Squilliam has brought up a number of good points, I'm impressed. Unfortunately though, I fear the question of SCE's and Sony's profit outlook as a whole is going to rely heavily on quite a few unknowables.

1) At what point will the BOJ intervene in the currency markets vis-a-vis the euro and the dollar. It seems most of Sony's currency problems are coming from the (near term) weakness of the euro versus the dollar and the general strength of the yen. The fact that they haven't intervened yet seems to say either A) There was a new "plaza accord"-like agreement between the major economies or B) They are fearful that they already hold to much foreign debt denominated in currencies they have no control over and that they will be the last one's holding it.

Either way they have a history of surprise dramatic large scale interventions in the currency market and there is going to be increased pressure for them to do something as the Japanese economy has tipped back into recession and the government will have little options in terms of fiscal stimulus given the proportion of debt to GDP is already in excess of 100%.

The only ways the currency variations should effect SCE is for operations inside Japan. Staff, production, profits etc that are all paid in yen which has apreciated. Everything else should be conducted in countries outside of Japan. The only componentry I can think of which will be more expensive would probably be those which are sourced from within Japan as well, obviously as they are a Japan centric company it would cost them a lot but I feel its balanced by the sharp drop in component/commodity prices from outside of Japan due to the economic situation. Unless you understand it better than me, I can't see how they would be severely effected by the balance of things. Sure, Microsoft would probably be doing better now as they have no operations inside of Japan to speak of and they too would be happy to take a reduction in Silicon cost as they own the I.Ps and can produce their components whereever they are cheapest.

2) Where and in what currency is most of Sony's manufacturing costs. Matsushita (Panasonic) is a terrible company to compare Sony against as they along with Cannon are notoriously Japanese (ie. significant proportion of production occurs in Japan, they still adhere to lifetime employment, and growth is mostly organic). Sony on the other hand is notoriously "American" in that they outsource heavily, employment policies are more in line with international norms, and they have never eschewed mergers and aquisitions as a means of company growth.

For both SCE and Microsoft I would expect most of the components to be manufactured in taiwan or mainland china (by a taiwanese companies operating in china). Now, whereas I know the PRC has allowed the RMB to appreciate significantly (as measured by percentage increase on an annual basis) since the begging of the year, I haven't seen or done any such analysis on the NTD recently. Usually, the taiwanese follow the lead of Japan currency-wise (in many subtle ways Japan still has suzerainty over the place), however these aren't normal economic times.

Sortof covered it and yes I agree.

3) For the PS3 in particular it would be nice to know some staticstics on what Sony thinks it's marginal cost for each unit is. Until you know this and have some idea of what marginal demand is you cannot determine even in an extremely oversimplified, orthodox market model if they would stand to make or lose money and how much. This is complicated by the above average stickiness of prices in this market and the highly path-dependent nature of aggregate demant. The conole market is seems to be one of these markets in which multiple equilibra exist even before you add in the destablizing effects of it's deep supply-chains thanks to above-average irrationaliy.

Anyhow I suspect that SCE decided quite awhile ago that there would be a price-cut coinciding with the large scale production of the 45nm cell and the possibility of a smaller version of the PS3. Since the switchover to 45nm has been delayed until Q1 2009 by IBM the pricecuts are also delayed. Since the rumors are KZ2 is pretty much done, the tea leaves point heavily to Sony saving it to be bundled with the revised console at release. If this is true then KZ2's official release may date serve as a useful indicator for when Sony thinks it's going to have this new revision ready for mass market.

I did some research on the console market, one paper I read indicated that the console market itself (If I recall correctly, and this was based on the Sega Genesis) had a price elasticity of -2.2 in the long term. Obviously short term it would be much higher than this. My favourite economic theory is game theory, its especially interesting as there are 3 players in the market and yet only two seem to effect each other.

One thing I know for certain is there is an incredibly strong network effect in the console market. Between the Wii, Xbox 360, PS3 we can see how networks of people influence their friends and family to purchase a console. There comes a point where there are so many people with an Xbox 360 that even if it were the same price or cheaper it would still be outsold by the Xbox 360.

They unfortunately do much I.P for The Cell processor, or you could say they own fewer patents than ever before. Also the situation with the RSX graphics processor is interesting as well, do they own it or are they paying a fee for its use? If the latter applies then they've got a longer term issue as that variable expense will stay with the PS3 for as long as it's produced. Does the situation between Nvidia and Sony mirror the situation between Microsoft and Nvidia? They were in a rush to get the part, so did they make a mistake I wonder.

 I do doubt that they will release a slimline PS3 for the 45nm shrink, its an expensive transition and a difficult one as we've seen with the 40gb - 80gb switch recenty so its not something they'll do lightly and quite frankly even at 45nm the console will still consume over 100W which is too much to really shrink the console.

P.S Im not an economics major but I did study up until the 2nd level at university a long long time ago!

I think you're forgetting that come April 1 2009 that TV sitting in the inventory must be depreciated at a rate of ~40%. The TV which was once worth $700 is now worth $420 or a loss of $280. So either they move the stock now by cutting the price or they are forced to take a larger hit later in the form of depreciation. Also they cannot begin to produce new TVs until the old stock is cleared and they've recieved the cash back for them. So whether they take the loss now or depreciate it later the loss is still going on their books.

And the production costs do effect things, for example next year a TV produced in February will cost less than a TV produced at the same time the previous year and will be better suited to the current market conditions.

2) Where and in what currency is most of Sony's manufacturing costs. Matsushita (Panasonic) is a terrible company to compare Sony against as they along with Cannon are notoriously Japanese (ie. significant proportion of production occurs in Japan, they still adhere to lifetime employment, and growth is mostly organic). Sony on the other hand is notoriously "American" in that they outsource heavily, employment policies are more in line with international norms, and they have never eschewed mergers and aquisitions as a means of company growth.

For both SCE and Microsoft I would expect most of the components to be manufactured in taiwan or mainland china (by a taiwanese companies operating in china). Now, whereas I know the PRC has allowed the RMB to appreciate significantly (as measured by percentage increase on an annual basis) since the begging of the year, I haven't seen or done any such analysis on the NTD recently. Usually, the taiwanese follow the lead of Japan currency-wise (in many subtle ways Japan still has suzerainty over the place), however these aren't normal economic times.