The software giant said it is aiming for a broader audience with the machine, which now costs $179.99 in the United States, down from $199.
"Our commitment to the consumer is to offer the best system at the best price," Robbie Bach, senior vice president at Microsoft, said in a statement.
Some analysts didn't expect price cuts until the fall, when companies traditionally try to rev up sales as the holiday season approaches. Microsoft didn't mention the price cuts during a press conference Monday night, when itfor the console. At the event, held in advance of this week's Electronic Entertainment Expo trade show in Los Angeles, the company introduced the Xbox Music Mixer, a $40 package of PC and Xbox software that will allow owners to transfer digital music and photos from their computers to the console's hard drive.
Microsoft has alreadyof the Xbox in Europe, where the console now sells for 200 euros, or about $230, in mainland Europe and 130 pounds, or about $210, in the United Kingdom, down from $270 and $250, respectively. The company is also under pressure to create new games for the console to boost sales of the device, which have been stagnating.
The cuts come the week after Microsoft unveiled a new pricing schedule for its Xbox Live online gaming service. The service costs $50 for a one-year subscription, or $6 per month. Consumers also can buy a starter kit that includes a headset for voice chat along with a one-year subscription for $70, up from the initial $50.
The Xbox price cut was preceded by an announcement from Sony that it would reduce the U.S. price of existing PlayStation2 units to $179, until a new PS2 package is introduced in June. Kaz Hirai, president of Sony Computer Entertainment of America, said the move was intended to help retailers clear out existing PS2 stock before the new package is released.
Hirai, in an interview at the E3 trade show, said he was nonplussed by Microsoft's decision. "I don't know what their reasoning is, but they're basically matching our closeout price," he said. "I don't know what to say."
News.com's David Becker contributed to this report.