Microsoft and its Xbox 360 franchise gets competitive with a price reduction

Sorry, Sony Corp. (NYSE: SNE), but your problems just got worse. According to a Wall Street Journal (subscription required) piece, sources say that Microsoft Corp. (NASDAQ: MSFT) intends on executing a price reduction for its Xbox 360 unit that is packaged with a 20-gigabyte hard drive. It now costs $349. The new price will be $299 sometime soon.

This is not good at all for the PlayStation 3 system. It's expensive, it isn't as popular, and it would be very difficult for Sony to answer this move by Microsoft with a price reduction of its own. Gamers can get the PlayStation 3 for as low as $399, but that's a far cry from $299 in an economy that is tanking thanks to energy costs and financial-sector issues. The negative wealth effect is on, my friends, and it's only going to get worse. I recently wrote about Sony and how the company has lost a ton of money with PlayStation 3. Since the Xbox 360 and the PlayStation 3 are considered equals in the minds of many not-so-hardcore gamers, the price reduction is going to have an effect. Of course, where does this leave Nintendo Ltd. (OTC: NTDOY) and its popular Wii console? Well, the Wii should be fine for now. People who buy the Wii are usually more casual in terms of gaming, so the Xbox 360 price cut most likely will hurt Sony. However, when there is eventual parity between the price of a Wii and the price of a high-end system, then Nintendo probably will see some sort of effect.

Where does this leave investors? Well, for my money, I think it leaves a best-of-breed publisher like Activision Blizzard Inc. (NASDAQ: ATVID) in a great spot. A higher number of Xbox 360s in homes means more opportunities to sell Guitar Hero units. As for Sony and its stock, investors should avoid it, in my opinion.

Disclosure: I own Activision Blizzard; positions can change at any time.