Analysis: Sony losing $240+ on every PS3

by Kyle Orland { Nov 16th 2006 at 4:55PM }

Market research firm iSuppli has determined that Sony will lose about $240 on every 60GB PS3 and roughly $305 on every 20GB system they sell at launch. The determination comes from iSuppli's cost analysis of the parts inside the system -- which includes a $125 Blu-Ray drive and a $129 Nvidia "Reality Synthesizer" -- and does not include additional costs from packaging, cables or the SixAxis controller.

The finding puts Sony in stark contrast with Nintendo, who said their Wii console would be profitable at launch, and Microsoft, which iSuppli determined is now making roughly $75 in profit for every Xbox 360 premium pack it sells.

While the report reveals that Sony is charging a more than fair price for what iSuppli calls an "engineering masterpiece," we have to wonder how long it will take for game and download sales to make the system even reach the break-even point financially.

[Via GameDaily]

Tags: business, losses, PS3, sony

Reader Comments (Page 1 of 1)

crono141 @ Nov 16th 2006 5:00PM

So, just like a plumber is a "Waste Management Technician" a graphics chip is now a "Reality Synthesizer"?

I wanna know who the douchebag is that started this kind of crap.

Thrawn @ Nov 16th 2006 5:06PM

You could ask him but I think he was on the Golgafrincham Ark Ship B

nick @ Nov 16th 2006 5:08PM

Thats pretty damn generous of Sony.

Kuturagi is my Santa Clause!

Gnac @ Nov 16th 2006 5:10PM

@ crono141:

Yup, much like this "engineering masterpiece" is putting lipstick on a pig.

Unimental @ Nov 16th 2006 5:19PM

I've got it! This information exposes the obvious wild-and-crazy Sony corporate strategy of producing less PS3s in order to lose less money. Brilliant!

Tom @ Nov 16th 2006 5:20PM

Shouldn't Vlad be here telling people that the PS3 basic version is actually the better one and worth more? After all you are clearly getting more for your money on it. I look forward to that article.

devi8i @ Nov 16th 2006 5:21PM

I thought in MS's quarterly report they illustrated that they are still taking a loss on 360 hardware sales?

Sizer @ Nov 16th 2006 5:22PM

> So, just like a plumber is a "Waste Management Technician" a graphics chip is now a "Reality Synthesizer"?

Reality Synthesizers are so last-gen. They're Stream Processors now.

Fhaze @ Nov 16th 2006 5:23PM

Sony however is expected to make up this shortfall by selling every 3rd PS3 it manufactures on EBay between now and Christmas. Officials from Sony refuse to comment.

Miniboss @ Nov 16th 2006 5:24PM

@ 6.

"Shouldn't Vlad be here telling people that the PS3 basic version is actually the better one and worth more? After all you are clearly getting more for your money on it. I look forward to that article."

That's true! Sony is losing more money on the basic version of the PS3, therefore it's the better value! Screw Penny Arcade or anyone with rational thought processes! The more a company loses money, the more the consumer prospers!

Grindstone @ Nov 16th 2006 5:26PM

So every 1,000,000 PS3 consoles sold is $240 million lost. But agian, these analysts did not include the price for the Sixaxis, cables, or packaging. So in reality the actual cost is higher.

Xbox 360 is turning a profit now?

Oh look, a flying pig ... and it's wearing lipstick...

Ryan @ Nov 16th 2006 5:26PM

Engadget lists it as MS losing $75 per 360. If they had flipped for a profit they would drop the price and Sony would somehow be worse off then they are now.

I guess losing $240 was there breakpoint or maybe they would have tossed in a video scaler.

n2 @ Nov 16th 2006 5:26PM

According to Yahoo Finance, Sony is 18 billion in debt right now if you view their most recent investor filings.

http://finance.yahoo.com/q/ks?s=SNE

They desperately need the PS3 and perhaps Blu-Ray to be a success. Thing is, every PS3 sold will put Sony further into debt, at least for the short term.

Korexz @ Nov 16th 2006 5:31PM

I feel bad for all the fools on eBay that are going to lose $1500+ when they get their PS3 delivered and it doesn't display in 1080i, but 480p. And the PS2 titles the are forced to play (because they are flat broke from buying the system, hence no PS3 game - I guess the 1080i downgrade issue is solved then... anyway) don't work. And finally after 2 weeks the Blu-Ray drive will stop reading disks, Japan will hit first then the US, and finally Christmas morning when spoiled OC brat finds out that Sony (and Mr. eBay Seller demon spawn) got him a bum unit... and Sony will them to wait and buy a new one because they can't cut down shipments to replace defective units... that would cost them EVEN MORE MONEY...

Am I the only one that remembers when the PS2 came out? The PS3 was obviously rushed to market, and you expect a higher level of quality than the PS2 release... you are all broke ass fools!

Ritz @ Nov 16th 2006 5:32PM

400,000 units x $240 loss = $96,000,000 lost!?

Uhmm... a 98% software to hardware ratio (from Japan) looks really shitty when you compare it those numbers. How many games do they need each person to buy before they break even?

FSK405K @ Nov 16th 2006 5:32PM

So THAT's why Sony is limiting the launch numbers...they're trying to lose less money. As units launched approaches zero, Sony is more financially successful.

peko @ Nov 16th 2006 5:36PM

sony loses a wii for every ps3 sold
lol

foodgoes @ Nov 16th 2006 5:39PM

I don't see the problem, Sony has plenty of money, i am sure they got a hefty back account from all the money they pulled in from their previous success. Like the Betamax, the MiniDisks, the Network Walkmans, the ATRAC3 format, and lets not forget the ATRAC3plus. And now they are gonna be laughing with the Blue-Ray discs, kind of like Phillps was with the Laser Discs then came the Digital Versatile Discs, or in this case could be Holographic Discs.

crono141 @ Nov 16th 2006 5:42PM

Thats Digital Video Disks, sir. DVD

Exick @ Nov 16th 2006 5:48PM

That seems odd. Sony is willing to take a substantial loss on the system as a whole, but they're charging $100 extra for $35 worth of extra parts between the two SKUs?

Dan @ Nov 16th 2006 5:49PM

@19

Actually, it was Digital Versitile Disc. Now, officially, it doesn't stand for anything.

Kayzai @ Nov 16th 2006 5:53PM

Reality Synthesizer???

Hmmmmm. I thought only GOD could create (i,e. Synthesize) Reality?? Whao this PS3 must be the next coming!!!

Now Sony can create REALITY, EMOTIONS and even create a total new 4th DIMENSION.

Sony think... Sorry, Sony KNOW that consumers are dumb. This is why they keep coming up with this stupid names and lies.

Anybody remember sony saying the PS3 could do 120 Frames per second at 1080P whilst outputting to separate 1080P Monitors???

I lost ALL respect for SONY after this claim as we all know the PSFREE can hardly compete with 360's graphics now.

I now understand why M$ would rather fight a real PS3 than the myth Sony has created.

Ritz @ Nov 16th 2006 6:01PM

"Anybody remember sony saying the PS3 could do 120 Frames per second at 1080P whilst outputting to separate 1080P Monitors???"
- #23, Kayzai

lmao, I remember that. You know, I bet the PS3 could do that with flOw...

Steve @ Nov 16th 2006 6:08PM

$240? Good grief! How many games and blu-ray movies does Sony think people are going to buy?

I guess anyone who really hates Sony now has a way to stick it to them: just go out there and buy a PS3 then do nothing but buy used movies and games for it.

Tanngrisni @ Nov 16th 2006 6:18PM

"25. $240? Good grief! How many games and blu-ray movies does Sony think people are going to buy?

I guess anyone who really hates Sony now has a way to stick it to them: just go out there and buy a PS3 then do nothing but buy used movies and games for it.

Posted at 6:08PM on Nov 16th 2006 by Steve "

... or you could just let it sit on the shelf, where they will lost over $800 on it (probably closer to $850 because the profit margins to the retailer has to ludicriously low).

I know people are bashing on Nintendo for not going with HD, but if "True-HD" means that you are losing 33% or more of all the capital you put into the hardware then Nintendo did the smart thing. Until the cost of Blu-ray drives and Cell processors go way down, Sony is gonna be in a world of hurt.

It's sad to see a company that has been in the driver seat for so long screw up so badly. It's like watching a particularly bad car wreck in slow-motion.

JJ @ Nov 16th 2006 6:19PM

This article is lacking some not so obvious truths. Sony makes there own systems which means that the losses are much smaller than stated if there are losses at all. There is an article about many past launches right here: http://www.actsofgord.com/Proclamations/chapter02.html Its always good to do your own research.

peter7898m @ Nov 16th 2006 6:24PM

The PS3 is still a sham, you will all find that out later.

Shad Genki @ Nov 16th 2006 6:25PM

Quick, call the waaahmbulance!!

some guy @ Nov 16th 2006 6:33PM

Wait...so if Sony sells 6 million PS3's...with 240 dollars lost for each one... is 1.4 Billion Dollars lost.

Sony Stock is going to plummet!

Game Artist @ Nov 16th 2006 7:13PM

Guessing that Sony makes about $20 on first party games and about $10 on 3rd party games. At least that would be somewhat consistent with previous gen stuff.

That's an attach rate of over 10 titles minimum to be profitable. (not including accessories which are enormously profitable as well)

Pulse @ Nov 16th 2006 7:16PM

Fanboys, stop hanging on every bit of news you hear, do your own research, its good for you.

Oh and 360 fans, this price thing and brokeness is getting old, if its price you want to discuss, tell me, why shell out that price for 360 when I could pay half the price for Wii and probably have more fun playing that, I don't think some of you think before posting.

Chyld989 @ Nov 16th 2006 7:36PM

"I lost ALL respect for SONY after this claim as we all know the PSFREE can hardly compete with 360's graphics now."

PSFREE? What does that even mean? Why can't people just type out the actual name of a system/company/person/whatever that they're bashing, rather than making up some stupid name that sounds similar when spoken (or, more accurately, taking said stupid name from someone else, thus not even thinking it up themselves)?

And it was originally Digital Versatile Disc, but because it was videos on DVDs that popularized the format, people not in-the-know referred to them as Digital Video Discs. Now, however, as Dan stated, it officially doesn't stand for anything.

epobirs @ Nov 16th 2006 7:53PM

#27

JJ, The most obvious truth missing from your own post is that Gord is completely wrong in that article and hasn't gotten any more accurate in the time since. Gord is an arrogant ninny lacking in simple logic. Companies outsource manufacturing because it is less costly than having it all done by their own employees and facilities with all of the costs that entails. The Apple iPod products are heavily outsourced both in their internal hardware and manufacturing, yet are extremely successful products.

Sony never made the claims Gord states. Those reports, in languague obviously intended to obscure the reality, indicated that each PS2 sold was profitable when the software and accessory sales attributable to that unit were factored in. Typical executive weaseling. Suggesting, as Gord does, that Sony was making a major profit on the base hardware within a year of launch is simply ridiculous. The profit potential for software and accessories is far greater. Taking a quick profit on the hardware and limiting the market for that hardware as a result is a foolishness I wouldn't attribute to anyone running the game business at Sony. Given a substantially lower SRP the PS2 could have hit market saturation a year or two sooner and provided a huge expansion for software sales on a continuing basis.

Sega's problems with the Saturn was due to wretched misorganization and haphazard planning for what the new machine should be. All of these downfalls were in place before outside production contractors entered the picture. The resulting Saturn was a very messy design, lacking in component integration that made it more difficult to ramp down the cost and more complex to produce.

The Dreamcast was the Saturn's opposite. A very well planned, clean design that would ramp down its costs in due course. The problem was that the company was simply too far gone and mired in debt by then. If there had been no challengers of Sony or Nintendo's abilities in the market, the Dreamcast might have prospered but those challengers did exist and didn't have to work very hard to push Sega off its precarious perch.

The problems with the Xbox came down to two issues, with the latter being driven by the former. The belief that they needed to be on store shelves in time for Xmas 2001 led Microosft to make a very bad deal with Nvidia. Being in a rush meant adopting an Nvidia chipset not far enough removed from their PC efforts to be sold as a complete package to Microsoft. Nvidia wanted to retain ownership of all the IP.

That in of itself wasn't necessarily fatal. Other products have prospered under the same circumstances. The real killer was that Nvidia perceived the XGPU and XMCP as being no different from high-end gaming PC products, where Nvidia was used to pulling in very high margins. A game console compnent needs to be sold at very low margin with the profits driven by volume.

So Microsoft was in too much of a hurry and Nvidia screwed itself by failing to understand the console business. That the chips were produced by a contract foundry and assembled by a contract factory were not factors in that. It would not have fixed anything for Microsoft to build its own facitities for those functions.

Currently, Chartered Semiconductor is working on a 65nm die shrink of the IBM designed CPU of the Xbox 360. Because Microsoft learned their lesson and owns the chipset IP this time around, they're free to take their business to anyone who thinks they can deliver it for a lower cost. These companies are in turn motivated to deliver cost reductions to Microsoft in the expectation that a lower price will lead to more sales of the product and continuing work for the foundry. The margins are very low but that is nothing new for them.

The initial .25 micron production run of the PS2 for Japan was very deep in the hole on each unit. (These chips were only intended as engineering samples and dev kits but Sony's .18 micron production line was delayed by many months.) This improved with the .18 micron chipset that was in production in time for the US release but the machine by their acknowledgement was sold at a considerable loss untill well after launch. This was reflected in sony's stockholder reports but the company could bear this pain because it still enjoyed strong cashflow from the PS1 and its ecosystem of highly profitable software and accessories. In turn, Sony is depending on the PS2's continuing strength to sustain the operation while the PS3 establishes its base. Over time, as the cost of the optical drive drops and the chipset expenses are greatly cut with 65 nm die shrinks, the PS3's loss per unit will become far less and eventually fall to below break-even.

The challenge is to keep their heads calm and avoid bleeding greater amounts than intended. The challenge is much greater this time around but the plan is still viable.

Revo @ Nov 16th 2006 8:05PM

I'm sure people must have thought of this before, but I've never seen it: Couldn't Microsoft theoretically just buy up massive stocks of PS3s and throw them in their corporate incinerators? Sony would lose hundreds of millions with no opportunity to make that money back through software sales. Sure, it would cost MS even more, but they could certainly afford it, and in the long run they'd have knocked a major competitor out of the console market.

Probably impractical or illegal in some way, but just a thought.

vc @ Nov 16th 2006 8:11PM

Someone wrote: ""Shouldn't Vlad be here telling people that the PS3 basic version is actually the better one and worth more? After all you are clearly getting more for your money on it. I look forward to that article."

You have it wrong. I would never maintain that the lower-priced console is better. It's lacking functionality of the higher-priced console.

However, which is the more highly subsidized console? Which console includes the most electronics (in terms of cost) per dollar?

Because Sony's taking a higher loss on the lower-priced console, it is therefore the better choice for the consumer looking for performance per dollar. Simple math.

epobirs @ Nov 16th 2006 8:27PM

#35

Consider the cost for Microsoft. The same expenditure would be far more effectively used to finance the development of a major game exclusive to their platform. That makes money for their existing base of customers and attracts customer to their product and away from the competition.

#36

Oh please, not this nonsense again. The PS3 is not a commodity available from many suppliers. It is an item from a single supplier, Sony. How much Sony makes or loses on a particluar model should have no influence whatsoever on a rational consumer's purchase decision.
Unless the consumer bears Sony some tremndous ill-will (not outside the realm of possibility, I'll admit) the COGS vs. SRP simply has no bearing on the consumer.

Causing the producer to lose money on the transaction has no actual benefit to the purchaser, so why would it be a factor? When choosing betwee the two Xbox 360 or PS3 SKUs, the consumer should only care about the value of the features acquired for that additional hundred dollars. That is the only place where the consumer can exercise any judgement to their own benefit rather than the manufacturer's benefit or detriment.

David @ Nov 16th 2006 8:44PM

Sony is so fucked when these things break and everyone gets mad, or if these burn down houses when people think it's a grill.

Give me Stars or Give me Death! @ Nov 16th 2006 9:59PM

Vlad, give up. When I say "give up" I mean on life as well as this dead horse that you're handily kicking the shit out of. And math may be simple but English apparently isn't since your last line is a sentence fragment and therefore incorrect.

epobirs and David are right, especially epobirs, but especially David.

Revo @ Nov 16th 2006 10:53PM

"Consider the cost for Microsoft. The same expenditure would be far more effectively used to finance the development of a major game exclusive to their platform. That makes money for their existing base of customers and attracts customer to their product and away from the competition."

Yeah, I figured that would be the main objection. I'm just thinking that Sony is in a weak position right now, but they could potentially build themselves back up to market dominance if the PS3 takes off. If MS could take them out while they're struggling, they wouldn't have to compete with them for market share in numerous future generations of consoles. It's conceivable that money spent to bring down Sony could in the long run would be more beneficial to expanding their userbase than trying to do so directly.

I'm not saying it's likely, or even a real possibility. It's really just a hypothetical point, but it's an interesting case worth considering.

Chris @ Nov 16th 2006 11:03PM

Sony doesn't sell the console at $599, so they're losing more than $240.

What is the wholesale price of a PS3?

vc @ Nov 17th 2006 12:54AM

"Oh please, not this nonsense again. The PS3 is not a commodity available from many suppliers. It is an item from a single supplier, Sony. How much Sony makes or loses on a particluar model should have no influence whatsoever on a rational consumer's purchase decision.
Unless the consumer bears Sony some tremndous ill-will (not outside the realm of possibility, I'll admit) the COGS vs. SRP simply has no bearing on the consumer."

COGS vs. SRP does have bearing on the consumer. You're crazy if you don't think it does.

There are two forms of value.

(1) value to consumer
(2) value for the company

The first is defined by the difference between consumer willingness to pay and the price the consumer pays. So long as WTP is higher than price, a consumer will happily pay for an item.

How does a consumer set his WTP? He sets it by considering the utility that an item will give him. In the PS3's case, that utility comes from a variety of sources, some of them emotional, some of them rational. Emotional utility comes from things like being the first kid on the block to own the newest console or from Sony's brand name, which certainly still holds some cachet. Rational utility comes from things like product features and functionality.

Assuming Sony's not just overpaying for components (we have to assume that they're basically competent and rational), every dollar of technology cost that Sony packs into the PS3 should directly increase end-customer utility, and should therefore drive up WTP. Therefore, a system with $250 in technology that's priced at $250 (and has no emotional benefit) is provides its purchaser with exactly no excess utility ($250 in utility less $250 dollars paid out). A $600 system with $850 in technology inside provides its purchaser with $250 excess utility (price less WTP).

Burnt Meatloaf @ Nov 17th 2006 1:40AM

I never trust estimates. Manufacturing costs are done under contract, too, so they usually include R&D.

I see everybody says the Wii will make a profit on hardware, but nobody says how much. Might it damage Nintendo's image if people found how how much money they make on every unit? Funny how estimates are only coming out for the 360 and PS3 on a regular basis. Nintendo always slides right through this BS.

As for the "Reality Synthesizer", didn't all the coproccesors for the N64 have the word "Reality" in them? Wasn't the whole system codenamed "Project Reality?" What's with calling the graphics chip of the Wii "Hollywood" when the system can't even play movies, let alone produce graphics that comes close to them?

People are such hypocrites.