Console Post of the Week (Supplemental: Tokyo Game Show)
The Tokyo Game Show is this week (September 20-23), and there's been quite a bit of speculation about what Sony will announce, centering around a 40GB version of the PS3 for $399.I think the speculation itself, and what it implies, as well as the implications of what Sony might do, are worth examing before TGS starts.
The analyst speculation is extremely interesting, but it tells us more about the analysts than it tells us about Sony. It's incredible, but Sony has done less than the analysts expected every single time since the PS3 launched. Has there been a single case of Sony exceeding analyst's expectations since last November?
No.
So when analysts are saying that there will be a 40GB PS3, it's worth taking a look at why they believe it's going to happen. The general line of reasoning seems to be this:
Sony discounted the 60GB unit to $499 and introduced an 80GB unit for $599. Therefore, a 40GB unit can come out at $399.
I haven't seen a single analyst say that any functionality will be missing from the 40GB model--it's just a smaller hard drive.
Here's the problem with that line of reasoning, though--it's assuming that raising the price and lowering the price are linear, and they're not.
Seriously, there's a $100 difference in cost for 20GB difference in hard drive size? Take a look at Pricewatch--do you know the difference in price between 60GB and 80GB hard drives for same-model notebooks?
Seven dollars and fifty cents.
Seven freaking dollars!
So here's where the analysts are mistaken. When Sony introduced a model with a 20GB larger hard drive and priced it $100 above the 60GB model, that wasn't representative of cost. It was gouging on a gigantic scale.
That doesn't work for Sony going in the other direction, though. The 40GB model only reduces their costs by a few dollars. How exactly are they supposed to sell the unit for a hundred dollars less?
In other words, the combination of Sony consistently disappointing and the miniscule cost savings associated with a 40GB PS3 make a $399 unit unlikely. I'm not saying they won't announce one--it is absolutely the most logical thing to do--but the numbers really don't add up, even if they're funding the loss with the proceeds from the IPO they announced a few weeks ago.
Instead, what would be far more consistent with how Sony has behaved in the last year would be for them to announce that the 80GB unit is going to sell for $499 and make it seem like a gift from the heavens:
Behold, more mortals, the awesome power of the console from the future!
Blah, blah, blah, and blah. In other words, behaving just like they have during the past year. I think it's fair to assume that Sony still doesn't get it until they prove otherwise.
Here's one more angle on the PS3 pricing. When the 360 was launched, iSuppli estimated that the bill of materials (BOM) was $525. Twelve months later (November 2006), that estimate was revised downward to $323. That's a 38% reduction in twelve months.
Cost reductions naturally occur over time as materials move along the production curve. Yields improve and costs decline. An important part of declining costs, though is volume. The more consoles you ship, the faster (generally) your costs decline.
iSupply estimated that the 60GB PS3 bomb was $840 at launch. If costs declined by the same 38% in a year from launch, then the BOM would be roughly $520 in November of this year.
Except of course, that the PS3 has manufactured far fewer units--at least 25%, and that's probably a conservative estimate. And by all accounts, the PS3 is a more complicated architecture, with far lower yields, so I think cost improvements will come more slowly.
Factoring all that in, I think it's reasonable to estimate that the PS3 BOM is still in the $600-$650 range. If we use $600 as the example, that means Sony would be losing $200 per unit if they sell a $399 model.
Compare with Microsoft. Microsoft went from losing $126 on the hardware to making $76 per unit twelve months later. If Sony does introduce a $399 unit at TGS, they'll have gone from losing $241--to losing $201. And that's based on the $600 BOM.
That's the problem with introducing a console at such an outrageous price. Sony might not make money on the hardware until the third year after launch, and if they have to keep dropping the price of the console, which is a reasonable expectation, maybe not even then.
That is absolutely brutal.
Now if Sony does announce a $399, it's absolutely fantastic for everyone who plays games. Microsoft will be forced to respond with a price cut of their own in the near future. With the user bases for each console exploding, developers will be even more willing to develop games. For us, it's all good.
So I'm very much hoping that Sony does announce a $399 unit this week. I just don't believe that history and economics are in favor of it happening.
If it does happen, though, I will be very happy to be wrong.
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