Microsoft said it will cut the price of the HD DVD add-on to $179 from $199. The company will also throw in five free movies during August and September.

The move comes as HD DVD seems to be losing critical ground at retail. Target (TGT) and Blockbuster (BBI) have said they will throw their weight behind the Blu-ray format, no doubt because it has the support of major studios and more high-definition movies are available for it. (UPDATE:Word is that Sony had simply purchased an “end cap,” or prominent space in Target stores. Target itself has not taken sides.)

But the format war isn’t over yet. A critical question is whether low-cost manufacturers in Asia will offer affordable HD DVD players this holiday season. The buzz in electronics circles is that if that happens, and if a big-box retailer like Wal-Mart (WMT) or Best Buy (BBY) carries the players, it could tip the scales in the high-definition format war.

When I spoke with Sony executives last month, they acknowledged that the price of Blu-ray players was not coming down as quickly as that of HD DVD, and that player pricing poses a significant challenge to the format.

Randy Waynick, senior vice president of marketing in Sony’s Home Products Division, said that Sony had sold somewhere in the neighborhood of 100,000 stand-alone Blu-ray disc players so far; that number does not include the PlayStation 3

consoles that include a Blu-ray drive.