Three big-picture PS3 predictions from OPM

Sony is unable to afford an $800 million loss to sell the unit at $399 (assuming 2 million are sold).

Since banks don't lend on a long term basis, something Sony is going to need, they will have to sell bonds. $800 million or more to be exact. Since Sony is only rated an A-, or a high grade junk bond due to their relatively high debt and poor liquidity (most of their money is tied up in inventory and other non-cash assets), they'll have to issue the bond at a fairly high interest rate when compared to the market rate.

So, Sony may have to issue an 8-10% coupon rate bond to get it to sell to bring in that $800 million needed to sell their product at a substantial loss to keep it price-competetive with the 360. That's $80 million a year out of their income, or 13.4% of their yearly net income. A 13.4% drop in NI usually results in a huge drop in stock prices, something not good for any company.

Or, you could claim that maybe a bank will be willing to give them the loan. Again, probably not. Sony has $8.2 BILLION in current loans, which are usually defined as loans due in the current fiscal year. They are going to have to pay off $8.2 billion this year, or renegotiate the loans to keep them going for another year (Sony is in a bad spot here given most of their debt is in short term loans, very risky).

Another problem that banks will look at is that Sony only made a profit last year by cannibalizing its own properties. Sony sold off 10 of its properties. For example, one of them was sold to the tune of $3.1 BILLION, yet Sony still only managed a $593 million profit.

Sony is not in good shape, especially considering they tripled their debt levels, mostly from volotile short term loans, in 2005. This means huge cash flow problems and a business that is losing money from continuing operations.

So, the short story is this - Sony cannot afford to cut rate the PS3 in any major way. They may be able to get away with a $100 million loss or at most $300 million based on their current financial situation and massive debt levels. This would translate in a PS3 being sold at $150 less than production cost, or around $500-$600, assuming they can scrounge up another $300 million in loans on top of their ballooned debt.

It's funny how people try to make up stuff without knowing EVERYTHING about Sony to back up their claims...especially without looking at the past to see that consoles that have attempted to sell for $500+ fail miserably (3DO anyone?)

#17 I am curious how they plan to launch 8-12 titles if the Hardware is not even finalized yet, unless they get the dev kits out 2 years in advance.

Of all the PS3 articles I have read a recurring theme is Sony can not take a big monetary hit. I am surprised that people think that way. Sony is a rock solid company. They have such a wide line of products, from TV’s to interests in the motion picture industry. I have not seen Sony’s stock holder reports but I am pretty sure they are one of the few companies in the world that could actually go head to head with Microsoft in a money burning contest.

#26 Where are you getting this information that PS3 dev kits arrived in Dec/Jan? The Square Enix team does not even have a Dev Kit yet, you know the guys that make Final Fantasy? They are stating that Sony does not even have the hardware finalized yet. So I am pretty sure the Dev Kits are not even close to being ready yet. And the final dev kits did not show up until 2 months before launch of the 360, do you just make this stuff up? Several big game companies went on the record last May as stating that the 360 dev kits were very easy to use and that porting PC game titles was very little work to get them ported over to the 360.

#32 Really please quote your source on this hot breaking new flash? I was just in GameStop today after reading your little post and asked them about it. Their comment was that they have 3 of the original 8 core systems in right now, and that all 30 premium systems sold out in three days. Best Buy said they sold all 60 of the premium systems they got in the course of two days. As for your computer hardware comments for god sakes please send me your source of that information. Because I want to go shopping where you do.

#38 I am sure you are right. But that is the price you pay for being first to market kind of a trade off.

#39: Hmmmmm EA says better AI, better graphics, more maps. Fight Night should look great Burger King paid enough in endorsements to probably cover a whole team of programmers. To bad they could not have passed some of that savings on to us the gamers and instead of $59.99 charged us all $49.99.

#42: Well thank you god for letting all of the rest of the world in on your wisdom. Please in your next post tell us all the winning power ball numbers before they are published and I will take your prophecy as the gospel truth until then maybe you should just keep your stupid fan boy comments to yourself. It is one thing to pose a different view or opinion but at least give it some thought unstead of making mindless statements.

#46: WOW you really ripped them a new…..just kidding kind of a pun on your name there. Anyways I completely agree with your comments. Do you think any of these companies if they were the only one would put half the effort into improvement that they do if they did not have any competition, no way. I like
kizza plan on buying all three (I already have a 360 and love it).

#49: My only argument to your comment is you are forgetting the PSP. I might say the PSP has some great games along with the DS.

Jago you must be one of those people who tattooed “SO” on you left butt check and “NY” on your right butt check. To even compare the 360 titles to any of the PS2, Xbox, or Game cube especially you obviously do not own a 360 or have ever even played any of the games.

#51: I am just curious please post where you got this information. You seem to be someone knowledgeable in finance, and not just some Sony Bashing Microsoft Fan boy.

Here is my prediction. This is me talking as a gamer. If Sony redesigns there controller, and keeps good on their promise of a great online gaming service (HUB), and does allow a game disk to be played in multiple PS3s (IE no DRM or limited at least), and launches before the holiday season 2006 in the US, has a number of great games at launch, and keeps the price within $75 dollars of the Xbox 360. I believe this console will do great. But for each one of those items that Sony ignores they will loose substantial market shares.

Wow first we have someone who has no original and educational thought in his mind (Kizza) and now we have someone (Jim N) who makes untrue assumptions.

First I'm even going to respond to Kizza.

Second, (Jim N) do I own a 360? No. Why? I can't justify spending $400+ to play games that are mostly "upgraded" current generation games. Have I played the system? Yea...we have one where I work at and I play it when we have small tournaments or free play challenges.

...and yes the Xbox, PS2 and Gamecube have better games then the 360 (at this point) and if you SERIOUSLY believe that the SMALL X360 library is better then all 3 of those systems combined then you have some pretty low standards (or are just wowed by shiny pretty graphics.)

"Second, (Jim N) do I own a 360? No. Why? I can't justify spending $400+ to play games that are mostly "upgraded" current generation games. Have I played the system? Yea...we have one where I work at and I play it when we have small tournaments or free play challenges.

...and yes the Xbox, PS2 and Gamecube have better games then the 360 (at this point) and if you SERIOUSLY believe that the SMALL X360 library is better then all 3 of those systems combined then you have some pretty low standards (or are just wowed by shiny pretty graphics.)"

You are a moron, I'll give you that, & that only. For starters you copy my insults to the tea as you do not have an authentic original bone in your body, ya american retard.
Next, duh, I wonder why the 360 doesn't have as many titles as 5-6yr old machines. Jeez, could you help us work tha one out Gayjo. If everybody shared that dumbarse attitude, then their would be no such things as games moron, as every console that launches from scratch starts off with a small library of less than original games.

You are a fangirl of the worst, most sordid, jaded, bitter kind jaygo gaygo. You are not a gamer, you are a dopey biased, donkey felating, inbred, trailer trash, sister reaping, brother dating, pig molesting, mother carressing, cousin stoinking, niece groping, 1 inch penised 12yr old with many fantasy fueled insight that have & will continue to lead you nowhere in life.

I'm actually starting to feel sorry for your dumb american, sounding ass. And even more sorry for your mother, for having to raise such a high grade invalid.

"No. Why? I can't justify spending $400+ to play games that are mostly "upgraded" current generation games."

So instead you'll spend $299.99 on a revolution & rave about mario party 12, mario kart 10, mario 64 & a half & possibly resident evil 55. What a retard.

"First I'm even going to respond to Kizza."

Of course you won't. I bitch slapped you like the little fangirl you are & then you proceeded to use some of my unintellectual insults on JimN.
You have nothing, never will have nothin, cause you are nothin' retard. Go & play with your

" then you have some pretty low standards"

I'd be careful here, as you don't exactly exude high standards yourself, especially considering I've seen your girlfriend/boyfriend at the spastic centre you reside in. I suppose it's the best a mongolude like yourself should hope for, retard.

In conclusion jaygo, anyone that has read my posts & thought about them, can only come to the conclusion that I am not a severe nerd in serious need of some high potency personality injections like your dull self. You should perhaps try bashing your head against a triple brick wall in the vain hope it will release some kind of personality onto your brain, that has been trapped somewhere in that mostly empty, oversized bubble you try to pass off as a head.
You are obviously a young nipper that's mummy refuses to work the streets of the trailer park an extra 3 night a week, to get the money to buy you a next gen machine.
Maybe you should dress up in drag & sell your own skinny, scraggly, malnurished ass to some of the ex cons in your trailer park enviroment. If your lucky enough to get 50c each time some cat cornholes you, you'll have a 360 after 800 butt poundings. Then you can buy a 360 & some antiseptic for your bleeding ringhole at the same time.
See I'm even helping your white trash ass now. I'm like an aussie dr phil really.

If anyone is wondering, If you make a statement saying the 360 is nothing more than a beefed up XBox or PS2, you are making yourself to look like a Sony or Nintendo Fanboy (or a M$ hater).

Both the 360 and PS3 are next generation machines in terms of technology. Developers have stated that the PS3 won't look that different than the 360 in terms of graphics. It will just be able to push more of the graphics around. The Revolution is Next Generation in its creative use of a new controller, but I think the hardware is closer to being a hyped up version of its predecessor than either the 360 or the PS3.

As for the predictions, I just don't see Sony releasing the PS3 for $399. But we will see what the reality is soon enough.

#54 -

I pulled my information directly from Sony's publicly disclosed income statement, balance sheet, and cash flow statement. Most companies leave that stuff easily accessible on their company website to comply with ease of accessibility laws for future investors (specifically any company that wants to list their stock in the United States). You can find it at Sony.com in the Investor Relations section.

heh. at least you're not a proctologist juan.

"I am pretty sure they are one of the few companies in the world that could actually go head to head with Microsoft in a money burning contest."

uh. no. laughingtarget is on... uh... target. their business is a 4% margin business. microsoft's conversely is a 34% margin business. (i'm rounding a bit there. too lazy to look up the exact figures. wrote it up at one point.) sony can't burn any kind of money. on a 4% margin, you're scraping for everything you have and hoping people keep buying your products. there's no 'rainy day' profit in there anywhere.

as to a prediction, i made mine in a bet with jeff.
http://www.joystiq.com/2006/02/09/good-news-for-ps3-launch-supply/1#c1010380

m3mnoch.

p.s. and jim. it's 's' on the left cheek and 'ny' on the right. you don't need the 'o.'

Hi, My name is kizza kutaragi and every thing I know about the US is from the south park and Jerry Springer. Your just pissed of because you don’t live in the most powerful nation in the world. You spend most of your time making fun of others and fornicating to PS3 trailers. You are pathetic, get a life.

m3mnoch - You're pretty close. It is 4.07% for Sony. They have sales of $14.5 billion but only $593 million in net income. We also have to remember that a lot of that net income is due to one-time income bursts from the sale of 10 of their subsidiary companies in 2005 (Sony went from a corporation of 66 companies at the end of 2004 to 56 at the end of 2005). This means, without a massive success of the PS3 with a minimal price cut, or a $600 unit selling well, then Sony is up the creek because they cannot keep selling off companies to make up for their losses.

Another ugly face of Sony is their continual negative cash flow. They don't have cash to burn because over the past few years, they've been losing cash (a very bad thing for a large, established company). Last year, they had $2 billion more in cash leaving the company. This trend has been going on for a some time now, leaving Sony more and more reliant on loans to do anything requiring money.

Sony's operating margin is a touch better, but the R&D on BluRay, Cell, and the PS3 in general is killing their company. Sony made around $949 million in actual operating income, but that hardly matters when it comes to concepts like economic value added (net income - cost of capital), which is poor, especially when Sony is low on cash and marketable securities (easily liquid) and is flush with debt, meaning high cost of capital.

Basically, back to the meat of the issue, Sony has negative cash flow, and have been that way for around 8 years. This means (on top of the huge debt mentioned in my earlier post) that Sony cannot afford any major price cut on the PS3 under its manufacture cost.

Wow . . . Just wow. OPM is just ridiculous for several reasons.

1) I can't see it costing $400.
2) Dual Shock is already in a lawsuit which could make them stop selling PS2's. If they had to stop selling PS3's before it launced because of it they would be in deep crap.
3) is a no brainer which I completely agree with.

Wow, this guy must be a relative of Nostrodamus with such insight... Holy crap man, what out of the stuff he said wasn't obvious? I mean, it would be stupid for Sony to price over the 360 price point. Regardless of the hardware. The controller met nothing but scorn from every media/blog site, and no system I know of had games at launch that couldn't be surpassed by later generation software. I also predict that of the launch titles, at least 25% will be from EA. Oh, and there will be supply issues. Oh, oh, and when they are short on supply, they will sell on Ebay for like $600-$800.

These are MY predictions. No PS3 will come bundled with a HDD. The one model available will be $399. If you want to save games, buy a memory card or a HDD. The HDD available at retail may cost less OR have more capacity than the 360 HDD to make it more enticing. They will NOT box a remote or headset with their console (All accessories will be sold seperately to chip away at the huge loss on the console they are gonna take cause of Blu-Ray). There will be MANY more movie previews on Sonys online service (they own like 4 large movie studios).

Lets see how close I am on Wednesday.