Merrill Lynch's Next-Gen console prediction

[Tap In]

Tap In I'm not sure if you're referencing my first post in this thread or not when I called it 'good vibe press' with that 'web site rumor' comment; but certainly I wasn't implying it was a coordinated effort or PR or anything. Obviously they are doing this for their financial customers. It's just a flawed analysis on their part is all. My comment stemmed solely from the fact that this might generate spillover positive press for MS, which it probably will.

Statements such as 'sell 360 for half of PS3's price' simply have no context, and are dubious at best considering that this was the same house that released the claim that PS3 would be $500 or greater in price.

Anyway I just can't go with Merrill's analysis - I agree some of their conclusions are rooted in truth, but frankly I just don't think these guys are following things nearly as closely as a lot of us here are, else they never would have released that initial $101 per Cell, RSX and blu-ray nonsense a couple of months ago.

I was not referencing you directly XB, but thanks for clarifying.

 

[Carl B]

You can also reverse this statement by going back to the last generation of hardware. The correct facts then would be an absolutely horrible outlook for Microsoft's cost/price on hardware. However, Microsoft did rather well, didn't they? It's a lot of red ink, but that seems to be the cost of entry.

Well, no player has entered the console market, made losses it's furst go around, and come back with a second console. Microsoft is the first. It certainly is not the normal cost of entry I feel. But then again, Microsoft isn't the normal company.

I think they are right that Xbox 360 will do well and is well positioned in terms of costs (with the little info I have gathered on the subject). It will be very interesting to see how Xbox does in the USA and Europe. I still think they need a real whopper to get the effect to spill over to Japan. I get the sense that the Japanese may be thinking "why should we buy a foreign product when most foreigners are buying our product?" If Xbox took a dominant lead in the USA or Europe, this may then spill over as a novelty item in Japan as an imported successful and established product.

I agree, I think it will do well. As for Japan, I'm not onboard with this whole notion that Japanese are inherently hostile to foreign entrants, but that's neither here nor there.

My real curiosity is in whether the Xbox 360 is a make-it-break-it product for Microsoft. What if it doesn't do much better than Xbox? What happens next round?

I think if it it's still making losses at the end of this gen, they pull it. But then again, by the end of this gen I expect it to be making a profit. Not overall, just trendwise.

 

[Carl B]

I was not referencing you directly XB, but thanks for clarifying.

Uh... well... just disregard then!

 

[Sis]

OMG! So they lol... I can't stop lol... So they think because MS's money is long that this will push them to win the next-gen battle? Oh Merrill Lynch you have some learning to do. I know everyday posters that can predict better than this. This is so funny. How do you guys interpert this?


Link http://webpages.charter.net/spartan85/ML_Consoles.pdf

A) They never predict that MS will "win"; they say that MS has significant advantages and then they detail those advantages; namely, first mover and costs
B) I'm sorry, but some of the cost predictions I've seen on this board are laughable at best: "I can buy a 40 gig hard drive at NewEgg for 30 bucks, so surely MS is paying less" or "Sony is manufacturing X so it's essentially free."

Key points from the article (IMO):

• We believe that Sony must be focused on recovering a portion of the development costs for Cell with PS3 sales
• The other major cost disadvantage lies with the Blu-ray drive that Sony plans to include
• CEO Howard Stringer has made some public commitments regarding the target level of profitability for the March 2007 fiscal year, and we're not sure those target are consistent with large losses on PS3 hardware.[xbdestroyer, this is different than "is Sony capabable of bleeding money" and speaks more to whether they should bleed money]

Also, for those up in arms about the costs, they have a breakdown figure in the document.

.Sis

 

[Tap In]

Uh... well... just disregard then!

ya bass-turd

 

[avaya]

I'm curious, because I really don't know, but was Meryll one of the firms estimating a 500 dollar price tag for the PSP? Ditto PS2.

These firms have a long and storied history of horribly overestimating the price of Sony game machines.

Analysts are, by their very nature, conservative with figures.

Merrill are reporting that PS3 could well cost just below $500 to manufacture.

Whether they believe Sony will continue the PS2 business model with PS3 i.e. selling the system at a loss is the question here. Merrill are of the opinion that Sony can't or won't do that anymore.

The analysts are always in some sense accurate with their figures since they are always taking estimates based on the most conservative scenario possible.

 

[Serenity Painted Death]

A) They never predict that MS will "win"; they say that MS has significant advantages and then they detail those advantages; namely, first mover and costs
B) I'm sorry, but some of the cost predictions I've seen on this board are laughable at best: "I can buy a 40 gig hard drive at NewEgg for 30 bucks, so surely MS is paying less" or "Sony is manufacturing X so it's essentially free."

Key points from the article (IMO):

• We believe that Sony must be focused on recovering a portion of the development costs for Cell with PS3 sales
• The other major cost disadvantage lies with the Blu-ray drive that Sony plans to include
• CEO Howard Stringer has made some public commitments regarding the target level of profitability for the March 2007 fiscal year, and we're not sure those target are consistent with large losses on PS3 hardware.[xbdestroyer, this is different than "is Sony capabable of bleeding money" and speaks more to whether they should bleed money]

Also, for those up in arms about the costs, they have a breakdown figure in the document.

.Sis

Isn't this ignoring the fact that Sony is not the sole entity involved with the production or creation of both the Cell processor and the Blu-ray optical media? Surelyl, they have a large stake, perhaps the largest, but they aren't exactly going it alone nor do they have to make this all up with PS3.

 

[Shifty Geezer]

Oh jeez....

They couldnt do that with Xbox1 because they foolishly rushed into bad deals with their partners like Nvidia that have kept production costs/losses high. They said this time around they learned from their mistakes and are situated much better with their vendors/partners that will allow a much more agressive pricing plan if needed. In other words they arent getting raped by their partners. Remember that Nvidia/MS lawsuit?

In truth they could have done that with the first Xbox but losses would have been unaccpetable. This time they can be much more agressive.

As I understand it the problems with component prices were in the prices DROPS, not the initial price. Even if nVidia and friends had priced at the cutting edge of profits, dropping the price of XB from $400 to $150 in one year would have incurred huge losses. Likewise with XB360. It's launched $400, presumably at a loss. The $300 bundle is probably about as lossy. Dunno. Within a year how much will the manufacturing of XB360 have dropped? $50 per unit? So if it costs $500 to make now, sold at $400, at a loss of $100 each, in one year's time if costs drop by fifty bucks it'll be $450 to make a box they sell for say $250 at a loss of $200 each. The equation here is sale price-manufacturing price=profit/loss. Within one year no matter how good the pricing MS are getting on components, if it's still costing a lot more to make XB360's then you're $250 pricepoint it'll make too much of a loss.

 

[Master-Mold]

Isn't this ignoring the fact that Sony is not the sole entity involved with the production or creation of both the Cell processor and the Blu-ray optical media? Surelyl, they have a large stake, perhaps the largest, but they aren't exactly going it alone nor do they have to make this all up with PS3.

But Sony has reportedly already spent $1.75 Billion in Cell R&D IIRC.

 

[Sis]

Isn't this ignoring the fact that Sony is not the sole entity involved with the production or creation of both the Cell processor and the Blu-ray optical media? Surelyl, they have a large stake, perhaps the largest, but they aren't exactly going it alone nor do they have to make this all up with PS3.

As the document points out, the PS3 is largely the only area in which they can recoup the development costs.

.Sis

 

[Serenity Painted Death]

I imagine they have royalty deals, etc, with other companies that will be using the technology, licensing fees for digital media, the list could go on.

Would it not be more accurate to say it is the LARGEST potential recouper? Not necessarily the only one.

One must also then wonder if they would stand to gain more by taking a relatively risky initial loss for future gains (early slaughter of HD-DVD). If hardware sales go as expected, they'll be making money on software pretty soon.

 

[Carl B]

But Sony has reportedly already spent $1.75 Billion in Cell R&D IIRC.

Well, Cell R&D was around $600 million combined I believe. Above and beyond that, Sony has spent aound $3+ billion on expanding fab capacity.

 

[Sis]

As I understand it the problems with component prices were in the prices DROPS, not the initial price. Even if nVidia and friends had priced at the cutting edge of profits, dropping the price of XB from $400 to $150 in one year would have incurred huge losses. Likewise with XB360. It's launched $400, presumably at a loss. The $300 bundle is probably about as lossy. Dunno. Within a year how much will the manufacturing of XB360 have dropped? $50 per unit? So if it costs $500 to make now, sold at $400, at a loss of $100 each, in one year's time if costs drop by fifty bucks it'll be $450 to make a box they sell for say $250 at a loss of $200 each. The equation here is sale price-manufacturing price=profit/loss. Within one year no matter how good the pricing MS are getting on components, if it's still costing a lot more to make XB360's then you're $250 pricepoint it'll make too much of a loss.

In my quick read of the document, I thought Merril Lynch was purely talking about having a $250 console unit out there in face of the PS3's estimated $500. This would be $50 dollars off the core unit's price, which does not seem impossible.

.Sis

 

[Shifty Geezer]

But Sony has reportedly already spent $1.75 Billion in Cell R&D IIRC.

That money includes fabrication investments.

 

[Sis]

I imagine they have royalty deals, etc, with other companies that will be using the technology, licensing fees for digital media, the list could go on.

Would it not be more accurate to say it is the LARGEST potential recouper? Not necessarily the only one.

One must also then wonder if they would stand to gain more by taking a relatively risky initial loss for future gains (early slaughter of HD-DVD). If hardware sales go as expected, they'll be making money on software pretty soon.

That's exactly what the article said. There isn't enough of a market for a Cell chip, other than the PS3, to recoup the dev costs. This is what the article is saying--not my opinion.

.Sis

 

[Shifty Geezer]

In my quick read of the document, I thought Merril Lynch was purely talking about having a $250 console unit out there in face of the PS3's estimated $500. This would be $50 dollars off the core unit's price, which does not seem impossible.

.Sis

Dunno about that. I was replying to Mold's talk of a fully loaded $250 console a year from now, which will be an enormous loss-leader unless MS have magic fabs that can halve production costs in one year.

 

[Mmmkay]

A) They never predict that MS will "win"; they say that MS has significant advantages and then they detail those advantages; namely, first mover and costs

Taking Sony’s weakened financial condition and Microsoft’s deep pockets into consideration, we conclude that Microsoft’s Xbox 360 should emerge as the early winner in the next round of the game console wars.

The article doesn't even pretend to be objective. It is written entirely as a vanity piece for Microsoft and its hardware partners for the Xbox 360. The 'laughable' $101 costing for CELL has now, according to Merrill, lept up to $160. Their basis for the PS3 being the primary source for recouping CELL R&D costs is based on a lack of evidence which is itself a fallacy. Sony have consistently described how CELL will be implemented throughout their CE devices, yet because they havent actually produced anything yet, Merrill decided that it was not going to happen.

[edit]Sis. They talk of the HDD-enabled pack being $250 by the PS3 launch!!!

Also, I just noticed this...

That assumes of course that the PS3 actually launches outside of Japan in 2006 – given the manufacturing challenge that Sony faces with Cell, it’s possible that the PS3 does not make the holiday 2006 selling season outside of Japan

 

[mckmas8808]

B) I'm sorry, but some of the cost predictions I've seen on this board are laughable at best: "I can buy a 40 gig hard drive at NewEgg for 30 bucks, so surely MS is paying less" or "Sony is manufacturing X so it's essentially free."

Key points from the article (IMO):

• We believe that Sony must be focused on recovering a portion of the development costs for Cell with PS3 sales
• The other major cost disadvantage lies with the Blu-ray drive that Sony plans to include
• CEO Howard Stringer has made some public commitments regarding the target level of profitability for the March 2007 fiscal year, and we're not sure those target are consistent with large losses on PS3 hardware.[xbdestroyer, this is different than "is Sony capabable of bleeding money" and speaks more to whether they should bleed money]

.Sis

1. The development cost for the CELL will be pay for itself with the help of Toshiba and IBM using it and helping sell it to other consumers. The CELL is bigger than just going into the PS3. Something that has been said here on B3D that obviously ML doesn't understand.

2. The development cost of the Blu-ray drive can be offset by the sheer amount that they can guarntee that the PS3 will sell. It's the sense of scale that will lower the price of the Blu-ray drives. Something that has been said here on B3D that obviously ML doesn't understand.

3. Howard Stringer has already said that the PS3 should turn a profit in 2007. That's roughly one year after the PS3 is released. I think he and the Sony execs have better information than ML don't you? The samething happened with the PS2. You and ML just need to research how much Sony spent before releasing the PS2.

 

[Carl B]

Guys I have to say I find it strange how many are willing to defend analysts here. Coming from me, this has nothing to do with their previous predictions in the console space (which have all been atrocious), it comes simply from the fact that I consider them for the most part to be lazy individuals with an easy job. Time and again, I have seen an analyst come on CNBC and give a terrible description of what's going on with a company. I've of course seen analysts completely miss the boat on 'buy' and 'sell' ratings; in fact, I think for the most part it's safe to say analysts are good at telling you what's already happened, rather than what's going to happen.

Example, company A reports second quarter drop in earnings. Stock drops. Analyst lowers target and puts a 'sell' rating on it. Nothing happens...

Well, what I needed from you analyst boy was this sort of 'analysis' before the stock dropped, y'know?

I feel they do *minimal* research before reaching conclusions, unless they are purely focused on one industry segment, and even then some analysts are suspect.

Now I've never been victimized by this nonsense because I do my own research and investing, but time and again, it's the norm with analysts. I have several friends on Wall Street btw, and they won't tell you different.

xbdestroyer, this is different than "is Sony capabable of bleeding money" and speaks more to whether they should bleed money

Now wait a minute, when was I talking about Sony bleeding money?

 

[Sis]

The article doesn't even pretend to be objective. It is written entirely as a vanity piece for Microsoft and its hardware partners for the Xbox 360. The 'laughable' $101 costing for CELL has now, according to Merrill, lept up to $160. Their basis for the PS3 being the primary source for recouping CELL R&D costs is based on a lack of evidence which is itself a fallacy. Sony have consistently described how CELL will be implemented throughout their CE devices, yet because they havent actually produced anything yet, Merrill decided that it was not going to happen.

[edit]Sis. They talk of the HDD-enabled pack being $250 by the PS3 launch!!!

Also, I just noticed this...

There's some strange wording that I took to mean early leader, not "victor" but maybe I was being generous. They do not say that the $250 price is the "premium" pack, only one that contains a HDD. Otherwise, they're suggesting that MS will lop $150 off the price, which I don't think they are saying.

.Sis