Sony PS3 Price Cut Around The Corner (SNE)

[NJ5]

WereKitten said:

I don't understand all this obsession with the profitability of the console hardware itself that some of you show.

Sony can increase profits while cutting the price by increasing sales and thus the profits coming from extra controllers and software sales, even if the cost of production doesn't decreas of the whole $100

Let's say that they expect each PS3 to sell an extra DS3 and 2-3 games in the short term (averaged over the year) after the console is bought. Let's make that $30+2.5*$20 = $80 of profit.

Thus right now each PS3 sold this year will bring $40. Let's say that's 10M sales, thats of the order of $400M.
Now let's suppose instead a new slim PS3 decreases cost of production by $90, and it's sold at $300 with the famous $100 sale cut. Now each new PS3 loses Sony $50, but with accessories and software it actually brings in $30.

Thus the condition for increased profit is that due to the price cut it can sell more than $400M/$30=13.3M.
If the cost reduction is bigger, then even a lower increas in sale will bring in more profits than the current situation.
Plus, gaining marketshare will bring in extra money in the long term when new accessories and games are bought.

Basically, they know the statistics and the average numbers, thus as soon as the production cost reduction will be hefty enough to match the sale increase they projected, they'll cut the price.

That's not how a cost/benefit analysis works (if I understood your post correctly).

First of all, we can ignore the manufacturing cost reduction of the slim, since that will happen with or without the price cut (it just confuses things to include it). Second, you should only count software and accessories from the PS3 buyers who bought the PS3 because of the price cut, the other buyers would have given that profit with or without the price cut.

Two scenarios to explain what I mean:

Baseline scenario: No price cut, and Sony sells 9 million PS3s, and getting a certain profit from software/accessory sales. Specific numbers don't matter for a comparison, hence "baseline".

Price cut: A $100 price cut halfway through the year, when 4 million PS3s have already been sold. After the price cut, for the rest of the year 9 million PS3s are sold instead of 5 million (for a total of 13 million). So Sony loses $900 million compared to scenario 1 on the hardware side (this is the "cost side" of the analysis). Of course, more software is sold during the fiscal year due to the higher HW sales. Let's take your $80 profit estimate for the year. The additional userbase gained from the price cut is 4 million, which has the benefit of generating 4 million * $80 = $320 million. The $80 from the remaining 9 million is not counted, since that's also in the baseline scenario.

As you can see, the difference between the two scenarios is a $580 million loss. Of course there might be some additional savings from raising HW production volume, but that will certainly not eliminate all this loss.