Sony's Asset-Lite Chip Strategy Is Good News For Games

Posted by: Kenji Hall on October 18, 2007

It’s no coincidence that Sony’s decision to sell its production line for the high-powered Cell chip to Toshiba comes so soon after a cut in the price of its PlayStation 3 videogame console. By transferring control of the chip-making facility, Sony can cut semiconductor-related costs.

That’s not only good news for Sony’s semiconductor unit, which would have to keep throwing billions of dollars at new tech advances to squeeze more tiny transistors onto a single chip. It’s also a plus for the PS3 since chips account for a big chunk of the console’s production costs. Sony can now continue to lower PS3 prices without risking even bigger losses at its gaming unit, which could lose up to $1 billion this fiscal year.

I wrote about this a few weeks ago, when Sony and Toshiba were reportedly negotiating a deal. Here’s an excerpt:

The sale could bring Sony an estimated windfall of $870 million. In the best-case scenario, Sony would gain another benefit: With Toshiba’s expertise in production efficiency, Sony could get a cheaper price on chips that would lower the PS3’s costs. Sony now spends about $89 on each Cell chip, or about a tenth of the overall cost per console, market researcher iSuppli estimated in a teardown analysis last November. “The point is this would have the effect of driving down costs for Sony’s gaming division,” says Macquarie Securities analyst David Gibson.

Toshiba’s new plant, in Nagasaki on the southern island of Kyushu, will continue to only churn out chips for the PS3. The deal also includes graphics chips for the PS3, and the sale to Toshiba of an older chip plant for the previous-gen console, PS2, in nearby Oita.

At the time, it was merely an educated guess. But Sony basically confirmed this line of reasoning.

Sony Group will advance the high-performance semiconductors used for PlayStation while reducing costs by further strengthening its collaboration with its respective partner companies. These enhancements will continue to strengthen the leading capability of the PlayStation 3 system and Sony Group's overall PlayStation business

And:

"We believe the production alliances that we have formed with IBM and Toshiba to manufacture high performance semiconductors for PlayStation by using state-of-the-art process technologies will lead to the advancement of the high-performance semiconductor business for PlayStation," said Yutaka Nakagawa, Executive Deputy President in charge of semiconductors at Sony.

Reader Comments

mark

October 19, 2007 6:52 AM

Toshiba has made chips, semiconductors, and memory dram for decades. Sony has decided to sell its cell-chip making unit to Toshiba for a long-term strategy - cutting cost, partnership with domestic corporation. If PS3 and the next-model of PS series will catch more market shares, The only weapon can be used a competitive price. With such analysis, Sony will sell what does not bring much profit. On a economics of scale, One company finds difficulty to be top on management in all units of manufacturing electrics components, consumer product lines, music & movies entertainment, industrial equipments. At a right time, Sony can re-organize its operation structure, then become more mobility, dynamic, and competitive.

Giovanni

October 19, 2007 5:52 PM

Please explain. Why would Sony get better prices by selling the production facilities? I would assume that the reverse would be true.

Imran

October 20, 2007 3:12 AM

There will be no cost advantage for Sony, it just allows them to stomp up some much needed cash and at the same time reduces R&D & Technical staff head count. Sony are dumbing down - relying more & more on "brand" and marketing. Sony is a financial basket case.

Jase

October 20, 2007 5:24 AM

Its simple mechanics - let the people with the most technical experience get on with what they do best. You start the ball rolling - they pick it up and continue to make it better.

You save on investing on those skillsets and pay a nominal fee on the developed product. Perhaps the best move Sony has made so far. Next phase work out how to make developers invest their time and effort to developing games to utilise the cell technology over other consoles!

Joe

October 20, 2007 10:06 AM

I dont see how Sony will get better prices selling the plant. When they own the plant, they control the cost of the chips. When someone else owns the plant, not only do they have to pay the cost of making the chips, they have to pay the maker a profit as well. Also, wouldn't it be a kick in the pants if once Toshiba had the chip plants they refused to sell to Sony thereby cementing HD-DVD as the successor to DVD and killing off Blu Ray once and for all? Don't think it can't happen. PS3 is a distant third in the game console sector. There can't be much profit in selling chips to them. Toshiba stands to gain a lot more by stopping PS3 production so HD-DVD can win the next gen movie format war.

Jason

October 20, 2007 8:25 PM

I'm an the epitomy of outside on this subject, but I am currently learning about semiconductor production. In an attempt to answer Giovanni's question I submit the following. Fab costs for chip production is extremely expensive. To keep up with the leading edge they would spend millions on constantly updating the fab. If Sony is only producing chips for their PS3 this an extremely high cost for them. But by having Toshiba, who I believe produces chips for many applications, produce their chips they could save money. Comes down to this a billion dollar fab producing chips for only one application makes each chip very expensive. A billion dollar fab producing chips for hundreds of applications... Well you get the picture.

Pit Crew

October 21, 2007 10:05 PM

I think Sony is doing the right thing here. Semiconductor chips are profitable and at the same time very expensive. So its a highly risky business unit. Its best for them to leave this risk to Toshiba and focus on getting more games out their doors.

jake

October 23, 2007 10:40 AM

They are selling the plant because Toshiba is going to use the cell in other applications. (driving volume up, cost down)

If they don't supply sony they will be in the same boat sony was.(low volume, high cost)

Toshiba is in a joint venture on the cell. I assume it would piss off everybody involed in the venture if they sabatoged it.

Sony is safe.
and Toshiba is safe because they have a share in Sonys blu-ray market.

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