decline in Xbox pricing combined with market share gains will have a limited impact on our price estimate for Microsoft. However it’s success in this field holds insight for consumer demand and also impacts game and console chip makers such as nVidia (NASDAQ:NVDA).

We currently have a Trefis price estimate of $30.67 for Microsoft’s stock, which is about 17% above the current market price of $26.20.

New Launches to Drive Market Share

Microsoft announced this week in a press release it has sold 1 million Kinect units for Xbox 360 worldwide in 10 days and is on pace to hit 5 million by the end of the year. [1] Kinect technology allows gamers to play using body movements rather than a controller.

In July 2010, Microsoft launched a cheaper version of Xbox 360 called Xbox 360 Slim priced at $200 to expand its offering. Also to lift sales, Microsoft cut prices of its Elite and Arcade Xbox models by $50 and also plans to discontinue these two models soon. [2]

We believe such initiatives will give a strong push to Xbox’s market share. You can see in the chart above how Xbox’s share in gaming console market increased from 11.5% in 2009 to 16.5% in 2010.

Pricing Pressure Due to Competition

Xbox’s average selling price declined from around $300 in 2007 to around $210 in 2010. [3] We expect this to drop further to around $150 by 2016, vs. the Trefis community average of staying at roughly current levels. This adds around 1% to our price Microsoft price estimate.

Notes:

  1. Microsoft press release: Nov 15, 2010
  2. New $200 Xbox 360 planned, Elite & Arcade getting $50 price cut
  3. Estimated using data from xbox-scene.com and gamasutra.com sourcing estimates from market research firm NPD

Disclosure: No positions

Source: Xbox Price Drops Have Growing Impact on Microsoft