Merrill Lynch's Next-Gen console prediction

[mckmas8808]

Wow, great synopsis! It's cool when people can discuss/debate things without it getting personal. I pretty much agree with all your points, I was just pointing out that nothing is for certain and it's not impossible for Xbox 360 to be cheaper to manufacture than PS3 over the course of next-gen. Certainly for Sony to even get on the same level as MS it will take several years, tremendous sales and several refreshes. I'd say for the next few years atleast, MS will have a lot more flexibility when it comes to pricing, wouldn't you agree?

Well I certainly agree with that. *raises hand*

 

[nelg]

I didn't say that owning a fab automatically equals lower costs. Actually, it should be more than obvious what advantage owning your own fab can have. As I explained further above, seeing PS2 & PSP production and PS3 to continue this trend, it's obviously cheaper for Sony as a whole.

If you disagree with this, please explain with what exactly and/or state why.

You were the one who said that there are obvious advantages to owning your own fab without taking into account the possible downside. It is not so simple as to say we can make it cheaper if we do it ourselves. There are far to many factors for it to be so simplistic. As Gubbi mentioned, Fabs are expensive. To be profitable you need near 100% utilization. Sales projections of Cell processors would not be accurate to within 20%. That margin could be the difference between a fully utilized Fab plant which would be profitable and one that would not. Furthermore to assume that just by removing a third party you automatically acquire their profit for yourself is just that an assumption. Business is ripe with cases where a product is offered at or slightly below cost to guarantee cash flow. Is it unfathomable to think that a contract Fab like TSMC might give someone like MS a deal at cost if they guarantee to buy 50% of their .65nm production capacity? The benefit to them is that they could use the scale provided by that deal to lower there cost and gain a higher margin for the remaining capacity. Again this is all speculation but such things happen all the time.

One,

Depreciation expensing is something all companies can take advantage from. Not just Sony. Do you think that Contract Fabs keep the same prices year over year?

 

[SirTendeth]

Inane- that was to funny...

Could you give a play by play, showing Maddens confusion in whether he is analyzing Chess or Checkers? please!

 

[Phil]

nelg:

You were the one who said that there are obvious advantages to owning your own fab without taking into account the possible downside.

Hold on for a second; I did state that I was speaking on behalf of their advantage. Just because I didn't touch on the possible downside (which I did in other replies, just not in the one directed at you) doesn't mean I don't see them likely as well. Obviously there are many IF-scenario's, heck we can even think up some scenario in which an earthquake destroys all the fabs Sony has but I don't think they have much room in this topic. As I already said; I'm using the basis of the successful PS2->PStwo transistion as a baseline to form that Sony can gain quite an advantage (if all goes well) with PS3 and the point that CELL is (can) to be used in various different products where CELLs with less than 7 SPEs can still be used which will drive down the defection rate opposed to Xenon where this is not possible.

 

[expletive]

Well, there are too many 'what if's in your sentences it seems. Where's that breakthrough tech for fabbing?

However, my post was not to make an argument for an outsourced fab model or otherwise, just to show why its not ALWAYS the best solution regardless of the products and doesnt always guarentee youre getting the cost for your chips. Sorry if that didnt come across. It doesnt have to be a technological breakthrough (though it could) it could be anything to processes, efficiency, lower costs, lower labor costs to run the plant, etc. All these things add up to being able to sell for 'less'

Where's a super processor that eclipses Cell? If you have any concrete info, then some investor bank may be interested... if not, it's over.

The assumption that anything but the PS3 will need the power of an 8:1 cell is really whats up for debate. Theres a lot of other threads on the forum debating whether or not the Cell will ever make it into a TV, Sony or otherwise becuase its 'overkill' compared to a cheaper, dedicated IC that performs the same NECESSARY functions. My point here was that the cheaper TSMC could make those competing dedicated ICs, the better the chance they have to get a huge order for them. Thats their incentive and thats why in the fab business they are a competitor of Sony's.

 

[one]

Depreciation expensing is something all companies can take advantage from. Not just Sony. Do you think that Contract Fabs keep the same prices year over year?

Do you mean in terms of the vertical/horizontal model in general, or do you mean the specific cases for the next-gen game consoles? If the former, I agree with SirTendeth. If the latter, I'd like to ask you this question I wrote in this thread. Intel continue to build fabs, and it's been a great success so far.

 

[mckmas8808]

The assumption that anything but the PS3 will need the power of an 8:1 cell is really whats up for debate. Theres a lot of other threads on the forum debating whether or not the Cell will ever make it into a TV, Sony or otherwise becuase its 'overkill' compared to a cheaper, dedicated IC that performs the same NECESSARY functions. My point here was that the cheaper TSMC could make those competing dedicated ICs, the better the chance they have to get a huge order for them. Thats their incentive and thats why in the fab business they are a competitor of Sony's.

Well Toshiba has already said they will use them in TVs so....

 

[scooby_dooby]

So what?

That was nearly a full year ago, and they have not begun using them at all. Until we actually start seeing it used his point stands, and is actually bolstered by the fact Toshiba seems to be backing away from their promise of all TV's in 2006 to be CELL based...

 

[nelg]

Do you mean in terms of the vertical/horizontal model in general, or do you mean the specific cases for the next-gen game consoles? If the former, I agree with SirTendeth. If the latter, I'd like to ask you this question I wrote in this thread. Intel continue to build fabs, and it's been a great success so far.

Do you mean amortize as opposed to depreciate? Anyways, Intel has a different market reality. One of the strengths of Intel is their fabrication abilities. How would be advanced neough to fab chips for Intel? Look for Arron Spink's post to this regard. If Intel overestimates production requirements they would not over-saturate the x86 market by a considerable degree. Whereas Cell outside of the PS3 does not have an established market so the impact of overcapacity is unknown.

 

[Phil]

Nelg,

Assuming Sony's success rate doesn't change and we expect them to sell around 70 million PS3 within 5 years - wouldn't that be enough in your opinion? Also, during this time, also expect full scale production of PSP chips as well...

Also, if they do have overcapacity, what's stopping Sony to use manufactured CELL chips for products such as TV, Hifi? If the chips are lying around (albeit defective for use in a PS3 because more than 1 SPE is defect), better to use them in products you intend to put on the market anyway?

 

[nelg]

nelg:



Hold on for a second; I did state that I was speaking on behalf of their advantage. Just because I didn't touch on the possible downside (which I did in other replies, just not in the one directed at you) doesn't mean I don't see them likely as well.

You conveniently omitted the possible downsides while stating that it was an obvious advantage. Does IBM have an obvious advantage making their own chips? When was the last time their foundry business made money?

 

[Carl B]

Do you mean amortize as opposed to depreciate? Anyways, Intel has a different market reality. One of the strengths of Intel is their fabrication abilities. How would be advanced neough to fab chips for Intel? Look for Arron Spink's post to this regard. If Intel overestimates production requirements they would not over-saturate the x86 market by a considerable degree. Whereas Cell outside of the PS3 does not have an established market so the impact of overcapacity is unknown.

Nelg I don't know if you caught this post of mine before, but I think it's relevent to the question of whether vertical integration makes sense for Sony.

I think the move definitely makes sense for Sony. PS3 provides a catalyst for them to build out this fab capacity, with some strong assurance of cost coverage in the future, but Cell and RSX production isn't the end-all be-all. Now having the new Nagasaki line in place, this is a fab that will be useful to them 10 years out, should Cell succeed or even should it fail. They'll always need chips, for PS4 (assuming there is one, right?), for their various CE devices (insourcing IC chip R&D and production is a new push for their CE division), and for any other of their own chips which they sell to others - digital camera chips being one strong one for them at the moment.

So I think the PS3/Cell provided the critical mass for the build-up, but now since reached, win or lose on Cell this fab capacity is going to be useful to them.

Remember that CE is a very high-volume field, and fab capacity gets soaked up if you're doing things right. The GPU comparisson has been made, but GPU's truly are a business more suited to outsourcing. NVidia and ATI simply do not have the capital for a modern fab investment; for them the risk would be enormous. With product cycles as quick they are, better to have the flexibility to jump from fab to fab should a decisive advantage present itself, or to contract out to multiple fabs should volume warrant it - all on a case by case basis.

 

[Phil]

You conveniently omitted the possible downsides while stating that it was an obvious advantage. Does IBM have an obvious advantage making their own chips? When was the last time their foundry business made money?

As I said, I noted them in other replies. Also, my posts were in reply to people arguing the disadvantages of having your own fab - naturally by disagreeing, I was taking a stance from the opposition (hence my emphasis on the advantages and not bringing something up others had already before you decided to jump in on what, page 15?). Now, are you going to continue taking this to a personal level or are you going to stay on topic and address the points I and others have brought up instead?

 

[one]

Do you mean amortize as opposed to depreciate? Anyways, Intel has a different market reality. One of the strengths of Intel is their fabrication abilities. How would be advanced neough to fab chips for Intel? Look for Arron Spink's post to this regard. If Intel overestimates production requirements they would not over-saturate the x86 market by a considerable degree. Whereas Cell outside of the PS3 does not have an established market so the impact of overcapacity is unknown.

Intel manufacture many kinds of semiconductor components at their fabs for their own platform business.

http://www.intel.com/pressroom/archive/releases/20050915corp.htm

Both fabs are 200mm facilities that produce primarily chipsets communications and flash memory components for a variety of Intel platforms.

 

[expletive]

Well Toshiba has already said they will use them in TVs so....

That was REALLY peripheral to the main point, but ok.

 

[scooby_dooby]

Nelg,

Assuming Sony's success rate doesn't change and we expect them to sell around 70 million PS3 within 5 years - wouldn't that be enough in your opinion? Also, during this time, also expect full scale production of PSP chips as well..

Why would their success rate not change? With a huge competitor like the XBOX360 it would be a miracle if Sony has the same level of success that they had with PS2.

The best Sony can hope for IMO is to retain a 10-20% lead in overall consoles sold, and even those are lofty goals IMO.

 

[dantruon]

Why would their success rate not change? With a huge competitor like the XBOX360 it would be a miracle if Sony has the same level of success that they had with PS2.

The best Sony can hope for IMO is to retain a 10-20% lead in overall consoles sold, and even those are lofty goals IMO.

ahhahah, that really make me laugh hard, ahahahah, ok i agreed with you that xbox360 might be a success in North America but and is a really big but, it will sell like crap in Japan, you wont see Japanese who bought 400 xbox per week to 400000 per week anytime soom after the launch.

 

[nelg]

As I said, I noted them in other replies. Also, my posts were in reply to people arguing the disadvantages of having your own fab - naturally by disagreeing, I was taking a stance from the opposition (hence my emphasis on the advantages and not bringing something up others had already before you decided to jump in on what, page 15?). Now, are you going to continue taking this to a personal level or are you going to stay on topic and address the points I and others have brought up instead?

I must have missed your disclaimer that you must read all your post to ascertain your point. Perhaps if you refrained from making absolute statements they wont go unchallenged. To illustrate my point look at this post.

True, though vendors won't price below what it's costing them plus some profits, as it would defeat to whole purpose of running the fab in the first place.

By that logic IBM must stupid because the did contract work for nV and others and still lost money. Therefore they priced their services below cost. Must have been the HP calculators used in the accounting dept.

 

[ihamoitc2005]

Advantage of self-fabrication of chip

Please explain how owning your own Fab automatically equals lower cost.

There are many advantages to owning fab facility.

Company has more control over quality, manufacturing process and hardware changes, change in production volume, and have more opportunities to review and adjust many steps in process. This leads to reduced cost, but having fab capability also reduces cost, as said by others, by not paying middle-men. Owning fab facility is good for a large company like Sony with many years experience in manufacturing and many products that benefit from fab capability.

Disadvantage is for companies with limited product line which results in very high percentage of assets locked up in fab facility so change in demand for one product makes big difference in total output of facility and hence big difference in contribution of the facility to company's bottom-line.

As for GameCube vs PS2 manufacturing cost, originally, GameCube had smaller chip and simpler case, but now that PS2 has a very small 90nmchip (originally multiple 250nm), no sliding drive and small, simple case, it is fair assumption that PS2 is less costly to produce. Higher selling price of PS2 is due to higher demand. Only if sales at higher price drop such that increased sales at lower price also increases profits, or if there is strategic advantage to lower price, PS2 price will not come down.

Not including development cost, software sales, and marketing, I feel the slim PS2 can be manufactured and sold at the $49 price with profit.

 

[Hardknock]

Not including development cost, software sales, and marketing, I feel the slim PS2 can be manufactured and sold at the $49 price with profit.

So you believe the PStwo costs about the same or less than a GBA to produce?