Is Sony Losing Their Shirt On Each PS3?
There’s been a lot of industry speculation that Sony is losing a lot of money with each PS/3 sold.
This article claims the the total cost of the main unit alone, EXCLUDING controllers, cables, packaging and any profit margin for the retailers (i.e. Wal-Mart’s gotta make money to sell these things), is $805 to $840 (for the low and high end PS/3’s respectively). Shipping cost to the retailers is also apparently excluded. Adding in these costs, (even with a very modest assumed retailer markup) and you get to about $900-$950, which, with the current retail prices at $499 and $599, implies a $300-350 loss per unit.
I’m not an expert in component pricing and manufacturing costs, but still, I’m skeptical.
Let’s look at some specific prices in that cost estimate:
Manufacturing Costs: $40
Really? Assuming the components come pre-assembled as modules (very likely), then assembling the parts is sort of like putting a Lego toy together – plug everything together, screw a few things together, and done. I’d make a wild guess that a trained worker could assemble 2 units an hour – that’s probably very conservative. The units are apparently being manufactured by a Taiwanese company (Asustek). By my wild guess, that would seem to imply labor costs of about $10/hour, or roughly $5/unit. If Asustek in turn pushes the manufacturing to a plant in South China, it would be even less. Note that in the second table, they estimate XBox 360’s manufacturing cost at only $6.10 per unit. No explanation is given for the enormous discrepency between the systems.
Enclosure: $31-33
Really? The plastic/alloy box around the PS/3 costs $31 in million unit bulk order pricing? I doubt it. Considering you can buy computer cases, at quantity 1, at retail price of $15 after rebate from NewEgg, I doubt Sony is paying more than $10-15 for the enclosure
Power Supply: $37.50
Hello, I’d like to order 5 million power supplies – how much will that be, per? $37.50? Wait a sec – I can buy a SINGLE 400 watt power supply at NewEgg for $20. You’re telling me my five million unit order is at almost twice that, per unit? Yes, I know the unit in the PS/3 is a ‘slim line’ power supply, but I hardly think that accounts for this price estimate. Thanks, but I’ll find a different supplier.
Other Components and Manufacturing: $148
Weren’t we already charged for manufacturing? What are these ‘other components’? The table already appears to list all the major chips, memory, hardware, optical and hard drive…
Combined price of 4 primary chips (graphics, CPU, I/O, ‘Reality Synthesizer’): $305
OK, here’s the deal with technology – I think it applies well to these chips, and to a lesser extent to the other items above.
Chipmaking has 3 main costs:
1) R & D – How much to invent it? This is basically a single large lump sum invested up front.
2) Manufacturing ramp-up – Initial yields are low and it takes time and money to figure out how to manufacture items in bulk. Again, this is basically a single large lump sum invested up front.
3) Per unit costs – Once you’ve got it developed and you have your manufacturing going, how much does it cost to stamp out each chip? This cost declines slowly over the life of manufacturing, but is much more stable (per unit) than the first two costs.
Now, a chipmaker has to make a profit per chip. Clearly, that entails charging more than the per-unit cost in item 3, but it also involves making enough money over the life of the chip run to recoup (and hopefully make a profit on), items 1 and 2.
I have no doubt that it cost Sony and their partners an enormous sum to develop these chips and their manufacturing processes. But I really doubt the true per-unit cost (i.e. item 3) is anywhere near $300 for the lot of them. Perhaps whoever created the table in question tried to amortize a significant chunk of items 1 and 2 against the first few hundred thousand chips off the line. But that just seems wrong to me – Sony, internally, is probably amortizing those costs against a projected run of 50-100 million PS/3s, lifetime (maybe more). Taking a very wild guess, I’d say the $305 figure is off by a factor of 2 or so.
To repeat, I am NOT an expert in these things, and may be wildly wrong. But it seems that analysts are applying cost pricing roughly equivalent to building a single machine with parts from NewEgg or Fry’s, rather than bulk pricing, bulk manufacturing, and amortizing R & D cost over 50-100 million PS/3s that will likely be built, lifetime.
How much money is Sony really losing, per unit? I don’t know, and perhaps Sony doesn’t really know either. Computing a per unit cost on the first batch of PS/3s is a bit of a silly exercise anyways. They’ll probably lose money in the PS/3’s first year, due to all that R&D, low software sales to a small initial base of PS/3 owners, and declining PS/2 sales. But my wild guess is that Sony will make a lot of money over the course of the PS/3 generation, and also will likely make more money than Microsoft.
November 17th, 2006 at 6:01 pm
I agree alot of these analysis estimates seem like bollocks. But where I do think that Sony are loosing money is the huge opportunity cost in not selling blue laser components to third parties, given the sortage in these components.
“Taking a very wild guess, I’d say the $305 figure is off by a factor of 2 or so.”
Hmm I personally believe that the 800ish figure is off by a factor of two.
1. The drop in price of the PS3 core to 50k yen in Japan, methinks that drop was prolly as low as they could go before loosing money on the console. Which is why they chose that price, rather than any other.
2. Given the two tier pricing strategy it would make sense to have the lower tier as the ‘subsistence level’ profits and the higher tier as the ‘lets rake in the cash’ profits. which a 400 odd build cost will do.
But then again nobody outside of Sony knows the actual price of the PS3, so it’s all guessing really.
November 18th, 2006 at 10:41 am
Phil,
Very good post on this. I always believed that the big 3 always lose money on the hardware. You’re numbers make more sence to me. I think we could add costs to the initial run units if you spread the cost of development over them.
Honestly, I’m more interested in the Wii anyway. They are selling for almost half the price.
November 22nd, 2006 at 2:29 pm
At least one factor to consider is the fact that Sony built a fab in order to build the cell processor. The cost of the chip itself aside, one thing I learned in my time at Intel is that fabs cost mind-boggling amounts of money.
e.g. (rough estimate): A 300mm/64nm fab costing, lets say, 1B-1.5B to build. The parts it makes will be obsolete or at best super-commodotized in 4 years. They may still make cell at that time, but on newer process, which means a new or re-tooled fab. That works out to a depreciation of $1M per day.
Crazy business!
November 22nd, 2006 at 10:16 pm
But even if the plant will depreciate by $1 Billion over the life of the PS3 (whether from $1B to $0, or from $1.5B to $0.5B, both of which seem excessive, but I’ll roll with them)…
There will likely be 50-100 million PS3’s made. So the fab plant amortization, per cell chip, is around $10-20 per. There would be other costs, too, including the R&D cost behind the chip. But still, the cell is in that table at $89, which seems excessive.
If Sony also uses the cell for many other non-PS3 uses, and/or produces cells at the plant for other uses, then that further reduces the amortization cost, per chip.
November 29th, 2006 at 11:05 am
As you said, you’re just throwing guesses around without any real basis. Transportation of modules is most likely included in cost. Also, workers don’t work alone at their homes, there’s management and other personel for keeping facitilities going. I don’t know the details of taiwan, but often there’s other social fees applied on top of salary which employers need to pay. It’s pretty hard just being a layman making guesses about production cost of high end electronics. It’s most likey not like manufacturing car when you’re working at microscopic levels and the QA problems which comes with it.
November 29th, 2006 at 11:15 am
Sairon, it’s true that my guesses may be off, but they seem reasonable to me. Even adding in some additional overhead, the costs in the table seem quite high.
In particular, comparing their estimates for the 20GB PS3 ($805.85), and the 20GB XBox 360 ($323.30), suggest that something is amiss.
At the line-item level, they’ve got $6.10 for manufacturing costs on the XBox 360 and $39.00 for PS3 (PLUS that vague sounding ‘Other Components and Manufacturing’ at $148.00).
Why such a large discrepency?
Or, looking at it top down, why is there a ~$480 price difference between the two. The Blu-Ray adds about $105 in marginal cost above a regular drive. But as for the rest of it – I just question whether the incremental costs of the Cell and the rest can add up to $375 in incremental costs for the PS3, over and above what comparable parts cost for XBox 360.
November 29th, 2006 at 12:24 pm
Yes that does seem a little odd, and I can’t question the fact that the article does seem very biased. I know nothing about iSuppli and their credibility when it comes to these things. One of the reason for the power supply having such a high production cost might also be because of the fact that there’s a need for a very low heat generation due to the machine being so compact. Of course it’s just speculation, would be intresting to see some replies from iSupply, you should mail them and attach a link to this article if you haven’t already done that.
December 15th, 2006 at 12:17 am
I just came across this chart showing how much the Wii is costing Nintendo. The graphic also shows numbers for the PS3. Here’s a link if you are still interested:
http://www.kotaku.com/gaming/wii/wii-autopsy-discovers-manufacturing-cost-221736.php