Is Sony eating hundreds of dollars on each PS3?

The game console might cost you $499, but it's got $806 worth of parts and manufacturing behind it, a research firm says.

Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
Michael Kanellos
3 min read
Consumers are getting a lot more than they bargained for with the PlayStation 3, according to analyst firm iSuppli.

The cost of manufacturing and materials for the low-end, 20GB version of the console comes to $805.85, iSuppli said in a report Thursday. That means that for every PS3 Sony sells for $499, it will lose $306.85 on components alone. Marketing and advertising costs would then boost the actual cost to Sony even higher.

The PS3 with the 60GB hard drive comes with a manufacturing and component bill of $840.35. Since it sells that version of $599, the component bill exceeds the retail price by $241.35, iSuppli said.

A Sony representative would not comment on the PS3's manfacturing costs.

The research firm's final estimates are in line with others from earlier in the year. In February, a scan of analysts' estimates put the manufacturing and material costs for the PS3 between $725 and $905.

Console makers typically sell the consoles for less than the actual cost. These companies make up for the subsidized boxes by selling game software at a premium.

Components also get cheaper over time, a la Moore's Law. Earlier this year, Ken Kutaragi, who heads up Sony Computer Entertainment, said that in 1999, the processor and the graphics chip inside the PlayStation 2 took up 239 square millimeters and 279 square millimeters in surface area, respectively, which made the chips relatively large (and hence relatively expensive). By 2004, the two chips were condensed into one that took up just 87 square millimeters, almost a sixth the size.

Merrill Lynch has said the PS3 manufacturing and materials cost could drop to $320 in three years.

Still, the Sony subsidy on the PS3 is somewhat high, compared to the Xbox 360. The hard-drive-equipped Microsoft game console now has a manufacturing and materials cost of $323.30. The box sells for $399, which is $75.70 above the component costs. When it launched, the manufacturing and materials costs for the box came with a component bill between $501 and $525.

The higher costs for the PS3 are largely driven by the expenses associated with the Blu-ray Disc drives and the custom chips used inside the machine. The Blu-ray drive costs $125, while the Cell microprocessor likely costs about $89. The reality synthesizer, a graphics chip from Toshiba designed for the PS3, comes to $129.

"The reason why the PlayStation 3 is so costly to produce is because it has incredible processing power," iSuppli analyst Andrew Rassweiler said in a statement. "If someone had shown me the PS3 motherboard from afar without telling me what it was, I would have assumed it was for a network switch or an enterprise server."

The power supply included in the unit costs $37.50, about double the price of the ones that go into PCs.

Microsoft also includes customized silicon in the Xbox 360, and the software giant participated in their design but the Xbox 360 chips are more closely related to existing processors.

The PS3 chips are somewhat distinct. Sony, Toshiba and IBM hope to defray costs by selling the Cell processor to other manufacturers. Toshiba plans to use a version of the Cell in TVs, and one workstation maker has agreed to put it into its computers. History, however, shows that it's a tough sell. Sony also hoped to get the Emotion Engine, the graphics chip from the PS2, into other computers. It didn't find takers.