Microsoft brings smartphone biz model to gaming

(MoneyWatch) COMMENTARY People don't usually associate Microsoft (MSFT) with innovative business practices. But a new low price deal for an Xbox smartly translates to game consoles an approach that has worked wonders in the cellular phone world. That not only gives the company a chance to expand its market share, but also sets it up to become a entertainment natural alternative to cable and satellite services over time.

As Don Reisinger explains at our sister site, CNET, consumers put a little down and then agree to a two-year service contract:

The software giant today announced that customers can now buy the Xbox 360 4GB console with Kinect for $99. However, in order to get the $100 savings, they'll need to sign up for a two-year Xbox Live Gold membership, costing $14.99 per month.

Some argue, rightly, that there are cheaper ways to put together an Xbox 360, Kinect motion detection controller system, and Xbox Live subscription. Buy the standard Xbox and Kinect bundle for $299, pay $60 a year for the Xbox Live Gold subscription, and you pay a total of $419. If you take the new deal, instead, it's $99 up front plus $15 a month for 24 months, or $459.

To some it seems like a pricing flaw. However, it's more likely a first step to find a balance between services and hardware revenue. Over time, Microsoft could raise monthly service prices to move customers toward the subsidized hardware model. Microsoft could flip the perception by making the $15 monthly service price the "normal" one. Perhaps it could arrange for significant device additions, or at least special content, that could shift people toward a phone-like two-year swap habit, keeping them locked in.

Being able to snag customers for two-year periods could do a lot for Microsoft's bottom line, as the company has made numerous streaming deals, including Bravo, Syfy, and HBO in the U.S.

Microsoft clearly wants the Xbox to replace the cable box -- and it's already in tens of millions of homes, which is a huge head start over Apple (AAPL) or Google (GOOG).

Erik Sherman

Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.

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