Nothing Cheap About the PS3

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Improved Memory

The most expensive component inside the PS3 is the Reality Synthesizer graphics chip from Nvidia (NVDA), which adds about $129 to the manufacturing cost. Behind that is Sony's own Blu-ray drive, which goes for $125, then the Cell processor, which Sony designed in partnership with IBM (IBM) and Toshiba (TOSBF), at $89 a chip.

Another notable component is a new type of memory chip from Samsung known as XDR DRAM, which is based on a design by Rambus (RMBS) for high-performance applications. It's a radical step up from conventional DRAM. Rassweiler says the four XDR chips used in the PS3 add $48 to the cost. "It's very cutting-edge memory technology, and it's the first time we've seen it used anywhere," he says.

Other suppliers include International Rectifier (IRF), which provides power-management chips to all three major gaming systems, including the forthcoming Nintendo Wii; Marvell Technology (MRVL), which supplied a Wi-Fi chipset; chipmaker Analog Devices (ADI); and hard-drive maker Seagate (STX).

Looking Ahead

With its price set some $100 to $200 higher than the Xbox 360, the PS3 will be at a disadvantage among consumers on a tight budget. But PS3 games will be priced at about $60 apiece, roughly the same as Xbox 360 titles. The problem there, says Rosoff of Directions on Microsoft, is that Sony will have to sell more games to make a per-machine profit. "Microsoft is selling on average five games per box, but I'm not sure how many it needs to sell per box to be profitable," he says. "It looks like Sony will have to sell more to reach that point."

Over time, Sony will reap the same benefits as Microsoft—the cost of chips will come down and some chips will be combined. One candidate for elimination in a future revision of the PS3, says iSuppli's Rassweiler, is a $27 Toshiba graphics chip designed to facilitate compatibility with older games from the PS2. "I've heard that Sony wants to put in some kind of software-emulator technology in the future, and so someday Sony could get rid of that chip." So over the long term, the PS3 could yet be a big profit-maker.

Hesseldahl is a reporter for BusinessWeek.com.