PlayStation 3 Could Change Game for Sony

The new PlayStation 3 boasts a 35% cost reduction, which may help stop hardware losses.
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Updated from 2:28 p.m.EST

Sony

(SNE) - Get Report

could slash the price of its PlayStation 3 by 35% in 2009 as the home video game console struggles against other competition.

According to technology-research firm

iSuppli

, Sony has reduced the cost of producing the PlayStation 3 by 35%, as the second-generation console features 30% fewer individual parts than the previous model. While the previous generation PS3 was sold at a significant loss, which Sony made up for through game title sales and royalties, the new version may help stop the hardware losses.

"With its new-generation PS3, Sony has come closer to breaking even, although it probably hasn't quite reached that mark yet," said Andrew Rassweiler, director and principal analyst of teardown services for iSuppli. "With iSuppli's estimated PS3 cost at $448.73, the product retailing in the United States at around $399 and taking into account other expenses, the PS3 may be able to break even in 2009 with further hardware revisions."

Wedbush Morgan Securities analyst Michael Pachter says that despite the cost reduction, Sony would not cut the price of the PS3 until after the end of the company's fiscal year. He argues that such a move doesn't make sense immediately following both the holiday season and news that Sony would slash 8,000 jobs as it aims to cut costs by $1.1 billion a year due to the economic crisis.

"My guess is that they will cut April 1, which is the day after the end of the fiscal year," Pachter said. "To cut $50 after Christmas doesn't do that much for you. Potentially, Sony could sell 3 million more units at a $50 incremental loss each. That's a $150 million loss, which is hard to reconcile with the job cuts the company has announced."

Sony shares, down 61.4% for the year to date, closed Tuesday's trading session up 59 cents, or 2.8%, to $21.55.

The PS3 has struggled against other consoles by

Microsoft

(MSFT) - Get Report

and

Nintendo

(NTDOY.PK)

, both of which have been priced far below Sony's hardware. The PS3 has sold 6.1 million units in the U.S. from its launch through November 2008, according to the NPD Group.

By comparison, Nintendo's Wii has sold 15.4 million units over its lifetime, and the Microsoft Xbox 360 has seen sales of 12.5 million. The Xbox 360 launched in November 2005, and the Wii began selling about one week after the PS3's launch in November 2006.

In 2008, sales of the PS3 had begun catching up with the Xbox 360. Through November, 2.8 million PS3 consoles were sold in the U.S., slightly trailing the Xbox 360 with 3.3 million. Nintendo's Wii console outsold both combined with 8 million units in the U.S. In November, though, the PS3 sold only 378,000 units in the U.S., compared to 836,000 Xbox 360 consoles and 2.04 million Wiis.

Analysts had pointed to the PS3's large price tag as a key factor behind the weak sales data. The entry-level model is priced at $399 for an 80-gigabyte hard drive, and the deluxe version includes a 160-gigabyte hard drive for $499.

While the PS3 could boast it had a Blu-ray high-definition disc player bundled in the console, both the Wii and Xbox 360 carried significantly lower price tags. Nintendo's offering has remained at its launch price of $249, while Microsoft lowered its entry-level Xbox 360 Arcade bundle in September to $199.

Atul Goyal, analyst with CLSA Asia-Pacific Markets, argues that Sony's gaming business is among the top loss-making businesses for the company, along with LCD TVs and the mobile handset business, and it continues to worsen. What is more shocking, Goyal says, is an apparent lack of communication even within Sony's gaming business.

In October, Sony Computer Entertainment of America head Jack Tretton told

Thomson Reuters

that the PS3 was selling faster than expected and would reach full-year sales targets even if the global economic crisis hurts holiday sales. "We are tracking at 100% up over last year ... about 30% ahead of where we should be," Tretton said in the interview.

However, nearly two weeks later, Kazuo Hirai, president of Sony's game unit, told

Bloomberg TV

that "I don't think we can meet

our PS3 sales target easily, but I think we don't have to give it up at this point."

"Interestingly, this statement came out barely two weeks after Jack Tretton, SCE US head said that PS3 sales are 30% better than expected," Goyal wrote in a research note. "We are not sure what the executives intend with these confusing reports or whether there is just no communication between them!"

Sony and Sony Computer Entertainment were not immediately available for comment for this story.