Sony's tightrope, and it's implications for future console generations.

[NJ5]

-- is usually coupled with less hardware sales -- which is where the losses come from

Almost, but not exactly. The losses come from producing the hardware. Sony has produced lots of PS3 which are now sitting in inventory.

Another problem with too much production which has already been mentioned in the forum is that, if they decide to do a price drop after reducing manufacturing cost and this happens soon, they'll be selling expensive hardware at a reduced price point.