How much of a hit is Sony taking on the P$3?

Sony’s share price dropped today and Friday after a Merrill Lynch report estimated that each PlayStation 3 will cost Sony $800 to manufacture. The report says, “In particular, we think the problem points are the Sony Cell processor and the Blu-ray drive.”

Well, duh. Estimates of the eventual in-store price tag for the PS3 have ranged up to $800. Nobody really expects that, but everyone has known the Cell and the Blu-Ray drive would be expensive. Gamespot says the report “predicted the manufacturing cost of the console could be much higher than previous estimates of around $500 per unit,” but that earlier report is nonsense. It estimated the system would cost Sony $500 and sell for $400. But every other estimate of the high price tag understood that Sony would be taking a huge loss on the system at first. The first Blu-Ray players are going to sell for $1,000!! Even the first HD-DVD players will be $500 and up. If the PS3 only cost Sony $500 to manufacturer, it could undercut Microsoft’s price and sell the loaded system for $299.

The question isn’t whether Sony will taking a beating. The Xbox 360’s head start and potential, combined with the Revolution’s likely low price and innovation, mean Sony has to price the system between $400 and $500; I’m betting it’ll sell for $400. The question is whether the company can afford it.

My guess is yes; Sony is too smart a company to be surprised by expensive parts. They must have worked this out and figured it was worth their while. Remember, the bet isn’t just about video games. Getting a huge installed Blu-Ray base makes it more likely the format wins over HD-DVD, which would set up Sony for loads of next-gen DVD licensing profits. And depending on what actually ends up in the PS3, Sony might really have the first successful home entertainment convergance product.

Still, it’s a big bet and sort of an inexplicable one. Sony is miles ahead of Microsoft in the current generation. The Xbox 360 has had a disastrous launch, and barely made a dent in the PS3 hype. Subtract the $350 for the Blu-Ray drive, and Sony would only be spending $450 per unit — then with a $399 price tag Sony basically wouldn’t be taking a loss given accessory sales, or could easily afford the loss to include a hard drive and still undercut Microsoft with a $299 price. Either the mother ship badly wants Blu-Ray to win, or they’re a little too scared of Microsoft.

— February 20, 2006

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