Microsoft’s Xbox 360 Ripoff

Update: As some readers noticed, I was not fair to Microsoft in an earlier version of this post. The $99 Xbox 360 deal includes Kinect, while the standard $199 offer does not. You’d need to buy a $299 package to get Kinect. So, the difference over two years is only $40 more rather than $130. My mistake and thanks to those who pointed it out.

I admit it. I’m not much of a gamer. But my math skills are decent and I know a bad deal when I see it – and Microsoft’s offer to sell discounted Xbox 360s is exactly that. A somewhat misleading deal that would cost you about $40 more and chain you to a service you might not like.

Actually, you don’t need lots of math smarts to figure out why this is a crummy deal, just multiplication and subtraction.

Let me walk you through it: A 4GB Xbox 360 with Kinect normally costs $299 at the Microsoft online store. A subscription to Xbox Live Gold, which most gamers probably want, costs you another $5 a month. At the end of two years you’ve spent $419.

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Microsoft, taking a leaf out of the Verizon/AT&T playbook, is offering a subsidized 4GB Xbox 360 with Kinect for $99. That’s the bait. Here’s the hook: To qualify you’ve got to lock yourself into a two-year contract for Xbox Live Gold at $14.99 a month. That comes to $459 over two years. Same hardware; same service. Such a deal.

But wait, as they say on late night TV, there’s more. If you cancel before the end of two years, you’ll have to pay a cancellation fee. As I said, that’s exactly the way mobile phone carriers do business. Buy a phone at a heavily subsidized price and agree to a two-year contract with a stiff penalty clause if you decide to opt out of the service early.

Why would someone go for this? Some people might not be able to afford the full price and not mind paying the equivalent of interest charges over a couple of years. Others might just look at the front end numbers: $99 vs. $299 and think, yeah, sounds good. That’s because all too many consumers forget TCO, as they say in the industry, meaning “total cost of ownership.”

The equivalent mistake would be buying a luxury car like a Ferrari at a great price, forgetting that you’ll likely be spending thousands of dollars a year for repairs.

Lots of companies try and capitalize on consumer forgetfulness. Once you sign up for Xbox live, your credit card will be billed every month with a relatively small sum that you might not notice or even remember that you’re paying. Similarly, companies that sell products with a rebate count on you to forget to send it in. Many people make that mistake, and in the technology world, unclaimed rebate money makes a contribution to profit margins that companies routinely count on.

Don’t fall for the Xbox 360 deal, and remember to do the math and think about TCO when you buy a technology product.