Sony to lose $100 on every PS3?

Written by Geoff Richards

June 29, 2005 | 15:18

Tags: #100 #loss #manufacture #merrill-lynch #playstation3 #playstation-3 #ps3 #report #rsx #xbox-360

Companies: #japan #microsoft #sony

The manufacturing cost of a single Playstation 3 could be as high as US$490 despite an expected retail price of US$399 when it hits the shops in 2006, according to financial analysts Merrill Lynch Japan. The hundred dollar subsidy would cause Sony to lose more than US$1 billion on hardware sales in the first 12 months - a pill tough to swallow even for the mighty consumer electronics giant.

Beancounters at Merrill Lynch Japan estimate that the first US$100 is absorbed by the Cell processor, the NVIDIA-designed RSX graphics chip and Blu-Ray optical drive alone. Factor in the cost of other components, case and final assembly and the final cost price balloons to 54,000 yen (£271 / US$490).

Launching after the introduction of Xbox 360 means there is little chance Sony would risk pricing PS3 at the breakeven £299 / $499 level; Merrill Lynch reckon Microsoft will sell Xbox 360 for US$299, forcing Sony to position themselves at US$399. Working on estimated first year sales of some 14 million units worldwide, the report suggests Sony would bend over to the tune of more than 130 billion yen (£652m / US$1.18 billion).

Sony will find little sympathy in Seattle: Microsoft's Xbox division has famously lost hundreds of millions of dollars, quarter after quarter, since the console's introduction. Reports vary, but with console prices falling in the last 12-18 months, Microsoft are estimated to make a similar $100 loss on each console.

Of course, loss-leading on hardware is common practice and cash is clawed back over time thanks to license fees and royalties from game sales: Sony turned a $458 million first-year loss into nearly $1.8 billion of profit during Playstation 2's second & third year.

Unfortunately for Sony, Merrill Lynch think things could be different this time around: if Microsoft combat Playstation 3's launch with a price drop for Xbox 360, second & third-year loses could total $1.2 billion. This is not what Sony's top brass will want to hear, having already sunk over $1.8 billion into the development of the Cell processor.

Despite this, Sony Computer Entertainment president Ken Kutaragi remained defiant in an interview with Japanese magazine Toyo Keizai, who published these disturbing findings in their latest issue. "Whether consumers think a product is expensive or cheap all depends on the balance between its appeal and price," he said, citing the rampant demand for Playstation Portable as an example of gamers wanting something so badly that they ignore cheaper alternatives and simple dig deeper into their pockets. "Our ideal [for the PS3] is for consumers to think to themselves, 'OK, I'll work more hours and buy it.' We want people to feel that they want it, no matter what."

This confidence may well backfire: despite a slow start, the original Xbox has emerged as a genuine alternative to Playstation 2, and Microsoft have a clear lead when it comes to online multiplayer thanks to their Xbox Live! service. From what we know from recent announcements, both next-gen consoles will have similar grunt, both touting high definition graphics and fresh versions of familiar titles.

If Microsoft launch first, as is expected, Sony will find themselves playing catch-up with a product that won't be vastly superior and could be a third more expensive than its rival.

Their saving grace will be their fans: over 100 million Playstations have been sold, and sales of Playstation 2 have just rocketed past 90 million, 27 months faster than the first generation console. Throw in Playstation 3's expected backwards compatibility with existing games, and you have one hell of a potential userbase.

Source: Gamespot

Would you pay $399 for a Playstation 3 if Xbox 360 was already available for $299? Or do you think both prices are too high - what price do you think is right for these new consoles? Tell us.
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