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In Theory: Can Microsoft produce a new, cut-price Xbox One?

Digital Foundry on the business case and the production realities.

It's panic stations at Microsoft, apparently. PlayStation 4 is wiping the floor with Xbox One, the new console is a sales disappointment, and the word on the internet street is that Microsoft will introduce a new, cheaper console this year and discount the existing model. Microsoft's Aaron Greenberg tweeted over the weekend to pour cold water on the latter rumour, but the suggestion that a new, cut-price Xbox One is already in Microsoft's plans is unlikely to go away, while Sony is able to boast of a 1.5:1 sales ratio in the UK and global statistics also favour the PS4 so strongly.

With all this in mind, we thought it would be interesting to assess whether a new, cheaper Xbox One is a remote possibility from a hardware point of view and also whether Microsoft would even consider it.

Let's tackle the business side of the equation first. In terms of hardware sales, Sony's revelation of the UK sales ratio tells us two things. Firstly and most obviously, it says that PS4 has hit the ground running with a brilliant start - a combination of a great product, superb marketing across 2013, and an attractive price tag when it hit the streets. But Microsoft's 3m worldwide sales for Xbox One is still a laudable achievement as well. Indeed, bearing in mind the disastrous gaffes and the continuous procession of embarrassing U-turns, some might even call it a miracle.

For a console that has attracted so much negativity from core gamers, the reality is that were it not for PS4 achieving even stronger results, Xbox One would be the most successful console launch of all time. If anything, the Xbox One software story is even more interesting. Despite being the more expensive console, UK publishing sources inform us that the Xbox One software attach rate - the number of games sold per console sold - is ahead of PS4 at this point, although the gap is closing, suggesting that while hardware sales are lower than the competition, the high price of Xbox One hasn't stopped people buying games. In effect, what we're seeing is exactly what Sony said last week: a reversal of the PS3/Xbox 360 situation. It's important to remember that that was a state of affairs that proved sustainable for Sony, despite the PS3 being more expensive than the Xbox 360 throughout its lifespan.

Another thing to bear in mind is that business plans are laid out over years and these new consoles are just over two months old. Any reaction at this point would be kneejerk in the extreme, especially when Microsoft's key card has yet to be played: Respawn's Titanfall, which comes out next month. It's not quite a console exclusive (it's coming out on PC and Xbox 360 too) but it's still a potentially big deal for Microsoft, and perhaps the next big must-play multiplayer game. Just how good it actually is remains to be seen, although the public beta this month should give us some idea.

"The major problem with the revised Xbox One hardware theory is that it's difficult to find any areas where substantial savings could be made over the current design."

The rear of Xbox One. Build materials are somewhat workman-like, and it's difficult to locate any area in the current design that could be revised with cheaper components. So if a revised, cheaper Xbox One is coming, where will the savings come from?

From a broader perspective, Microsoft would have gone into the launch acutely aware that it would probably lose to PS4 in sales volume. It's not as though the company would have been unaware of the value of a positive price differential, especially bearing in mind how much that helped Xbox 360 over the years. The spectre of its many PR disasters would also have weighed heavily on the minds of PR and marketing personnel, especially in the wake of a horrific E3, yet there was no panicky pre-launch price cut and nor was there any sign of a Kinect-free SKU, which would constitute the easiest way to restore price parity with PS4.

From a business perspective, then, for lots of different reasons it's difficult to imagine Microsoft changing course so soon. If it did, though, there's another important question to consider: where are the cost savings that would justify a redesigned console?

As we noted in our initial hardware test, the Xbox One does not come across as a finely honed, quality piece of hardware. The design itself is simple and easy to mass-produce, the plastics are cheap (the shiny sections on the casing of our unit are already mysteriously scratched) and, motherboard apart, the basic construction of the console is considerably less complex than PS4. So what parts of the console can be swapped out for cheaper components? And what could change in 12 months in terms of the cost base that would make a saving that counts for something in the minds of potential customers? After all, in the run-up to full production for the launch, we can safely assume that Microsoft pursued all avenues in making the production of the console as cost-effective as possible.

Let's look at some of the mooted options. Firstly, the Blu-ray drive. This simply can't be removed for a number of reasons - it won't take a genius to point out that a disc-less SKU will end up being more expensive for the consumer in the long run based on digital prices, while broadband infrastructure isn't really there to support continual 30GB downloads for everyone just yet. The reasons why both Microsoft and Sony integrated optical drives in the first place have not changed in the last two months, and that's before you consider that removing the unit would not make the price that much more attractive anyway.

"Removing Kinect may please the core gamer, but the peripheral is there for a reason. Microsoft sees it as the key component in its media integration strategy."

Unloved by many, the biggest issues facing Kinect are a fundamental lack of supporting games, along with under-development of the media functions that were supposed to define the system.

It's difficult to find substantial savings anywhere else in the design of the hardware. The 500GB hard drive is already the cheapest configuration available to buy in bulk, and although other options are available, going much lower would fundamentally impact the usability of the machine bearing in mind that every game needs to be installed. A key cost - the 28nm APU processor - will get progressively cheaper, but not to any degree that isn't already factored into Microsoft's spreadsheets. Significant costs savings on the central chip won't kick in until the system is moved onto a smaller fabrication node, and based on what happened on last-gen console, that will take years to kick in. Cost savings elsewhere - on the controller, or headset - would impact essential functionality and compromise an interface that Microsoft has invested millions of dollars in developing. And again, we can't see any kind of substantial cost saving there.

The elephant in the room is Kinect, the advanced motion sensor that adds a great deal of cost to the bill of materials. Unloved by gamers, and apparently shunned equally by developers based on the lack of software that supports it, its mandatory inclusion in the box looks for all the world like an albatross around Microsoft's neck, especially when the machine works just fine with the peripheral disconnected.

The question we need to ask here is why Kinect is in the box in the first place. Microsoft has not exactly been secretive about this - it sees Xbox One's place in the living room as its best bet in making the machine a success with a mainstream audience across the machine's lifespan. Leaving Kinect out of the box could well boost sales in the here and now, but if the camera is seen as key to appealing to a demographic outside of the core, removing it now would be a U-turn with incalculable consequences in the medium to longer term. Indeed, with the market fragmentation that would result, Kinect would effectively die in short order. That might raise some cheers from its hardcore detractors, but it's just not the way Microsoft sees the audience for the machine developing across the cycle.

Beyond hardware changes, the pricing situation could in theory be more malleable. Already we've seen online retailers in the UK knock £20 off Xbox One, suggesting that there's already some leeway there. But it's worth bearing in mind that the overall economic situation in console land is a far cry from years gone by.

"Effectively realising the vision for Xbox One is a tough task - but somewhat easier than producing a financially viable cheaper SKU any time soon."

The problem Microsoft has in removing Kinect is that it removes much of the potential the system has in being unique and distinctive compared to its competitor. Comparisons like the Tomb Raider head-to-head suggest that reducing Xbox One into a more cost-effective 'me too' product may not be the answer.Watch on YouTube

After splashing out billions on its last-gen consoles, both Sony and Microsoft want to make money from their hardware. Microsoft saw its enormous expenditure in the Xbox division during the 360 era as an investment: the best and indeed only way to compete against the juggernaut that was the PlayStation brand during the PS2 era. The very design of the next-gen consoles suggests that buying the audience via investment it can never hope to recoup just isn't going to happen any more. Compared to their predecessors, they are very safe designs, and it's no surprise to find that they are so similar at the architectural level.

So what are the viable options for Microsoft if the business situation isn't looking good? If Xbox One's performance doesn't live up to expectations - if it is indeed panic stations in Redmond - then the most practical and logical course of action would be to suck up a price cut before considering anything else. Other than that, the only option would be to remove Kinect, removing much of what makes the console unique and leaving a 'me too' product differentiated only by console exclusives, and one that faces continued unflattering comparisons on multi-format titles. The company is likely to view this as completely unpalatable.

Alternatively, Microsoft can pull out its collective finger and actually make Kinect - and by extension, the machine's media integration credentials - something the market actually wants. That's quite a task, but significantly simpler than producing a brand new Xbox One when it will be years before doing so is financially worthwhile to Microsoft.

Overall, then, our suspicion is that all we'll see this year is a price cut, if even that. Viewed through the prism of the core console gamer and the specialist press, the battle between Microsoft and Sony is painted all too easily as an all-or-nothing affair where desperate measures are required to get Xbox One back in the game. But the reality is that there will almost certainly not be a radically revised Xbox One released this year, simply because the production options aren't there, and try as we might, we can't see a reasonable business case where new hardware addresses the challenges Microsoft faces either.

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