$99 Xbox: Microsoft’s killer move

May 4, 2012, 6:46 PM UTC

FORTUNE — Since the Magnavox Odyssey sold for $75 in the 1970s — the equivalent of $230 and change today — video game consoles have been a pricey upfront investment. If a user wanted the latest cutting-edge hardware, it meant putting down hundreds of dollars. Microsoft may be about to change that.

According to a recent report from The Verge, the Redmond, Washington-based tech giant could introduce a subsidized $99 Xbox 360 package as early as next week, pairing a 4-gigabyte version of its console with its popular Kinect controller. The Kinect motion sensor retails for $149 as a standalone product. The business model would closely resemble traditional cell plans. But instead of a two-year carrier contract, consumers would sign up for a two-year commitment to pay $15 a month for Xbox Live Gold and unspecified additional content. Users who break the contract pay an early termination fee.

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Owners will end up paying more in the long run ($459 with a two-year commitment vs. $299 for a similar bundle without a subscription), though a deal like this could drive significantly more sales. Despite the Xbox 360’s long-running streak as the best-selling console in the U.S. — 16 months and counting — sales were actually down 48% during the third quarter of 2012 compared with the year prior. Gutting the upfront price could reinvigorate sales, convincing some consumers who may have been the put off by the Xbox 360’s current costs to splurge. And once they’ve opted in, they’re locked into the Xbox experience for two years — unless they’re willing to pay a penalty.

More importantly, Microsoft’s (MSFT) new strategy could cement its six-and-a-half-year-old console’s position as an affordable home entertainment hub. As the company has matured the Xbox ecosystem, Microsoft has focused as much on expanding its device’s media offerings as putting out new games. The Xbox now serves as many if not more media options than offerings from Roku and Apple (AAPL), not to mention traditional console competitors Sony (SNE) and Nintendo.

Like competitors, the Xbox can access streaming services from Netflix (NFLX), Hulu and Vudu (WMT). Microsoft also runs its own music and video offerings on the console, as well as a modified version of its Bing search engine. But in recent updates, Microsoft has been very aggressive about opening the service to a wide range of additional services or apps. In the most recent quarter it added apps for Comcast’s (CMCSA) XFINITY TV, Time Warner’s (TWX) HBO GO and MLB.TV.

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Of course, the Xbox 360 isn’t just a hardware channel for media, it’s a full-fledged video game system with a long roster of quality titles. For some, that’s a much better value proposition over a Roku box, with only casual options like Angry Birds. And while users would end up paying more in the long run, $99 upfront is a much lower psychological threshold to cross, at least initially, compared with $299 or even $199. Some consumers may not mind spending more in the long run if it means they can pay in small installments.

From a business perspective, it might mean a shift for video game hardware, where the console — at least for Sony and Microsoft — isn’t a primary vehicle for games anymore, but all kinds of digital content, something which Microsoft has long stated it’s wanted all along. It almost makes you wonder why they didn’t think of it sooner.