Merrill Predicts Sony to Lose 6 Billion + over 5 Years

[RancidLunchmeat]

Is there any plausible argument at all that anyone can think of which would lead Sony to lose $6 billion?

I would imagine if we could actually get ahold of the ML report it contains plausible arguments that lead to their conclusion. Wouldn't you?

How else can they lose $1 billion+ a year for 4 years, unless the cost of the hardware doesn't come down? Would ML really take the current loses per hardware and say 'if that doesn't change over the next 4 years, Sony will lose 6 billion'?

That was actually my original assumption, but if we take a look at the numbers, that doesn't hold water.

ML predicts a five year loss of 738 billion yen. The JP Morgan report which looks to come from Sony Management states a 06 loss of 200 billion yen. If we assume ML used that 200 as a first-year basis for their conclusion, we get a loss of 538 billion over the next 4 years, which is certainly reflective of a decrease in yearly lost revenue.

So they didn't just 'straight-line' the first year losses in a 5 year projection.

What they did exactly, I can't say. The only thing that I can think of is manufacturing costs and selling price. Perhaps ML believes that manufacturing savings will be largely offset by price drops, and the cost of the console already is so far in excess of price that Sony will continue to be 'upside down' on the console for the first half of its lifetime?

I obviously don't have an answer for you, Shifty.

 

[nonamer]

Logical fallacies? What are you talking about? For starters the only ad hominems in this thread are being used by people who are automatically discounting the results of ML's study based upon the fact that they are ML.

Second, I never stated that ML's rating as one of the best in predicting stock prices provided any support for THIS prediction of stock price. In fact, I went so far as to mention that ML & CS were BOTH considered to be top ranked in this regard, and they have both reached entirely different conclusions on Sony's stock price. Appeals to authority would only be valid if I were using it as evidence to support an argument, which I clearly wasn't.

Could've fooled me. It sounds like you were making a logical fallacy by using the credibility of ML to boost their claim, and hit the JP Morgan one as being from Sony.

Third, there is no logical discussion going on here because nobody has the criteria that ML or CS used to make their assessments, and nobody has even READ their assessments, we've only read reports of what their reports have supposedly said.

Unfortunately this an argument from ignorance, which is in fact another logical fallacy. But enough with the fallacies.

Since we know that there is no plausible justification for losses of this sort, then it can be concluded that the criteria used by ML is probably wrong, no matter what it is. My guess is that it's the same clueless guy who make the original $800/$900 dollar PS3 prediction. Yes, the one with the $350 Bluray drive and $230 Cell processor, which means the predictor has little understanding of what he's predicting. Whatever it is, it's mostly clear that the predictions are based off of invalid data to begin with.

 

[Nesh]

I would imagine if we could actually get ahold of the ML report it contains plausible arguments that lead to their conclusion. Wouldn't you?



That was actually my original assumption, but if we take a look at the numbers, that doesn't hold water.

ML predicts a five year loss of 738 billion yen. The JP Morgan report which looks to come from Sony Management states a 06 loss of 200 billion yen. If we assume ML used that 200 as a first-year basis for their conclusion, we get a loss of 538 billion over the next 4 years, which is certainly reflective of a decrease in yearly lost revenue.

So they didn't just 'straight-line' the first year losses in a 5 year projection.

What they did exactly, I can't say. The only thing that I can think of is manufacturing costs and selling price. Perhaps ML believes that manufacturing savings will be largely offset by price drops, and the cost of the console already is so far in excess of price that Sony will continue to be 'upside down' on the console for the first half of its lifetime?

I obviously don't have an answer for you, Shifty.

Is there any rational logic behind the 538billion loss?

The basis year says nothing. There are more things that should be accounted for.

With that logic someone could have used the first losses PS2 made at its basis year to show that they would have made more loses over their 5 year period.

Economies of scale, building support, increase on gaming software sales etc and other factors make a console profitable. And at launch these are missing.

This is probably the most incomplete prediction/analysis I ve ever heard. They should show the variables and comment on them on why they wont help the product be profitable.

Proffesional analysts/estimators wouldnt accept this unless there were enough data and exlanations

btw: I believe the guy is mostly trying to form negative expectations in investors to hit Sony in the stock and capital market

 

[RancidLunchmeat]

Economies of scale, building support, increase on gaming software sales etc and other factors make a console profitable. And at launch these are missing.

And if cost exceeds price such a degree that the savings you mentioned above are negated by price reductions in order to increase demand?

This is probably the most incomplete prediction/analysis I ve ever heard. They should show the variables and comment on them on why they wont help the product be profitable.

Proffesional analysts/estimators wouldnt accept this unless there were enough data and exlanations

btw: I believe the guy is mostly trying to form negative expectations in investors to hit Sony in the stock and capital market

Huh? Are you reading something other than what was provided by the OP? Because the link that the OP provided was a Pro-Sony commentary bashing the ML predictions. The actual ML prediction hasn't been provided. That might explain why you find it 'the most incomplete...ever'.

 

[Nesh]

And if cost exceeds price such a degree that the savings you mentioned above are negated by price reductions in order to increase demand?

How will cost exceed the price with economies of scale and production specialization?
And what happened to software revenues which are the heart of console profitability?

Huh? Are you reading something other than what was provided by the OP? Because the link that the OP provided was a Pro-Sony commentary bashing the ML predictions. The actual ML prediction hasn't been provided. That might explain why you find it 'the most incomplete...ever'.

No. I am refering to the estimation of billions of losses over the 5 year period

 

[dobwal]

Since we know that there is no plausible justification for losses of this sort, then it can be concluded that the criteria used by ML is probably wrong, no matter what it is. My guess is that it's the same clueless guy who make the original $800/$900 dollar PS3 prediction. Yes, the one with the $350 Bluray drive and $230 Cell processor, which means the predictor has little understanding of what he's predicting. Whatever it is, it's mostly clear that the predictions are based off of invalid data to begin with.

"plausible justification"....what can you logically conclude since you lack any true figures or facts? You can't use assumptions as proof of someone else fallacies in their predictions. This is all opinions and the fact that this conversation is taking place in a forum is probably a strong indicator that all of us here are the least qualified in making an accurate prediction on Sony's future financial prospects.

 

[Nesh]

Well there was this story about stock market analysts I ve heard some time ago. They decided to make an experiment. Let stock market analysts make predictions about the course of some shares and compare them with that of a moneky throwing darts (if I remember correctly) on a table with shares. The ones with the darts ment price increase

The monkey got 50% of these correctly. The analysts were less accurate

 

[RancidLunchmeat]

How will cost exceed the price with economies of scale and production specialization?

Have we ever gotten accurate estimates of the PS3 manufacturing cost?

It's certainly possible for cost to exceed price even with economies of scale and production specialization, depending on what the cost originally was and how much that cost is reduced through the above.

And what happened to software revenues which are the heart of console profitability?

What happened to it? Who knows? Maybe it's included in the analysis, maybe it's not. Since we have yet to see the actual analysis and have only seen its conclusions, it's unknown.

No. I am refering to the estimation of billions of losses over the 5 year period

You said the prediction was 'incomplete'. How can you make such a claim if you haven't seen the actual prediction? You went on to lambast the analyst for not providing 'the variables and commenting on them', again, without reading the actual prediction.

You finished by concluding the ML analyst had alterior motives in making his prediction and stock valuation.

All without actually reading the analysis itself. Rather poor form, I'd say.

 

[pc999]

A bit more info.

http://www.gamasutra.com/php-bin/news_index.php?story=11667

It was Merrill Lynch estimates that earlier this year described the console as an “expensive and difficult-to-manufacture productâ€￾ based on the “problem pointsâ€￾ of the the Cell processor and Blu-ray disc drive, and put manufacturing costs of the console at around $800 at launch, falling to $320 over the following three years.

 

[nonamer]

"plausible justification"....what can you logically conclude since you lack any true figures or facts? You can't use assumptions as proof of someone else fallacies in their predictions. This is all opinions and the fact that this conversation is taking place in a forum is probably a strong indicator that all of us here are the least qualified in making an accurate prediction on Sony's future financial prospects.

Not true. We do know something of the cost of a PS3. For instance, Cell is about 235mm^2 in size, which is pretty mundane in size and cost. Same is true of the RSX. The only real problem cost is the Bluray drive, which appears to be around $200, same as the HD-DVD drive for the Xbox 360. Memory, i/o, connectivity, manufacturing complexity, etc., all seem to be in line with the Xbox 360 in fact, except that Sony makes more of the parts themselves. Also, everything will scale down to 65nm by next year and the Bluray drive cost will drop to parity with regular DVD drives. Ultimately, we can conclude that everything will follow Moore's Law and drop in price very rapidly. Expecting continuing losses of a billion each year either implies that they cut prices to like $600 -> $300 -> $150 -> $75 every year or some other insane fashion, or Moore's Law will stop. Neither one is a reasonable assessment and we can quickly point out that the analysis is completely wrong. In fact, I'm willing to state that the initial massive losses of about $2 billion comes mostly from R&D and construction of various factories, software products, network servers, etc., which are fixed costs that will vanish by next year. Expecting further losses like that is totally silly.

 

[Rolf N]

If I had to lose 6 billion dollars on a stab at the console market, I'd probably erect my own island in the ocean where I'd open my own landfill next to my own factory, and I'd drop the consoles from the end of the manufacturing line directly into the landfill.

Any attempt to advertise and sell the product would greatly endanger the goal of losing those 6 billion dollars. I'd rather not take such risks.

 

[Lazy8s]

PS3 sales could burn through the few million buy-everything gadget enthusiasts well before the console's build cost decreases significantly, and Sony would then have to choose between dropping the system's price and piling on another year of heavy hardware losses or dropping out of the console race by seeing just how few buyers exist at the US$500-and-up point.

Having to compete from behind, this scenario could play out more times and eventually realize the unthinkable levels of financial losses.

 

[cthellis42]

PS3 sales could burn through the few million buy-everything gadget enthusiasts well before the console's build cost decreases significantly,

A few million? OH NO!

 

[Powderkeg]

No one here considers the domino effect.


What makes everyone think the $6 billion in predicted losses is ALL hardware related losses?

Higher price point almost certainly means reduced marketshare. Tougher competition from MS and Nintendo will likely reduce the marketshare even more.

Fewer PS3 owners means fewer PS3 games sold, which means less income from games.

Take the reduced income from games plus the hardware losses and that's how they are figuring a $6 billion loss. It's not just the hardware alone, it's also the loss of income from the game sales, and I seriously doubt anyone here has a better prediction as to the cost of reduced game sales than the analyst in the OP does.

 

[assen]

Does these 6 billion include the upfront investment that was sunk into Bluray and Cell development?

If not, it's really a bit of a stretch. At the PS2 install base of 100 million, 6 billion is $60 per console, but I don't see Sony getting to 100 million this generation, let alone for 5 years only. I doubt price pressure from MS will be able to get them to average $60 loss per console (more like $100, if you factor in some games) over the entire life of PS3.

 

[Powderkeg]

Does these 6 billion include the upfront investment that was sunk into Bluray and Cell development?

If not, it's really a bit of a stretch. At the PS2 install base of 100 million, 6 billion is $60 per console, but I don't see Sony getting to 100 million this generation, let alone for 5 years only. I doubt price pressure from MS will be able to get them to average $60 loss per console (more like $100, if you factor in some games) over the entire life of PS3.

Yeah, but if they only sell 50 million consoles instead of 100 million and they have roughly the same attach rate as the PS2, how much would they lose in game sales?

They would only generate half the income from games that they did with the PS2, right?

 

[Rolf N]

Take the reduced income from games plus the hardware losses and that's how they are figuring a $6 billion loss. It's not just the hardware alone, it's also the loss of income from the game sales, and I seriously doubt anyone here has a better prediction as to the cost of reduced game sales than the analyst in the OP does.

Making a smaller profit than on some other occasion is not the same thing as losing money. Your "cost of reduced sales" is lunacy.

 

[NavNucST3]

Insert xbds feelings about analysts--> here

Can't believe it two pages and no xbd, what a slacker!

 

[Shifty Geezer]

Making a smaller profit than on some other occasion is not the same thing as losing money.

No, but it does mean it's harder to pay the running costs for an international operation, which I think Powderkeg is saying, and which I hadn't really factored in at first (so thanks Powderkeg for making me think of it!). Consider the staffing of SCEI, including all the worldwide studios, and funding 40 download games, and all the promotional stuff, etc. Let's say just running SCEI costs $1 billion a year. That means the software sales have to cover both hardware loses, and running costs of SCEI. Less units means less software sales, and those running costs become relatively higher.

Now if XBD weren't avoiding this thread like the plague, he may be able to pull up some financials to give an idea of what running SCEI costs!

 

[Nesh]

Have we ever gotten accurate estimates of the PS3 manufacturing cost?

It's certainly possible for cost to exceed price even with economies of scale and production specialization, depending on what the cost originally was and how much that cost is reduced through the above.

What happened to it? Who knows? Maybe it's included in the analysis, maybe it's not. Since we have yet to see the actual analysis and have only seen its conclusions, it's unknown.

You said the prediction was 'incomplete'. How can you make such a claim if you haven't seen the actual prediction? You went on to lambast the analyst for not providing 'the variables and commenting on them', again, without reading the actual prediction.

You finished by concluding the ML analyst had alterior motives in making his prediction and stock valuation.

All without actually reading the analysis itself. Rather poor form, I'd say

You are trying to justify the worst case scanrio.

Anything is possible. But every company makes estimations and if the worst case scenario is estimated then dont expet the product to exist, or you should atleast expect major changes in strategies. If the problem is lets say...a problem of economies of scale not reducing the cost per unit significatly enough then Sony would have cut many of the extra features.

Just because anything is possible you cant justify any claim as being valid.

Sony isnt MS. They sell a product to make a profit. They cant afford making such HUGE losses in a such a long term period and not care.

Its not unknown if he used the software sales in his analysis because simply there is no data available yet that can develop a valid analysis based on this variable. There is nothing in existence that shows the behaviour of the demand on sofware sales because the console just got released. Sofware sales havent even started

His analysis seems so hypothetical it cant be even taken into consideration significantly

Also YOU personally mentioned the "base year" as probably being indicative. Which again is a very invalid information. Almost all consoles make HUGE losses in their first year. PS2 made HUGE losses in its first year as well and if I remember correctly it even surpassed the estimations. Because of this it shows how unproffesional this anayst may be by providing so early such an analysis. Especially if he doesnt have the appropriate information and expected manufacturing costs under his disposal, which are available to both Sony, and Nvidia.

So what will keep economies of scale from having significant impact in cost? BR drive (which is not PS3 specific) and is aimed for mass production and consumption? RSX with a similar performance to 360's GPU? Which is based on an already esxisting GPU ? Which will be outdated soon with the introduction of G80?

PS3 and 360 arent THAT different except from the fact that all PS3's have a HD and a BR drive. Both have new CPUs but 360 has a more optimized GPU.

Actually it should have been better if I mentioned incomplete publicized report. He didnt provide the details of his estimation. He gave the result only. And a result without explanation is as good as everyday talk
Again improffesional unless the site ment that FISCO didnt provide the details.
Not to mention his past estimation of PS3 costing $900 (with wrong mathematics of simple summing up and overinflated manufacturing costs per part). He affected Sony's stock market performance in the past with this estimation. So I suspect this may (i didnt say IS) be intentional and this suspicion of mine will remain since some analysts do this to affect performance by forming expectations and converge it with their "predictions".

Similar predictions took place with the PS2, affected Sony's stock market performance during their announcment but they were outright wong.