Microsoft: Smartphone-style contracts will be the Xbox 720’s bread and butter

xbox 720A new Xbox won’t be the only key to reigniting Microsoft’s stagnating game console business. According to the Windows 8 company, the mobile market will also redefine its living room entertainment business. How? Pricing.

The video game business is changing at speed. Video game retail sales have plummeted year-on-year over the course of 2012. The decline in disc-based game sales is reflective of an increasingly digital market; people are still spending on video games, they’re just downloading them in greater numbers and publishers typically don’t share digital sales data. The decline in devoted gaming machines is the real concern hidden in those poor retail numbers. Microsoft in particular is feeling the heat, with Xbox 360 sales in the last quarter falling 29 percent year-on-year. A brand new console might not reignite Microsoft’s game console business though. All devoted gaming machines are feeling squeezed: The Nintendo 3DS portable’s sales fell 18 percent in September. How do you fix this business?

By subsidizing sales with subscriptions, just like smartphones. Rather than charge $400 or $500 for a new game console upfront, Microsoft plans to sell the Xbox 720 at a low price with an accompanying subscription.

In a discussion with the Wall Street Journal, Microsoft interactive general manager for marketing Matt Barlow said that subscription programs will be the core of future Xbox releases. “This type of program is pivotal to our business,” said Barlow.

Microsoft began testing the subscription market back in May when it released a $99 Xbox 360 that through its chain of Microsoft Stores. The console is cheap, but it comes with a mandatory two-year contract requiring monthly payments of $14.99. That includes Xbox Live Gold, but at $180 per year, the device and service end up costing significantly more than if they were purchased individually at flat rates. Following that test, Microsoft began offering the same package at Best Buy, Toys ‘R’ Us, and GameStop.

Since Microsoft only sold 1.7 million Xbox 360s over the period when the program first went into effect, it clearly didn’t help the aging console. It didn’t need to though. All it needed to prove was that the model was viable for Xbox going forward into the next generation.

The question now: Who will be controlling and collecting that subscription fee? Will it be Microsoft or cable companies like Time Warner and Comcast as a number of industry analysts like Morgan Pachter suspect?