Sony's Plan to Cut PS3 Costs

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The arrangement bears a striking resemblance to Sony's joint venture with Samsung Electronics to make liquid-crystal-display panels for flat-screen TVs. That venture, which was formed in 2004 and became profitable a year and a half later, is one reason Sony has clawed its way to the top of the LCD-TV market, after getting a late start. In the April-June quarter, Sony ranked second worldwide, with a 13% share, according to DisplaySearch.

Buying Time to Delay Another PS3 Cut

For Sony, the fact that a decision about semiconductors can improve its gaming business is a big plus. Combined, the two account for more than 20% of Sony's overall $70 billion in revenues, but were a big liability last year. Semiconductors lost about $500 million, the division's third consecutive year in the red.

In semiconductors, Executive Deputy President Yutaka Nakagawa wants to turn things around with an "asset-lite" strategy. That involves jettisoning noncore operations to focus on Sony's imaging chips for digital cameras, video cameras, and cell phones, an area where it's No. 1 in the world. Nakagawa knows that he won't succeed if he keeps throwing billions of dollars at new advances that would squeeze more tiny transistors onto a single chip. (Sony's startup costs for the Nagasaki plant: $1.7 billion.)

Hirai, president and chief operating officer of Sony Computer Entertainment, faces a similar budget crunch. He needs to restore video games to profitability after a massive $2 billion operating loss last year. This year won't be as bad, but Hirai may need to double his marketing efforts to drive PS3 sales. The more consoles he sells, the faster game software should sell and the more Sony will make off of licensing fees.

Meanwhile he's eager to close the gap between production costs and retail prices as quickly as possible. When the PS3 went on sale, market researcher iSuppli estimated that Sony was losing $306 on the lower-priced 20GB model and $241 on the pricier 60GB version. Outsourcing the Cell chip in-house may buy Hirai time to delay another PS3 price cut.

Hall is BusinessWeek's technology correspondent in Tokyo
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