In its highly anticipated teardown analysis of the initial production run of Sony's PlayStation 3, being introduced this week in Japan and North America, technology analysis firm iSuppli confirms what many -- including financial analysts at Merrill Lynch and elsewhere -- had suspected as far back as last February: For each 60 GB PS3 model sold in the US for a retail price of $599, Sony loses an estimated $241.35; and for each 20 GB model sold for $499, the manufacturer loses $306.85 (assuming loss from the retail price).

Keep in mind that these are retail prices we're mentioning. Although margins for video game consoles are believed to be razor-slim, Sony is actually earning less in revenue than $499 and $599.

It's widely known that game console manufacturers, especially on the initial run, actually plan to lose money per unit sold as part of the price of building a customer base. Companies like Sony, Microsoft, and Nintendo know that they can make up that lost revenue from the sale of games, which in the optical disc era, are very cheap to produce. This supplemental revenue is called "software attach," and it's measured by the average number of games customers purchase along with the base unit.

In recent analyses of Xbox 360 sales, the software attach rate has jumped to about 5 - which is considered high, with 4 usually being the industry's high water-mark. But when Xbox 360 premiered at this time last year, the software attach rate was believed to be closer to 3. The average sale price of a console video game in the US is generally assumed to be $50.

Granted, the PS3 is just being released, but an up-to-the-minute tally of available games for all next-generation consoles, based on data supplied by Amazon, shows the one-year-old Xbox 360 with about 140 game titles currently available from Amazon.com, versus 33 for the PS3. For Sony to sell enough software alone to make up for what iSuppli projects it loses per 20 GB PS3 sold here, its software attach rate would have to be a nearly-impossible 6.

This means Sony must rely on sales of accessories and other gear in the hopes of breaking even, for a release that has already been constrained by supply shortages of critical equipment, such as -- ironically -- the blue-laser diodes Sony itself manufactures for PS3's built-in Blu-ray Disc player.

According to iSuppli's data, the Blu-ray optical drive is the second most expensive single component in the PS3, at a cost of $125 per unit. Just ahead of that is nVidia's Reality Synthesizer GPU at $129. IBM's Cell BE CPU -- whose processing power has been likened to that of a supercomputer by standards set just a few years ago -- costs Sony a mere $89 per unit. Seagate supplies the SATA hard drive, costing Sony $43 for the 20 GB model and $54 for the 60 GB model.

Why does Sony lose less on the more expensive PS3? Because it only costs Sony an additional $35.50 per unit to produce the 60 GB unit, though it sells for $100 more.

ISuppli analyst Andrew Rassweiler credited Sony's beyond-state-of-the-art design and manufacturing for the PS3's high costs. "To give an example of how cutting-edge the design is," Rassweiler stated this morning, "in the entire history of the iSuppli Teardown Analysis team, we have seen only three semiconductors with 1,200 or more pins. The PlayStation 3 has three such semiconductors all by itself. There is nothing cheap about the PlayStation 3 design. This is not an adapted PC design. Even beyond the major chips in the PlayStation 3, the other components seem to also be expensive and somewhat exotic."

When Microsoft premiered its Xbox 360 in November 2005, iSuppli estimated that company's bill of materials for the Premium unit at $525, though it sold for $399. The $126 difference could easily be made up with a software attach rate of 4 or higher. Today, iSuppli released an updated bill of materials estimate for Xbox 360s manufactured this year.

With component costs having depreciated over one year's time, and the cost of factory retooling and improvements no longer a major factor, Microsoft spends only $323.30 per unit. After margins are accounted for, Microsoft likely earns a modest profit per unit sold today.

Source: http://www.betanews.com
By Scott M. Fulton, III, BetaNews
November 16, 2006, 10:59 AM