(Adds comments from analysts in third through fifth paragraphs, comments from Nintendo executive in eighth paragraph and updated stock price.)

 
   DOW JONES NEWSWIRES

Sony Corp.'s (SNE) Sony Computer Entertainment America will cut the price of its PlayStation 2 game system to $99.99 starting Wednesday.

Sony hopes the 23% price cut will sustain the life of the PS2, which it says has sold more than 136 million units worldwide since its launch in 2000.

Sony also said it will still offer its newer PlayStation 3 console for $399.99 for an 80-gigabyte model, its least expensive. But after showing a willingness Tuesday to lower console prices, industry watchers now expect Sony to indeed cut PlayStation 3's price by another $100 sometime in the next few months. Sony is still losing money on every PS3 it sells at $399, so a price cut could hurt the games division, analysts said in December.

The new PS2 price should resonate with consumers facing a challenging economic environment, despite the relatively limited number of video games still available for the console, said BMO Capital Markets analyst Edward Williams. Sony, and leading PS2-compatible game publishers Activision-Blizzard Inc. (ATVI) and Electronic Arts Inc. (ERTS) should also see a benefit, he said.

Used videogame retailer GameStop Corp. (GME) also stands to gain. That's because value-seeking shoppers that frequent used goods retailers, like GameStop, are more likely to buy $99 PS2s, according to Sterne Agee analyst Arvind Bhatia.

The cut suggests Sony's strategy of selling a pricey game machine with advanced features and cutting-edge components appears to be backfiring as a deepening recession has U.S. consumers more price sensitive than ever.

The company is in the midst of a major restructuring - shedding 16,000 jobs worldwide - in an effort to reverse out of the net loss it expects to post in the fiscal year through March. That will be the first net loss in 14 years at the company.

The NPD Group reported earlier this month that PlayStation 3 sales fell 1% last month. Sterne Agee analyst Bhatia said Tuesday he expects the company to cut PS3 prices by up to $100 in the next 60 days. The PS3 is more expensive than the market leader, Nintendo Co.'s (NTDOY) Wii. Nintendo has no intention of cutting the Wii's price, a Nintendo executive told Dow Jones Newswires.

Analysts said in December that Sony might not reach its goal of selling 10 million PS3 consoles through March, as sales for the hardware dropped despite gains by competitors.

Sony also faces increased competition from a new business model in the industry that would allow gamers to purchase or subscribe to games without going to a store, and even without having to buy the latest hardware.

If Sony doesn't close the gap with its rivals, it could risk making the PS3 an afterthought to game publishers, who focus their resources on the machines with the most users.

Microsoft Corp. (MSFT) cut Xbox 360 prices in early September and started bundling games with the most basic console for $199.

Part of Sony's strategy hinged on selling the PS3 as a relatively inexpensive Blu-ray player. But prices of Blu-ray players have fallen so sharply recently that it's now possible to buy a Blu-ray player and an Xbox 360 for less than a PS3.

Sony's shares were recently down 0.7% to $20.61.

-By Kerry E. Grace, Dow Jones Newswires; 201-938-5089; kerry.grace@dowjones.com

(Ben Charny contributed to this report.)