PS3 costs cut in half

With the recent price drops and all the shuffling of SKUs, the PlayStation 3 seemed like it would never get close to being profitable for Sony. Although still not making a profit on each each system sold, they are getting considerably closer as Sony has announced that production costs on the PS3 have been cut in half.

The generable rule of thumb in the gaming industry is that when a console is first launched, the company is expected to sell it a loss and eventually make up for this loss through exclusive licensing and software that will draw gamers to purchase the system. Although it has been proven to work in the past, the PlayStation 3 just seemed way in over it’s head as Sony had gone on record saying that they were losing roughly 200 USD per system sold.

Originally, production costs of the PS3 were around 800 USD when the system first launched, but through different cost cutting maneuvers, Sony has been able to bring down the production cost of the system to a reasonable 400 USD, almost the same price of the newest 40GB model. Some of the cost-cutting moves have included shrinking the chip sizes, re-evaluating parts (like removing the Emotion Engine for the latest 40GB model) and various other design tweaks.

Last week Kaz Hirai expressed to the media that the PlayStation division of Sony, specifically the PS3’s division, is expected to turn a profit in 2008 as opposed to the losses experienced in 2007. Thankfully the PSP and even the PS2 have maintained solid sales and the gaming portion of Sony has been staying afloat. Now that production costs are below the retail price, this also allows some breathing space to bring the price down one more time without disrupting profits. Although this price drop may not come soon, it could be expected around the holidays of 2008 when Microsoft and possibly Nintendo could be eyeing a price drop for their respective systems.

Sony has also benefited from Warner Bros. recent defection from HD-DVD to Blu-Ray as investers have raised the value of Sony’s stock by 4.1%.