Yea, with everything I have on my hard drive (60gig), I have 27gigs left.

If you're talking about bigger hard drives, you can put just about any 2.5" (notebook) hard drive in the PS3 and replacing the hard drive does not void the warranty and is also shown how to do in the PS3's manual. So, for up to $100 I can go to http://newegg.com and pick up a hard drive that can have up to about 160gigs of space.

*edit* also, the costs will decrease over time. Things like removing the EE, switching to 65nm parts, ect will affect the cost of the system to produce and also the price for consumers. 

In re price: don't forget the rate of inflation -- it's a bit above 3% a year, and that adds up over time. That $199 magic price-point in 2000 would be close to $299 in 2009 dollars. Assuming an annual $100 reduction in price - perfectly reasonable, because electronics drop 35-40% a year and Sony has moved aggressively on PS3 cost reduction - Sony's game-plan looks like this:

2007: $499 Early adopters and HDTV aficionados get it
2008: $399 HDTV crosses 50% penetration, mass market builds
2009: $299 HDTV universal, mass sales take off

Maybe I'm off here, but 50% HDTV penetration by next year seems incredibly optimistic to me...

Two predictions can be made here: What Sony "should" do, and what Sony "will" do.

What I think they "should" do is lower the price as much as possible. The cost of manufacturing a PS3 has come down quite a bit, and will likely come down even more. The price of manufacturing a new console drops logarithmically - quickly at first, then reaching a constant level. They should price it as low as possible while maintaining it above the expected manufacturing cost in the future, such that in the end, the profits on the console will equal (ideally) zero over the entire life of the console.

 Whats mass market price these days ?

It's true, analyst expect 52 million homes to have HD-TV by the end of 2008.  This puts it at about a 36% penetration.  

Thats some weird math you did there. 0-9 is 10 years. 10*3=30% 200*1.3=260. That would make the mass market price closer to 250, which goes a much longer way to explay the wii than how 300 dollars is "mass market" for the PS3.

Sony has already lost well over a billion dollars on the PS3 hardware, and they're likely to lose a good deal more over the course of the next year. There is a near 0 percent chance that they will make money on the hardware this generation (although it's within the realm of possibility that they could make a profit overall, thanks to software licensing). 

The big, big problem with this method, Senator, is that it often backfires awfully and expensively when you don't actually accrue much market share. Look at the Xbox. What happens if Sony spends billions now on vicious price cuts, then tries to make the money back in two or three years... but few people are buying a PS3 anymore? That's a very realistic scenario, as that is what happened to the two secondary consoles last generation: good sales spikes at the beginning, followed by gradual declines until the systems were selling quite terribly near the end.

http://vgchartz.com/hwcomps.php?cons1=GC&reg1=All&cons2=PS3&reg2=All&cons3=XB&reg3=All&weekly=1

As you can see, the PS3 is currently above Xbox/GC levels thanks to the price cut, but it's been flirting with GC/Xbox level sales for quite some time now. Your method makes perfect sense if the PS3 eventually increases its market share, but what if the PS3 uses your strategy and it ends up with the 10-15 percent market share it has now? Answer: Sony loses billions of dollars.

It's easy to gamble with other people's money. You can say that this is what Sony should do when you aren't involved in the financials and you don't have to answer to share holders. Sony does have to answer, however, and they can't keep viciously cutting their price in the hopes that their market share will noticably increase. Every one of these cuts is a gamble, and Sony's financial resources are much more limited than many seem to believe (they have more debt and less cash reserve than Nintendo, and their annual profits are approximately 1/10th that of Microsoft).

 The generally accepted answer is 199, but we'll see if that's true this time around.