Nothing Cheap About the PS3

Sony's new console will end up costing the company even more than it does the consumer, according to iSuppli analysts

By Arik Hesseldahl

Hopes are riding high that the PlayStation 3 can eventually bail troubled Japanese electronics and entertainment giant Sony out of the ever deepening waters it finds itself in.

On Nov. 17, Sony (SNE) is slated to release the new game console in the U.S. A successful PS3 launch will go a long way toward closing a year during which Sony has seen nothing but trouble: The biggest notebook battery recall in PC industry history, huge layoffs, and declining profits overall (see BusinessWeek.com, 10/26/06, "Sony's Singed Reputation").

And that was before the snags preceding the unveiling of the PS3. On Nov. 11, a scarcity of PS3s created chaos among key retail chains for the debut of the next-gen game console in Japan (see BusinessWeek.com, 11/12/06, "PS3: The Sound and Fury"). Then, a few days later, Sony confirmed a report that in spite of earlier assurances to the contrary, not all of the games designed for the PlayStation 2 are compatible with the new machine.

On top of that, Sony can't count on the new game machine being a quick fix for its financial woes. Sales of the PS3 itself aren't going to make Sony any money, at least not right away, according to a teardown analysis of the game console by market research firm iSuppli. In fact, Sony will be taking a bath on every unit sold, to the tune of $306 for the lower-priced 20GB model and $241 for the more expensive 60GB model.

Cheaper Chips

iSuppli estimates that the 60GB version of the PS3, which sells for $599, actually costs Sony $840 to build, not including the controller and packaging. The $499, 20GB model costs $805 to build. iSuppli analyzes manufacturing costs, not marketing expenses, which could send Sony's per-box loss even further skyward.

Sony's plan is much like that of rival Microsoft (MSFT): Take a loss on the console and make it back on the games. And that's exactly what Microsoft did when it launched the Xbox 360 a year ago (see BusinessWeek.com, 11/22/05, "Microsoft's Red-Ink Game"). At the time, the $399 Xbox 360 cost the software giant $470 to make, leaving a loss of $71 for each one sold.

But times change, and the prices of chips come down. A new iSuppli analysis of the Xbox 360 and the price of the components used in it reveals that Microsoft may be close to hitting the breakeven point on the Xbox 360. The console now costs Microsoft $323 to manufacture, leaving a gross profit of $76 per unit.

Out of the Ordinary

That puts a new spin on the second phase of the Microsoft-Sony battle: Sony is stepping back into the fight with a money-losing product just as the tide of profitability is turning for Microsoft. Microsoft's latest earnings report for the quarter ended Sept. 30 tells the tale: The software giant's entertainment business unit lost $96 million on sales of $1.03 billion, with sales up by more than $400 million and losses down by $77 million over the year-ago period (see BusinessWeek.com, 10/27/06, "Microsoft Waiting for Vista, Zune").

And so far, 6 million Xbox 360s have been sold. "If Microsoft can hit the 10 million mark by the end of the calendar year, it will be selling a lot more software, and so will be on target to be profitable sometime in [calendar] 2007," says analyst Matt Rosof with Directions on Microsoft, a Redmond (Wash.) consultancy. "They originally said they would do it in fiscal year 2007," he adds.

So why is the PS3 so expensive anyway? Because nothing about it is ordinary, says iSuppli analyst Andrew Rassweiler, from its specially designed core microprocessor to the memory chips it uses and the Blu-ray DVD drive it contains. "There's certainly nothing cheap about its design," Rassweiler says. "It's essentially a custom-made supercomputer sold at an affordable price. When we first looked at the motherboard, it looked like something built for high-end piece of telecom equipment, like a switch or a router."