Sony to take $100 loss on $399 PS3, says new report

A recent study by financial analysts at Merrill Lynch Japan suggests that the PlayStation 3 may cost up to $490 dollars to manufacture, with the company predicting that Sony will launch at $399 and take a $1.18bn loss in its first year on the market.

Merrill Lynch's report is based on the assumption that the Blu-Ray drive, Cell chip and RSX graphics processor will cost around $101 each, with the remainder of the components and manufacturing costs boosting the production costs to the $490 level.

It's normal for console manufacturers to take a hit on their hardware in the early stages of a system's lifespan, and PS3 will be no different - but the analysts estimate that Sony will still roll out $100 more expensive than the Xbox 360, which is expected to be priced at roughly $299.

Arriving at $399, the PlayStation 3 would still be losing around $100 per unit, which adds up to around $1.18 billion of losses for Sony if year one sales predictions of 14 million units prove true. Even more worryingly, if Microsoft cuts its price and forces Sony to follow, year two losses could be around $1.2 billion.

By comparison, the PlayStation 2 was in profit within two years, having taken a $0.46 billion loss in the first year but reversed it with a $0.76 billion profit in the second year. The Xbox, however, has remained in loss throughout its lifespan to date - and the Xbox 360 is expected to be subsidised to the tune of $80 to $100 when it launches.

It must be borne in mind that Merrill Lynch doesn't necessarily have an inside track on Sony's manufacturing costs, and the $101 price on each of the main components seems surprisingly high - especially considering that Sony will be fabricating each of those components itself.

However, comments from Sony Computer Entertainment chief Ken Kutaragi in Japanese magazine Toyo Keizai, translated by GameSpot, suggest that a higher price point than the Xbox 360 may indeed be on the cards.

"Whether consumers think a product is expensive or cheap all depends on the balance between its appeal and price," he told the magazine. "Our ideal [for PS3] is for consumers to think to themselves, 'OK, I'll work more hours and buy it.' We want people to feel that they want it, no matter what."

Kutaragi went on to compare the situation to the launch of the original PlayStation, which retailed at around three times the price of Nintendo's 16-bit SNES at launch and was condemned by the press for being too expensive; and to the launch of the PSP, costing more than twice as much as the Game Boy Advance.

Of course, a fairer comparison might be with the launch of the DS, which also costs less than the PlayStation Portable but is much higher spec than the GBA - and has significantly outsold Sony's handheld system in Japan.