Sony’s PlayStation 3 costs less, sells better

During the holiday season, Sony’s PlayStation 3 is starting to sell better than ever and a new report says the console is being priced lower than ever.

In November, the PS 3 came in third place among at 710,400 units, compared to 819,500 for Microsoft’s Xbox 360 and 1.26 million for the Nintendo Wii. But the PS 3 was the only console to grow its sales above last year’s numbers, with sales up 88 percent from November a year ago, according to the NPD Group.

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On top of that, Sony is losing less money than ever on its redesigned PS 3 Slim console. An analysis shows that Sony makes the smaller and thinner version of the console for $336.27, according to market researcher iSuppli. Sony sells the console for $299, but it makes money — just as razor makers lose money on razors and make money on razor blades — through sales of its games and royalties from third-party game makers.

Could it be that Sony’s fortunes are starting to turn around? At first, the PS 3 seemed to be a colossal misjudgment in strategy. While Nintendo created the innovative Wii controller for a low-cost console, Sony loaded the PS 3 up with expensive hardware, saddling it with a seemingly ridiculous launch prices of $599.

Sony fell from about 60 percent of the market share in the PlayStation 2 generation to about about 22 percent with the PS 3. That was a staggering shift, triggering billions in losses at Sony. And it meant that developers left Sony’s camp in droves to make games for the Wii and the Xbox 360. As Sony cut its costs and lowered prices, Microsoft matched the price cuts, always staying ahead of Sony in both price and market share.

But this year, Sony made the extra investment in a console redesign that is finally paying off. It created the PS 3 Slim, a smaller and lighter version of the PS 3 with a 120-gigabyte hard disk. It also stayed the course on its investment in games, launching a number of outstanding PS 3-only games, including Flower, Killzone 2, Infamous, Uncharted 2, and others.

The Sony PSPgo, on the other hand, is struggling. The new version of the PlayStation Portable launched in October, but it failed to turn the tide against the Nintendo DSi and the Apple iPhone and iPod Touch, which are both stealing away the audience for the high-end PSPgo. Sony sold 293,000 PSPs in November, while Nintendo sold 1.7 million DS/DSi handhelds.

The cost analysis is interesting. Previously, Sony sold the older model PS 3 for $49.72 less than its manufacturing and materials cost, based on pricing from October, 2008. (iSuppli’s teardown analysis does not take into consideration other costs beyond hardware such as software, box contents, and royalties). iSuppli expects that Sony will cut its costs further in 2010, and it is thus close to the tipping point for profitability.

“Since the introduction of the PlayStation 3 in late 2006, Sony has subsidized the price of every console sold, a deficit the company has made up for with game sales and royalties,” said Andrew Rassweiler, director and principal analyst, teardown services, for iSuppli. “However, with each new revision of the game console hardware, Sony has aggressively designed out costs to reach the hardware and manufacturing breakeven point as quickly as possible. The latest version of the PlayStation 3 manages to further reduce the loss, even with the U.S. price of the console having fallen by $100 during the past year.”

One of the big differences, as we reported before, is that Sony is now using a Cell microprocessor built with a 45-nanometer process, compared to the older and more expensive 65-nanometer process. (The numbers refer to the width between circuits). iSuppli’s October estimate of the cost of the Cell was $37.73, about 19 percent below the $46.46 for the 65-nanometer part in the previous-generation PlayStation 3.

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The new hardware also cuts the power usage of the PS 3; the new PS 3 has a 220-watt power supply, while the older one had a 400-watt power supply. Overall, the PS 3 has 2,568 components, compared to 4,048 in the original version.

Not counting the $66 Blu-ray drive, the Nvidia Reality Synthesizer is the most expensive component in the PlayStation 3, at $45.82. However, that a 21 percent decline from the Reality Engine employed in the previous version of the PlayStation 3 hardware, based on pricing in October 2008. iSuppli believes Sony is using a 65-nanometer technology, compared to 90 nanometer in the initial version of the PlayStation 3 in October 2006.

Sony has a strong slate of games coming in 2010, including MAG (see our preview), God of War III, and Final Fantasy XIII. Is it enough to turn around its fortunes in the console war? Possibly, but that’s still far from certain.