November 22, 2006 11:14 pm

Weak yen could help Sony’s PS3 succeed

The all-time weakness of the yen against the euro and pound could “save” the delicate economics of the PlayStation3 games console, and rescue Sony from an estimated four years of losses on its complex machine.

New calculations by UBS suggest that if the historic strengths of sterling and the euro against the yen continue into 2007, Sony will make only a tiny loss on each console when the PS3 is launched in Europe next March.

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Recent reports by independent engineers who have stripped the PS3 to its component parts suggest that each unit is currently costing Sony a little over Y90,000 ($763). This in turn causes the company a loss of about Y30,000 every time a PS3 is sold in the US or Japan.

But based on analysts’ assumptions that the high-end PS3 will be sold at retail for about €590 ($757) in Europe and Britain, Sony will be losing less than Y3,000 per unit when the revenues from those markets are translated back into yen.

Fumio Osanai, a UBS analyst, said that Sony would be looking extremely carefully at yen weakness over the next 12 months, because “under current forex market conditions the European games market could save the PS3 from heavy early losses”.

Sony’s company-wide calculation on currencies is that its earnings are affected up or down by Y13bn for every Y1 movement against the euro.

Britain and continental Europe are expected to be strong markets for the PS3. More than 35 per cent of the PlayStation2’s global sales were made there and games analysts expect the pattern to be repeated with the new generation of consoles.

However, analysis of the PS3’s high-end – and in some cases unique – components has led some to doubt that Sony can quickly cut production costs in order to reduce losses on the machine in Japan and the US.

CLSA wrote in a recent note to investors that while “it took seven to eight quarters after the launch of the PlayStation2 for Sony to break even, it could take 15-16 quarters for the company to recoup its initial PS3 investment”.

Because the new console has involved significantand PS3-dedicated research investment by many of the component manufacturers, Sony is understood to have less scope to force prices down at its suppliers.

Games hardware has generally been treated as a loss-leader in each console’s early years, with the main profits being made on the software sales and royalties.

But because of Sony’s hefty subsidy of the PS3, its economics appear fragile to some investors who say that the company could struggle to cut costs.

By one analyst’s calculation, which assumes that Sony makes about $10 in revenues on each game whether produced by itself or a third party, 30 games must be sold per PS3 console – compared with eight for the PlayStation2 – to make up for the losses which Sony will incur over the next few years before the hardware itself achieves break-even.

The recently-conducted dissections of the PS3 have uncovered a previously hidden goldmine for the many component makers – mainly Japanese and Taiwanese – which stand to gain from the PS3’s success.

Yoshiyuki Kinoshita, a Merrill Lynch analyst, believes that a new cycle may have developed. Where previously electronic component makers supplying to the game console makers could not make good margins, the latest generation of machines will deliver a sharp boost to profits.

The biggest components include Nvidia’s Reality Synthesiser costing $129, the IBM Cell processor costing $89, D-ram memory from Samsung at $48, and the Seagate hard drive at $54.

The PS3 consumes eight times more electrical power than its predecessor and Delta Electronics of Taiwan has specifically designed the unit to cope.

Similarly a unique heat piping system has been designed by Furukawa Electric to dissipate the extraordinary heat generated by the machine’s central processor.

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