Making the PS3
Here's an excerpt from an article over at Business Week Online:Toshiba is gunning for an early lead in the high-stakes battle for share in the market for the newest high-definition DVD players... It's also selling the machines at a loss.
That's the verdict of market research firm iSuppli, which carried out a so-called teardown of the machine, picking it apart to determine what's inside and how much it cost to build. iSuppli analyst Chris Crotty reckons the internal electronics cost about $674, bringing the total to more than $700 when components such as packaging and manufacturing are included.The players sell through retailers like Best Buy and Target for $499, leaving Toshiba with a per-unit loss of $200 or more.
That's interesting, but what is most interesting is something that isn't even mentioned in the article. If an HD-DVD player costs $700 to make, what in the world does it cost to make the PS3?
Here is the data we have to work with. An HD-DVD player is selling for $500. The first Blu-Ray player to hit the market (made by Samsung) isn't really considered a "high-end" Blu-Ray player and it's selling for $999. The PS3, which includes not only a Blu-Ray drive but also the Cell processor and everything else that makes it a game machine, is selling for $599.
So what exactly could the Samsung player have that the PS3 doesn't? Upconversion of standard definition DVD's, possibly, since the Samsung upconverts (over the HDMI connection only, not component) and I haven't seen that mentioned as a PS3 feature (which is a serious omission, by the way, if it's not included), but that technology has been around for several years and shouldn't be a huge cost factor. I don't see much else, though, and I seriously doubt that Samsung is selling their player at any more than a bare minimum above cost.
Sony desperately needs mass consumer acceptance of Blu-Ray, because they desperately need to win the format war--controlling the format would be tremendously profitable, and it's a format that could exist for decade or more. If Blu-Ray loses, not only do they miss out on that revenue stream, but it could also seriously damage market share for the PS3. In other words, they've positioned themselves where they have to win.
That's why I strongly believe that, at a bare minimum, the PS3 is costing Sony $900 a unit. It might well be over $1000. If an HD-DVD player is costing $700 to make, a $300 delta seems entirely reasonable. And Sony wouldn't have announced a $599 price point--which they know is absolutely wrong strategically--unless they were already losing a fortune at that price.
That's why all these articles about Sony are incorrect. This isn't their strategy--it's a corner.
From the long view, it looked perfect. Here's what Sony was thinking:
1. We have an unassailable position in the video game market.
2. We need to win the high-definition DVD format war, because it's a win that would last a decade or more.
3. We can win #2 by making it part of #1.
In the long view, that's a great strategy. And it looked like a brilliant strategy right up until the point Sony realized that the PS3 cost $300 more to build than they expected.
Make no mistake: at $399, the PS3 does result in Sony winning the HD format war. Here's what Sony never considered, though: at $599, it might well lose them the format war. Again, though, they're backed into a corner--they can't absorb another $100-$200 loss per unit when they're already losing at least $300.
Hardware costs have backed them into a corner. So when these Sony executives say the ridiculous things that they're saying, that's not part of a strategy--it's panic. It's feeling the wall against their back.
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