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If you look at the relative positions of Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT), this is a no brainer.

Sony are losing a billion dollars this year alone in retail price support for the Playstation 3 because it is far more expensive to make than consumers are prepared to pay. To finance this they have sold off other chunks of their business and raised equity capital. The PS3 is also suffering from a lack of AAA exclusive games, so currently there is little motive for a gamer to buy one. This changes during 2008 when the system seller titles start to appear.

Microsoft have first mover advantage in that the Xbox 360 has a lot of AAA exclusives. Hence they have sold twice as many consoles worldwide, thus far, as the PS3 has. However their superiority in exclusives will start to erode during 2008. They have a second advantage in that the 360, whilst technically as capable as the PS3, is relatively economic to manufacture. This is something Microsoft have put a lot of effort into. So as their AAA exclusives advantage reduces, then their ability to use the price mechanism will come further into play. Especially as Microsoft have lots of money in the bank.

Currently Microsoft can easily sell every Xbox 360 they can make, fueled by the demands of the festive season. However, as we get into Q1 2008 the demand will, naturally, slacken off. This would be the absolutely perfect time for Microsoft to use the price mechanism to stimulate demand. They could put together, say, a Halo 3 package at a price where it was a “must buy” and so move a huge number of units off the shelf.

By acting sooner rather than later, they preempt Sony’s upcoming AAA titles. And by using the price mechanism they know that they are using a tactic that Sony just cannot afford to follow.

This really is a one off moment where Microsoft could put in the knock out blow against Sony and so win this generation of the console war.

Source: When is Microsoft's Xbox 360 Price Cut Coming?