While the Nintendo Wii is still comfortably outselling both Microsoft and Sony, the war for what could be second place has found a new home: Europe. Yesterday Microsoft announced that it would be cutting prices of the Xbox 360 hardware across the board in Europe. The Xbox 360 Premium is now €269.99/£199.99, the Elite €369.99/£259.99, and the Arcade €199.99/£159.99—a drop of €80/£50, €80/£40, and €80/£20, respectively. "Xbox 360 is now mass market in Europe," said Chris Lewis, the vice president of Microsoft's Interactive Entertainment Business in Europe. The price drop was arguably overdue, but the bigger news is that it could be a very direct threat to Sony's business in Europe.

Based on the estimates of EA, the PS3 sold 2.8 million units in Europe in 2007, with the Xbox 360 selling only 1.9 million. EA sees Sony making big moves in 2008, it estimates that Sony will move at leave 5 million units, while it only sees the Xbox 360 selling 1.5 million to 2 million systems. Compare that to the US, where in 2007 Microsoft sold 4.62 million units to Sony's 2.56 million. If Microsoft consistently wins the sales race in the US, and Sony handily beats the Xbox 360 in Japan, Europe may be one of the most important battlegrounds in this console war. Microsoft knows it. "Europe for us is still the swing," said Microsoft VP Jeff Bell in a recent Reuters interview. "The biggest challenge is that Sony as a brand has had greater staying power than in other areas. Not just PlayStation 3, but Sony as a brand."

With Microsoft now undercutting both Nintendo and Sony in price with its range of Xbox 360 products, can Sony fight back with its own price drop? The company has to be concerned, says one analyst. "Sony will be nervous that the PS3's recent sales surge may fizzle out now that the premium Xbox 360 undercuts the PS3 by GBP 40, and the cheapest Xbox model is almost half the price of the PS3," analyst David Mercer from Strategy Analytics commented. "Sony will be scrutinizing the daily sales reports, but will probably try to hold out until later in the year before making its next price move."

With a comfortable lead in sales, Sony doesn't have to make the decision yet, but with Blu-ray lasers becoming smaller and cheaper and Sony's willingness to introduce new hardware configurations, the possibility is always there. Sony also has the advantage of sitting on top of the winning high-def format in Blu-ray, and the PlayStation 3 is such an able Blu-ray player that it is powerful weapon to drive sales. Sony also has the strong-looking PlayTV waiting in the wings for Europe; the product turns the PlayStation 3 into a DVR, and allows place-shifting of recorded content using the PlayStation Portable. In short, Sony is uniquely placed in Europe to completely take over the living room of high-definition enthusiasts.

Should Sony be nervous about Europe? Sony has the sales lead, it has strong consumer electronics branding, it has the winning format in Blu-ray, and it has a suite of products like the PlayTV and the PlayStation Portable that combine into a very slick home theater system. The Xbox 360 price drop could be interpreted as Microsoft blinking in the face of Sony's strong position in Europe—a key territory Microsoft would love to control. Sony has the ultimate luxury in this war in Europe: the ability to wait and see what happens.