PS4: Sony Gets Cost-Conscious

Sony's (NYSE: SNE  ) PlayStation 3 was a design marvel when released in 2006 -- a bargain supercomputer that was sold for well below cost. That won't happen anymore.

The PS3 was expensive when it was released ($600 for the 60 GB model), but there was a tremendous value in the console, as it sold for less money than the cheapest Blu-ray players at the time, and it integrated a powerful multicore processor that still holds the performance crown among game consoles and is not believed to be fully exploited by any game on the market. Back in 2006, analysts estimated that the PS3 cost Sony at least $900 to $1,000 in materials and assembly, making it a huge bargain for consumers, given its hardware horsepower.

The more recent game-console model, however, has been to sell hardware below cost to create enough incentive to buy the device and then lots of games that would recoup the initial losses. Over time, the financial model would also include a reduction in hardware cost, to eventually sell the console at a profit. It has taken Sony nearly five years -- much longer than expected -- to reach that profit level, and it appears that the company is not willing to do that again and stem losses that were counted as billions of dollars, not millions. Sony said that a massive reduction in hardware production cost allowed the company to turn PS3 losses into profits.

That is apparently going to change, as Sony isn't willing to accept such losses anymore. Nikkei is running a story in which Sony CFO Katou Masaru said that especially the semiconductor market has changed substantially since 2005 and 2006 and that Sony is generally reviewing development and startup costs of a new console. A huge part of the PS3 cost was the investment in new chip factories to produce the Cell BE processor. According to Masaru, there was no third-party manufacturing capacity in 2006 to support the PS3.

There was no information about the next PlayStation design. However, it seems clear that Sony won't try to challenge a perfect storm of new technologies and associated cost anymore. The PS3 was a huge bet on Blu-ray, HD gaming, and a brand-new hardware architecture. Sony is fortunate that Blu-ray won the HD war against HD DVD, but we doubt that the company will take such bold and costly risks anytime soon again. Will the PS4 be a more conservative design for its time? No doubt about it.

The company expects that it will ship about 15 million PS3s this year.

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