Land in sight: Sony cuts PS3 production cost by 35%
Business and Law Features

Land in sight: Sony cuts PS3 production cost by 35%

El Segundo (CA) – Sony’s PS3 trails its rivals in shipments and remains a financial disaster for the company, as market experts believe that Sony will never be able to entirely recoup an estimated $2.5 – $3.0 billion in losses the system has accumulated so far. But Sony is making progress, according to iSuppli, and is moving the console closer to a breakeven point.  

Game console manufacturers typically accept losses in hardware sales, but take in huge profits by selling games and other content. That was the case when the PS2 came to market, when the Xbox 360 became available and it was no different with the PS3. The PS3, however, took that business model to a whole new level: The console, thanks to its Cell processor, expensive XDR memory, a pricey GPU and a Blu-ray drive, may have carried a production cost of nearly twice its retail price initially. Described as a supercomputer for the TV, the PS3 was a financial gamble from the very beginning.
 
Sony is now taking steps to bring down the production cost of the PS3 substantially, especially since Microsoft has been at a breakeven point for some time and the Wii has always been profitable. According to iSuppli, the first version of the PS3 carried an estimated bill of materials of $690.23 (according to a 2007 estimate, which was down from more than $900 estimate in 2006), while the newly revised PS3 is believed to cost Sony $448.73 in materials, manufacturing and box content. This number is still above the console’s $399 retail price, but the new design allows Sony to cut its losses dramatically.

iSuppli said that the revised PS3 design (80 GB) contains about 2820 individual parts, compared to 4048 in the previous-generation model with a 60 GB hard drive. All of the key integrated circuits in the new PS3 have undergone changes and employ more advanced process geometry compared to the previous model, the market research firm said. Key parts, which include Nvidia’s Reality Synthesizer, IBM’s Cell Broadband Engine and Toshiba’s I/O controller are now manufactured in 65 nm, cut the overall power consumption of the PS3 and reduce the number of discrete components in the console.

iSuppli believes that Sony pays $46.46 for the Cell processor (down from $64.40 for the 90 nm model) and $58.01 for the Nvidia GPU, down from $83.17 previously. The market research firm estimates that the PS3 console has a material cost of about $415.74; the controller (with 189 individual parts) may cost $14.84, while manufacturing is estimated at $18.14.  

“With its new-generation PS3, Sony has come closer to breaking even, although it probably hasn’t quite reached that mark yet,” said Andrew Rassweiler, director and principal analyst, teardown services, for iSuppli. “With iSuppli’s estimated PS3 cost at $448.73, the product retailing in the United States at around $399 and taking into account other expenses, the PS3 may be able to break even in 2009 with further hardware revisions.”

However, the new number does not take into account marketing cost and the share retailers are taking – which means that Sony will have to make much more progress to make the PS3 a profitable business. In the short term, the only opportunity to achieve profits may be content: And we could be seeing a shift here as well: Just around Christmas, Sony rolled out a new PS3 advertising campaign that does not promote the PS3 as a game console, but as a high-definition streaming-video/Blu-ray console.