Microsoft Takes a Page Out of the Smartphone Playbook

In the smartphone biz, subsidies are king.

One of Apple's (NAS: AAPL) initial missteps with the iPhone was not to adopt the common practice with the original phone, which led to some pricing and average-selling-price stumbles in the first year. Carrier subsidies also present a risk that's been gathering attention lately as Apple literally sucks profit margins out of its carrier partners.

Well, Microsoft (NAS: MSFT) is thinking the subsidy model might be a good idea -- but beyond the smartphone industry. The software giant has just launched a new deal that offers an Xbox 360 4 GB console including a Kinect for $99, provided that buyers sign up for a two-year contract for its Xbox Live Gold service for $15 per month.

No subsidized contract would be complete without an early termination fee, which is $250 in this case. This fee declines each month, just like in the smartphone industry.

I'll save you the trouble of grabbing your calculator; the total cost over the life of the contract is $459. Unsurprisingly, you end up spending more with this option than if you were to buy the pieces separately. An Xbox and Kinect bundle normally goes for $300, and you could purchase 12 months of Xbox Live Gold for $60 (before various discounts that are out there for a subscription). Of course, Mr. Softy is hoping you'll load up on other content once you're inside its digital storefront.

Will Sony (NYS: SNE) respond in kind with a subsidized PlayStation 3? After all, the iconic electronics company's most profitable division is financial services.

Microsoft is keeping mum on the next iteration of its gaming console, which is casually being called the Xbox 720, although the company has said it won't be out this year. It would be rather unkind to make this offer only to release the new model in 2013, so this might be a hint that 2014 is the year for gamers to look forward to. Meanwhile, Sony is "confident" that it can beat Microsoft to the punch with the PlayStation 4.

The Xbox deal lowers the upfront cost, just like in the smartphone world, but beyond that it's really not much of a steal.

It's hard to imagine Microsoft delivering multibagger returns because of its massive size. Luckily, you can still Discover the Next Rule-Breaking Multibagger that's a small company poised for astronomical growth. It has all six signs of a Rule Breaker, and I own it personally. Get the free report now.

At the time thisarticle was published Fool contributorEvan Niuowns shares of Apple, but he holds no other position in any company and a short bioto see his holdings and a short bio. The Motley Fool owns shares of Microsoft, Sony, and Apple and has created a bear call spread position in Sony.Motley Fool newsletter serviceshave recommended buying shares of Apple and Microsoft and creating bull call spread positions in Apple and Microsoft. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.