What is the true cost of manufacturing the PLAYSTATION 3?

[Carl B]

What I´ve been thinking recently is that Sony wasn´t positive on the losses they´d have to suffer, since the final price wasn´t set, they offered an estimation. At the current price, I really doubt PS3 is selling at much of a loss, if any.

That earnnings estimate was presented roughly one month before E3 though; I just can't envision either why Sony would purposefully lie on that front (to their detriment) or how they could not know their pricing strategy that close to the announcement.

 

[Acert93]

What I´ve been thinking recently is that Sony wasn´t positive on the losses they´d have to suffer, since the final price wasn´t set, they offered an estimation. At the current price, I really doubt PS3 is selling at much of a loss, if any.

We know MS is losing on each unit. So at $100 more ($499) Sony has more ports, a Blu Ray drive, and a processor that consumes 40% more die space, and 2 different types of RAM. Even if all the additional parts only costs $100 they would still be in the red like MS.

Just on the optical front, it is hard to believe a Blu Ray drive is cheap. New technology, low production, etc. Even looking at Toshiba's HD DVD line we are in the $500 range (which is less than the announced BRDs). The PS3 already has ethernet and CELL to decode, so you don't need those costs. But the drive is still expensive with estimates per-drive being pretty high.

Almasy, maybe you can offer some reasons why you think Sony may be selling at cost?

Sony's internally projected losses, market analyst projections, and comparing the parts to the 360 (and considering MS's losses) everything points to 1) the PS3 being more expensive to manufacture and 2) Sony not breaking even at $499.

 

[Powderkeg]

http://www.actsofgord.com/Proclamations/chapter02.html

This website disagrees, though there's some thing on the website I'm really not sure if they're right, so I'm not sure how accurate this site is.

I don't know where that web site gets it's information from, but if you look here:

http://www.sony.net/SonyInfo/IR/financial/ar/qfhh7c000000dh3y-att/ar2001e.pdf

You'll see that in fiscal year 2000 the Games division had sales of 655 Billion Yen, and operating income of 77 Billion Yen. The very next year they had an increase in sales up to 661 Billion Yen but an operating income of -51 Billion Yen.

That means in 1 year they had a drop in Operating Income of 128 Billion Yen, pushing them into a net-loss.

I don't see how that is possible if they were earning $175 profit per unit in PS2 sales, or earning any profit at all for that matter.

 

[SenatorMonkey]

I'll just cross-post a tinfoily thought I had over at GAF

Here's another, perhaps more tinfoil-hattish theory on the high PS3 pricing.

First, before E3 (mainly around GDC), there were a lot of threads and analyst estimates about the cost of a PS3. They had things at around:

Cell: $100
RAM: $50
Blu-Ray: $100
RSX: $100
Controller: $15
Casing: $20
Ports: $15
HDD: $50
Misc crap: $a bit more

Total: Around $500 - $550


Now, I'm seeing people estimating that Cell is a $200 cost, RSX is $150, Blu-Ray is $250, all to ultimately get the costing up to around $800-$850.

What if Sony realizes (and has been told) two things:

a) Their Blu-Ray partners are releasing machines in the $1000+ price range, that perhaps won't offer significantly enhanced features over the PS3, so they have pushed Sony to price PS3 higher, so that it won't dig into their revenues too much ('do this or we'll support HD-DVD'). Once Blu-Ray becomes a more accepted product, and costs go down (hence retail pricing goes down), this pressure alleviates

b) Sony comes to the conclusion that at launch, they can sell all of their units no matter how much they charge, and they figure that the first 6M-10M units will go very easily, even at $600.

Wouldn't it be possible then, that Sony will not be losing much on these units at all? If they can make an extra $100 per unit (or more, depending on how much they 'could' sell them for), isn't that just really smart business? Come next spring, around E3, they can drop the price by $150 or so, and work through the next 20M units, all the while making money (or at least not losing billions) on the hardware.

Thoughts?

 

[scooby_dooby]

Come on guys, merril lynch nailed this MONTHS ago!

 

[Fox5]

Well, I can't speak to that website - I myself have always been in the 'sold at a loss in the beginning' camp, but as the years go by I'm not sure where to find the factual supports for that position.

Anyway whatever the case with PS2, there is no way that SCE could be predicting that sort of loss on the year, and yet the PS3 be a breakeven product at retail. It would be the mystery of the age.

Really? I've always been in the break even or sold at a small loss camp initially (and the goal is then to reach the break even point as quickly as possible). Yeah, they invest a lot into the consoles initially and that won't be recouped for a while, but the hardware isn't lossy. I think everything prior to the Saturn was sold at cost or for a profit. Saturn may have been sold at a small loss. Dreamcast may not have been sold at a loss initially, but after the rapid price drops it probably was.
Ps2 was sold at a loss initially, but not designed to do so. Unexpected production and shipping problems greatly increased the initial costs, but they dropped fairly rapidly afterwards and was probably at a break even point before the end of the year.
I believe Xbox was the first console to really jump-start the myth of consoles selling at a loss, so it definetely did.
Gamecube sold at a loss initially, as per Nintendo's claims, though only a small loss and it was designed to be sold at break even, I believe unexpected economic conditions were what caused it to be sold at a loss.

Xbox 360 may or may not be sold at a loss, but I think it was designed to quickly reach a breakeven point on the hardware. Perhaps not as quickly as previously though, Microsoft has jacked up the prices of more or less mandatory hardware accessories (controllers, memory cards, hard drive), which should help ease Microsoft's burden of providing an undercost console.

Just on the optical front, it is hard to believe a Blu Ray drive is cheap. New technology, low production, etc. Even looking at Toshiba's HD DVD line we are in the $500 range (which is less than the announced BRDs). The PS3 already has ethernet and CELL to decode, so you don't need those costs. But the drive is still expensive with estimates per-drive being pretty high.

And with low consumer demand (few HDDVD movies, and low hdtv penetration), it has to be sold at a high cost. Also, Toshiba doesn't sell games, they need to recoup their investment into the technology and make a profit, so it is selling at much higher than their cost of production.

That means in 1 year they had a drop in Operating Income of 128 Billion Yen, pushing them into a net-loss.

I don't see how that is possible if they were earning $175 profit per unit in PS2 sales, or earning any profit at all for that matter.

Ok, so maybe PS2 did sell at a loss for quite a while. Though it I wanted to nitpick, I could say they were paying off loans and things of that nature.

 

[dubyateeeff]

Cell: 170$
RSX: 80$
XDR: 60$
GDDR: 25$
Motherboard and connections: 30$
Box: 10$
PSU: 50$
BD-ROM: 125$
HDD 20GB: 20$
HDD: 60GB: 50$
WiFi: 1$
HDMI: 1$
Controller: 12$

I think you are overestimating, I mean, "Controller 12$?" More like 10$

The PSU-estimate is high, since they are producing them/buying them in large quantitites... say 25-ish. We know they get the cheap ones, just look at the recent recalls they had

BD-Rom...40$

Box... 2$... I mean, box+milk 0.5$... +manual+warning text+packaging

Which brings it to a total of 488$ (if I did my math correctly) for the 20gb one, 519$ for the 60gb one

 

[Carl B]

BD-ROM $40? Dubya I think you've gone mad.

I just don't understand how you can reconcile the losses SCE expects to be making next year with the profits you're predicting on the sale of the hardware. I mean, is there any reasoning behind these estimates, or are they purely arbitrary? I agree the controller and PSU numbers from Urian's estimates were too high though.

By 'box' I think he meant console casing however.

 

[dobwal]

http://www.actsofgord.com/Proclamations/chapter02.html

This website disagrees, though there's some thing on the website I'm really not sure if they're right, so I'm not sure how accurate this site is.

That website doesn’t know what it is talking about in terms of PS2 profitability. Look at the Sony’s earning reports from the ps2 introduction.

FY99 ending March 31, 2000

PS1 hardware sales= 18.5 million
PS1 software e sales=200 million

PS2 hardware sales= 1.41 million
PS2 software sales= 2.9 million

Profits= 730 million USD

FY00 ending March 31, 2001

PS1 hardware sales= 9.31 million
PS1 software e sales= 135 million

PS2 hardware sales= 9.2 million
PS2 software sales= 35.4 million

Profits= (-409 million USD) a loss

FY01 ending March 31, 2002

PS1 hardware sales= 7.4 million
PS1 software e sales= 91 million

PS2 hardware sales= 18.07 million
PS2 software sales= 121.8 million

Profits= 623 million

Lets use some forum math.

Look at the data from fy99 to fy00. You have a 1.139 billion dollar turnaround associated with the increased hardware sales of PS2. While there was a decrease in software sales (30 million units less), unless software licensing fees are $40.00 a game, there is no way slower software sales strongly contributed to that large of drop in profits.

Look at fy01 data. Sony make 623 million, which is about 107 million less than in fy99. Yet Sony sales about 5.5 million total more hardware units and close to 10 million more software units in fy01. Also, PS1 and PS2 should have been both cheaper to manufacture in 2002 vs. 2000.

Take away that 7.4 million in PS1 sales and 91 million in PS1 software in fy01 and its not hard to make that 623 million dollar profit vanish into thin air. Even if I lowball the figures I can make almost all that profit disappear.
PS1 Software= 91 million X $5.00 = 455 million
PS1 Hardware= 7.4 million X $15.00 = 111 million
Total = 566 million

Now take account of that 121.8 million is PS2 software and its hard to see where anyone can see the PS2 at profitability from onset of intial manufacturing.

Sony generated almost 1 billion dollars in profit form fy99 to fy01. Looking at the total profit generated over three years and the fact Sony moved 586.1 million units of software during the same time. Ignoring all other cost and using only software and hardware sales, Sony's average license fee per software unit would have less than $1.61 US dollars for one to be able to extrapolate that Sony PS hardware sales as a whole produced a profit during that time period.

 

[dubyateeeff]

BD-ROM $40? Dubya I think you've gone mad.

I just don't understand how you can reconcile the losses SCE expects to be making next year with the profits you're predicting on the sale of the hardware. I mean, is there any reasoning behind these estimates, or are they purely arbitrary? I agree the controller and PSU numbers from Urian's estimates were too high though.

By 'box' I think he meant console casing however.

I am just talking manufacturing here... you've also got marketing, R&D (PS3 or PS4, however you look at it), dev relations, shipping, internationalization etc...

BD-ROM... well, "its just a CD-Drive" with a different laser.

Also, there is one important thing that I don't know about... how is Sony writing costs off? They can write off (factory, R&D, marketing etc) one year (next year), or over a span of several years. I just dont know. Therefor I just look at what I believe the manufacturing costs are.

 

[Skrying]

IMO, any guess that's lower than $600 is a total waste of our time. I dont believe at all that Sony is not selling for a loss. Frankly, I'd place unit cost more around $700.

PS3 is expensive, for us and Sony.

 

[archie4oz]

BD-ROM... well, "its just a CD-Drive" with a different laser.

While most estimates IMO are rather high, the $40 one is absurdly low. Just a couple of years ago 405nm blue laser diodes were upwards of several thousand dollars a pop, and were only available from Nichia (which Sony has a tight partnership with) and Cree... Granted those prices have dropped staggeringly each quarter, but $40 is just ridiculous...

 

[Powderkeg]

If we are going to speculate on the possible cost of the Bluray drive I would like to point out that the Vaio desktop with a Bluray burner will debute at $1,000 more than the DVD-burner version of the same system. (Assuming the Bluray equipped system is the same system as their top of the line DVD equipped desktop)

Obviously read-only drives would be cheaper than burners, but that much of a markeup can't all be profit, and it's far too much to be written off as the difference between a burner and reader.

 

[Almasy]

We know MS is losing on each unit. So at $100 more ($499) Sony has more ports, a Blu Ray drive, and a processor that consumes 40% more die space, and 2 different types of RAM. Even if all the additional parts only costs $100 they would still be in the red like MS.

Just on the optical front, it is hard to believe a Blu Ray drive is cheap. New technology, low production, etc. Even looking at Toshiba's HD DVD line we are in the $500 range (which is less than the announced BRDs). The PS3 already has ethernet and CELL to decode, so you don't need those costs. But the drive is still expensive with estimates per-drive being pretty high.

Almasy, maybe you can offer some reasons why you think Sony may be selling at cost?

Sony's internally projected losses, market analyst projections, and comparing the parts to the 360 (and considering MS's losses) everything points to 1) the PS3 being more expensive to manufacture and 2) Sony not breaking even at $499.

Well, my guess might not be the most educated one, but still, given the high price of PS3, I doubt there´s much of a loss going on here. I mean, the extra ports can´t add much to the expense, I sincerely doubt Blu Ray Drives cost $400 or so (if I were to bet, I´d say it´s around $100).

Maybe you misunderstood me, I didn´t imply Sony was making a profit on this thing, but I think blown up guesses such as "PS3 costs $1000!! Sony AM DOOMED!!" are really farfetched. Yeah, Sony uses the blades and razors model, but common sense tells me it´s not to that extent.

IMO, PS3 costs Sony around $650 or so .

 

[Carl B]

IMO, PS3 costs Sony around $650 or so .

Almasy, that is all good; everyone gets a guess.

But I just have to wonder, what in the world do you think is going to cause SCE to lose close to ~$900 million this year - by their own estimation - in light of such light manufacturing losses on the PS3 (if your numbers are accurate) and a profitable PS2 and PSP operation to boot?

 

[Almasy]

Almasy, that is all good; everyone gets a guess.

But I just have to wonder, what in the world do you think is going to cause SCE to lose close to ~$900 million this year - by their own estimation - in light of such light manufacturing losses on the PS3 (if your numbers are accurate) and a profitable PS2 and PSP operation to boot?

I admit, that fact has made myself doubt my guess for a long time. That´s why I mentioned that maybe even Sony itself weren't positive of the price back then.

But really, obviously I have no idea of exact costs, but making a rough guess, let´s make a quick estimation

RSX around 100
CELL around 130
Blu Ray around 100
HDD around 40

so, adding that up, that´s $370, leaving still $230 for everything I´ve missed. I don't know, I just can´t envision PS3 costing them $1000, unless CELL really is a nightmare to produce and costs them $250 by itself. Blu Ray is a mistery, given that the price point of introduction players is not reflecting of anything, since you pretty much pay for being the first to own this new tech.

So, maybe in a worst case scenario, at most PS3 costs $700 IMO.

 

[Fox5]

Almasy, that is all good; everyone gets a guess.

But I just have to wonder, what in the world do you think is going to cause SCE to lose close to ~$900 million this year - by their own estimation - in light of such light manufacturing losses on the PS3 (if your numbers are accurate) and a profitable PS2 and PSP operation to boot?

Having to pay the bill for the factories and R&D, along with a consideration of much higher losses due to manufactuering difficulties? (though shouldn't 90nm be pretty mature by that point?)

 

[Carl B]

Having to pay the bill for the factories and R&D, along with a consideration of much higher losses due to manufactuering difficulties? (though shouldn't 90nm be pretty mature by that point?)

SCE isn't paying for any fabs though - that's a different division. Not to mention the majority of that has already been paid in it's own right. R&D yes, there will be some - I think mostly related to the Playstation Network. But I mean, I think there has to be a tacit acknowledgement that the PS3 is of some expense to produce. R&D alone doesn't explain it. We're talking about not only shy of a billion in loss, but absorbing the otherwise profitable operations of their existing consoles along with that.

 

[archie4oz]

SCE isn't paying for any fabs though - that's a different division.

Eh? SCEI still has 2 rather large fabs (one of which is fabbing the RSX). IBM (and perhaps Chartered) will likely provide the bulk of the initial Cells, however I wouldn't be too surprised if OTSS and/or SCEI take over the bulk of the 65nm node production...

 

[rajeev84]

My guesstimate

Cell - $125
RSX - $125
Memory - $75
Harddrive - $50
Wifi and bluetooth etc - $50
Blu-ray - $250
Other Shit - $50

Total Sum = $725