Why Sony needs to (but can't) drop the price of the PS3

In a report that could send shock waves through the video game industry, market research firm iSuppli has detailed the real cost and new savings found in Sony's second-generation Playstation 3.

iSuppli's report, issued Monday, says that the current PS3 model contains 2,820 individual parts, including Nvidia's Reality Synthesizer, IBM's Cell Broadband Engine, and Toshiba's I/O controller, which are now made using 65-nanometer process technology, compared to 90-nanometer technology formally employed in the previous iteration. That has drastically reduced the PS3's power supply cost by 30 percent from $30.75 to $21.50.
Kionix's three-axis accelerometer in the PS3 controller has replaced the Hokuriku Electronic Industry Co. part, saving Sony an estimated $1.45 per unit.

But perhaps the most important cost savings is in the console's vaunted Cell processor from IBM. According to iSuppli, the latest PS3 includes a new version of IBM's Cell Broadband Engine, which is priced at $46.46 -- 28 percent lower than its original cost in the first-generation hardware. A new version of Nvidia's Reality Synthesizer, the console's GPU, at $58.01 per unit is now priced 30 percent lower than it was in the first generation.


Altogether, Sony's second-generation PS3 features a 35 percent total cost reduction from the first-generation model. In dollars and cents, today's PS3 costs Sony about $448.73 to produce, compared to the old model's $690.23 price tag. That said, the lower cost doesn't include software, box contents, and royalty expenses.

Realizing that, and considering the PS3's current price tag of $399, iSuppli has found that Sony is still losing money with each sale of its console. But Andrew Rassweiler, director and principal analyst at iSuppli, believes Sony may be able to break even in 2009.

"With its new-generation PS3, Sony has come closer to breaking even, although it probably hasn't quite reached that mark yet," Rassweiler said in a statement. "With iSuppli's estimated PS3 cost at $448.73, the product retailing in the United States at around $399 and taking into account other expenses, the PS3 may be able to break even in 2009 with further hardware revisions."

Great, but is that enough time? With Microsoft and Nintendo outselling Sony's console each month with ease, Sony's window of opportunity is almost closed.

According to NPD, sales of the PS3 fell 19 percent in November from a year earlier, and according to a report in The Wall Street Journal, analysts are expecting "flat or lower PS3 sales" again in December. Compare that to the Wii's incredible sales numbers and the Xbox 360's jump of 8 percent over last year, and it's apparent that things aren't going so well in the Sony camp right now.

Paying a penalty on pricing
As I look for an answer to why this is happening, I don't see how it can come down to anything else but price. All in all, Sony's hardware and library of games are viable, and Blu-ray is an added bonus for some. But when it comes to price, the average consumer who wants to buy a console will balk at picking up a PS3 because it's so expensive when compared to Microsoft's Xbox Arcade and Pro models or Nintendo's Wii.

There's no secret that Sony's console is priced too high. And although Sony zealots try to pretend that it offers more value and is the "Cadillac" of the video game industry, it's abundantly clear that what consumers want -- an affordable console -- isn't something they find in the PS3. Value or not, consumers want to save money.

Sony knows this and although it's unwilling to admit it, the company seems to want to compete on price too. But with financial troubles unlike anything it has ever seen, Sony is trying to turn a profit and limit losses to keep shareholders happy.

In essence, Sony finds itself in a dangerous position: it needs to make money, so it wants to keep its prices high, but by doing so, it's not selling as many units and its goal of becoming profitable byway of the "value" argument simply isn't working. And as the recession deepens and consumers are looking to save money wherever possible, Sony is quickly finding out that it's not a good time to be the "value leader" instead of the "cost leader."

I truly believe Sony's gaming division wants to drop the price of the PS3 and knows all too well that price is the single factor holding it back. But when a console that has been available for over two years still costs $448.73 to produce and the parent company is in financial trouble, dropping the price to a more suitable level -- $299 -- is almost out of the question.

I get that. I just don't think Sony can expect consumers to like it.