PS3 price cut at TGS?

[Dodece]

There is another line of thought we can follow here, and that is Sony has already used that IPO to generate cash for a price drop. Unfortunately that price drop probably already happened during the summer in North America, and funded bundles in other regions. The reality is that Sony was losing a lot of money on the machine to start with, and if production prices could drop that dramatically then the price of the system would have been even lower at launch.

The general consensus was that Sony was losing two hundred dollars on each machine when the system launched. Those launch machines cost them eight hundred dollars until they were sold. After a machine was sold it only cost them two hundred dollars. So in effect the machine not selling cost them four times as much. The losses on a machine not selling were quadruple expectations. I think a realist would expect that Sony would not be happy incurring that level of loss.

They had to find a way to start moving those machines, and obviously losing three hundred dollars on those machines was preferable to losing eight hundred dollars on machines not selling. They probably had no plan to reduce the price that soon. They were basically forced into a corner. Abandon the product, take greater then expected losses, or the third option reduce the retail price, and incur greater losses.

While those machines sat unsold they were costing Sony a lot of money. When you have four million machines sitting unsold. You are looking at 3.6 billion dollars lost that is a major difference compared to the expected loss of 800 million. Sony could not simply justify to investors that the machines would eventually sell. The machines were sucking up liquid income and placing it in inventory. They could not halt production.

Halting production would drive costs up and increase losses in efficiency. Actually it would increase the costs of productions as Sony had to redirect assets. They could neither slow down or halt production. The entire plan is based on a high manufacturing capacity to begin with. That is how they intended to drive down production costs through volume. Compared to Nintendo who started modest. Sony started out grand.

The reality is that Sony has probably lost at the very least two billion dollars more then expected during the launch year. The machine has also cost them a lot in the form of liquid assets. They were probably expecting to lose two billion in the first year that would be ten million units sold. However they already had to reduce prices in Japan at launch. Had to eat a hundred dollar loss in North America, and has had to increase value in other markets through bundles. That is lost Software revenue.

Further more and people forget this. They have had manufacturing woes no less then a few months ago they failed to meet a product quota. Falling hundreds of thousands of units behind in their production goals. Compound that with having to reinvest in new technology as Microsoft is doing with the Falcon model, and you have a run away spending effect. Even if the effect a year from now drastically decreases production cost initially it is going to cost more money.

Sony is in no shape way or form financially happy with these losses, and they have gone to great lengths to reduce these costs. They have streamlined their machine removing functionality and components. They have reduced human redundancy. They have even increased their initial losses in an effort to stifle the bleeding.

The grim reality is that the IPO is a great way to generate liquid assets for the entire company. However much of it is going to end up covering PS3 losses, rather then justifying the increase of said losses. Sony has already made the sacrifice, and that was this summer. The most likely reason for the new model is as an excuse for them to jack the prices back up so they can decrease their losses.

Will Sony reduce the price of their unit or maintain the price point? The answer is probably not that would be suicidal. Instead they will get the North American unit back to its original price. They did not want the five hundred dollar price point to begin with, and bleed off the bundles. They accomplished their goal they kept the line moving through the dog days of summer. They can rely on holiday sales to keep the line moving. Perhaps by next summer they will return to the cheaper price point.

I think many here are going to end up being truly shocked. Sony dropping the price during the summer was nothing more then a desperation move. Without it the entire machine would have ground to a halt, and Sony would have depleted so much money into hard assets that they would be hard pressed to be flexible. They had no choice and basically had to jack themselves to salvage the situation. They will not jack themselves when they have no need to.

Sony may need to reach 20 million units before they turn a dime on the machine. Every time they drop the price they push the point farther back as they incur greater losses in the front end they must have greater sales in the back end. Think of it like this they lose two hundred dollars in the beginning, and half way through after ten million they start making money balancing the equation out. Thanks to lower production costs, and licensing fees. However dropping the price early on means it might take upwards of fifteen million sales to reach the median point. That means they have to sell thirty million. Every time they drop the price the total units sold must increase by a large margin.

Sony is going to think strategically and stick to its long term plan as best as it can. They want the production run to remain frugal. They want to keep the total they must sell to break even to remain small. They want to keep yearly losses as small as possible. They want to survive on market conditions as much as possible if sales were good enough after the price cut in the summer chances are they are good enough for the holidays. When sales will increase regardless of the price.

We have to be mindful that Sony was already taking massive losses, and had to increase those losses more out of desperation then anything. They were probably incurring greater losses then they expected anyway. Survival takes first priority winning takes second. You want another good reason for Sony not to drop prices again. Microsoft will match them on any price cut, and that is no good for Sony. That just puts Microsoft in the consumer pleasure spot. The margin would not change in all likelihood. Microsoft would gladly match Sony if the drop were costing Sony even more money.

Sony is not going to reduce prices, and if they do I think it is only good news for Nintendo and Microsoft. Once that happens they know they can bust Sony. Both would gladly follow a wounded Sony into the trenches.