Thursday, June 30, 2005

It's Just My Imagination, Running Away From Me

Q: How difficult is it to talk out of your ass?
A: I don’t know. Go ask Merrill Lynch.

In a story that has gotten a ridiculous amount of coverage (and has now been picked up by Slashdot, which means it will be seen by one hundred billion people), Merrill Lynch Japan Securities is predicting that the PS3 will cost $399 at launch. Here are a few excerpts from the article (available here:

According to the latest issue of Japanese magazine Toyo Keizai, Merrill Lynch Japan Securities has recently calculated an analysis that the production of a single PlayStation 3 console will cost Sony approximately 54,000 yen to make ($494), as of its initial release in 2006...

Given that Sony's PS3 will face stiff competition from Microsoft's Xbox 360, the chances that Sony will release its console at its production cost is slim. Under the assumption that the Xbox 360 is expected to sell at around $299, Merrill Lynch Japan predicts that Sony will sell each PS3 at the price of 44,800 yen ($410) in Japan and $399 in America. That would mean Sony would suffer a loss of more than 130 billion yen ($1.18 billion) during the first year of the PS3's release.

So what are the chances that MLJS really knows how much the PS3 costs? Well, zero. Let me repeat that: zero. They’re making assumption upon assumption upon assumption. The article assumes that each of the three major components (CPU, GPU, Blu-Ray Drive) will cost $101 each. “Everything else” will cost $191. Even a 10% error in the estimate (which would be quite good) would change the price of the PS3 (and, presumably, the launch price) by $50. That’s a huge difference in the console market, which is extremely price-sensitive.

One of the primary objectives of an investment firm is to gather publicity for themselves. That’s all Merrill Lynch is doing here. They have nothing of substance to say—it’s just a way to get the spotlight. Why everyone is jumping on their jock and believing any of this is beyond me.

I’ll say this, for about the fourth time: If Xbox 360 launches at $299 and the PS3 tries to launch (I’m guessing September 2006 in the U.S., no matter what Sony is saying publicly) at $399, they will get their ass kicked. Period. And if Microsoft is smart enough to lower their price to $249 on Sony’s launch day (which they might be able to do if they sell enough units during the head start, which will make production costs start to ramp down), it’s going to be very, very ugly for Sony.

None of these companies are superhuman. If you cut them, will they not bleed? Yes, that’s a Blade Runner reference, and you’ll see why in a few minutes.

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