Cost of Sales wouldn't be affected by a price drop. I thought you were talking about vis-a-vis Xbox 360-dominated quarters (i.e. product mix).
If it costs you $5 to make something, selling it for $10 or for $8 shouldn't affect your cost of sales. Microsoft might take charges against retailer promotions in SG&A though.
Am I misunderstanding?
not in this case (edit// you're not misunderstanding, i mean). it would if they were holding inventory, perhaps; they'd be factoring a small writedown into cogs (or a separate expense if the writedown was large enough). but with how MS ships product, cogs would likely remain the same and so yeah it'll just result in lower rev.
quarter to quarter, the division did have higher cost of rev though... q1 to q2 rev increase from 2500m to almost 4000m and yet their gross margin was actually 19m lower. techncially it did improve YOY which the report highlights, but q1 was one of their best margin performances and it changed a lot in q2.
not really sure why though because with quarterly reports they never put much effort into segments, and you'd need a pretty comprehensive segment income statement to better understand where it came from.