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May 16, 2007 11:13 pm

Sony has work cut out to recoup PS3 costs

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When Ken Kutaragi, the diminutive and brilliant engineer behind three generations of the PlayStation games console, announced his retirement last month, it marked the end of an era at Sony.

But his indelible imprint on Sony’s struggling games division was apparent on Wednesday, when it reported a hefty operating loss of Y232.3bn ($1.93bn) and said it would not turn a profit until the fiscal 2008-2009 year, at the earliest.

At the heart of the problem are the massive costs Sony incurred in developing the PlayStation 3. Merrill Lynch has estimated the PS3 cost $900 to produce when it launched; its price tag for the 60 gigabyte version is $599 in the US.

The biggest costs are represented by the powerful Cell microprocessor, estimated to cost $230 each, and in the Blu-ray disc player, which is thought to cost $350 per console.

Sony on Wednesday night admitted that selling the PS3 “at strategic price points lower than its production cost during the introductory period” was the main factor behind its mammoth operating loss.

“It was not an ideal launch,” said Takao Yuhara, Sony’s senior vice-president. “Our focus is to strengthen our software line-up this year.”

Sony is already beginning to trim costs where it can, and analysts point out the company went through the same process with the PS2, which remains the world’s best-selling console.

“So far Sony seems to be on the right track; there is more financial discipline in the games division, and that is because of Sir Howard [Stringer, Sony’s chief executive],” said an analyst at a foreign brokerage.

Within three years, the production cost of each PS3 is estimated to decline to $320, according to Merrill Lynch, and analysts expect Sony to slash PS3 prices by at least $100 during the crucial Christmas sales period this year.

Sony is in the process of reducing the manufacturing technology used for the Cell chip from 90 nanometre to 65nm, and analysts say a move to 45nm is possible.

This year, Sony intends to ship 11m PS3 consoles, without naming a sales target. By comparison, Nintendo has said it intends to double global sales of its best-selling Wii console to 14m units this year. Analysts say the operating losses at Sony’s games division in the current year ending March 31 will be about Y60bn-Y70bn.

“I think Sony’s 11m forecast is a bit optimistic, without any serious top-tier titles to be released in the next
12 months,” said Hiroshi Kamide, analyst at KBC Securities. “Component manufacturers are saying things are difficult. I’m sure Sony is trying to decrease production costs, but can there really be meaningful price cuts in six months?”

Analysts say a dearth of sure-fire software titles in the pipeline is a problem for the PS3, with many developers loath to take on the risk of investing in a product that will not necessarily sell well.

“Some companies are unwilling to invest in the beginning of the cycle because they don’t know if they can recoup their investment – thus their resources are directed at [Nintendo’s] Wii and are much cheaper,” said one analyst.

Nintendo develops most of its software in-house, which observers say gives the company a more holistic view of what customers want – and delivers better profit margins. But Sony is not standing still. Analysts say it is likely to launch a lighter, better version of its hand-held PlayStation Portable game player this year, to compete more effectively against Nintendo’s DS.

Appointment of Kaz Hirai as the head of Sony Computer Entertainment is likely to help the company form better ties with software developers. Many analysts say there’s only room for Sony to improve its games division.

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