Would a PS3 price cut do it?

[mkozlows]

Stromprophet said: stof said: Well I think we can all agree that when Sony eventually does cut the price for the PS3, the effects will be immediate, in that the 360 and Wii will match or exceed any cut Sony can offer. There's no evidence for that. Again, where were you guys all these years ago? May 2002. PS2 Price cuts, could have price cut more if they wanted to. Xbox has to price cut and this was 6 months after launch.

Let me see if I understand you. Your argument is that a PS3 price cut won't trigger a 360 price cut, and as evidence for this you offer that a PS2 price cut did trigger an Xbox price cut? Um, okay. The simple reality of the thing is that console buyers have proven to be very, very price-sensitive. Sony is obviously seeing this firsthand with the dismal sales of its $499/$599 PS3, but so is Microsoft, with the merely okay sales of the 360 at $299/$399. Microsoft knows, obviously, that if they want to be a big mass-market console like the PS2, they need to be cheaper. And the 360 is in a position now where they can sensibly be cheaper -- around the holidays, estimates were that they were making $75 per unit (looking just at component costs of the box itself and ignoring everything else); the upcoming 65nm die shrink will put them in an even better place, cost-wise. They're going to reduce the price of the box before the holidays, and the only question is when and by how much. (My guesses are May and $100, based on the discounts that were being given out before the holidays, plus a bigger hard drive.) Meanwhile, Sony will not be able to ignore this. The 360 and the PS3 are basically identical consoles in terms of hardware performance, Blu-Ray isn't a feature that sells beyond a small enthusiast market right now (the HD-DVD drive for the 360 sold 100K units, which strikes me as very plausible as a rough sizing of the market that is interested in buying game consoles for HD movie playback at the moment), and the 360's game portfolio is undeniably superior to the PS3's (a situation that's guaranteed to be true at any point in 2007). So Sony has to drop the price... but how can they? According to those same analysts, they were losing $240 per unit (again, just looking at component costs) during the holidays. Now, they're going to shrink those costs over time. Microsoft was able to cut the 360's cost by 38% by a year after launch, so assume Sony can do the same. This puts the PS3's cost in November at around $500 (for the expensive one, but the cheap one is only $30 less right now, and that'll narrow over time). Which means that if they cut the price by $100, they'll be still losing money on the cheap unit and almost breaking even (considering only component cost of the console) on the expensive one. Two things about this: 1. It's bad for Sony. Microsoft lost billions of dollars on the Xbox, which wasn't something that pleased higher management or the stockholders. The Xbox project was approved on much rosier assumptions, and if Gates and Ballmer had realized how it would really go, they probably wouldn't have gone ahead with it. (The 360, coming off the fiscal fiasco of the first Xbox, was designed with costs and profitability much more in mind.) Even so, Microsoft has reliable cash cows in Office and Windows, so can afford to toss around a few billion in losses here and there if it means entry into a strategic market. Sony's not in that position, and they really want to make money off the PS3. They're not going to pull a Microsoft and stay in the red if they can help it at all. 2. It doesn't really help the PS3. If both the 360 and the PS3 drop $100, now you've got two next-gen consoles: The 360 for $199/$299, and the PS3 for $399/$499. The cost of entry for Sony's console is twice as high as for Microsoft's, and the price difference between similar tiers has gone up as a percentage of the price. (That is, $599 is 50% more than $399, but $499 is 66% more than $299.) People who are price-conscious are even more likely to buy the 360 over the PS3 after they each have $100 drops. If the PS3 really wants to be competitive with the 360, it needs to cost the same. (Even then, I think the 360 is the better buy, but "the PlayStation brand," as Sony likes to remind us, still has some cachet, and I suspect it'd be a real fight.) But there's no way Sony can afford to drop its price by $300, which means that it can't compete with the 360 on an even price footing, which means Sony desperately needs to convince everyone that the PS3 is not only as good as the 360, but that it's hundreds of dollars better, price drop or no price drop.