You do realize that you can download games that are over 17 GB's, don't you?  You can save games to an external HDD.  And that includes updates.

So they aren't planning a 'major' loss, which obviously means they may still take a smaller loss on the PS4 initially, which I really wouldn't find surprising. I can understand selling a product below cost, as long as it's not an enormous amount below cost. I'm guessing PS4 will launch at $499 and they'll be taking a $30-$50 loss on each console, which is still significantly below the loss they were taking with the PS3 at launch, I believe.

Yep and there are 360's with HDD's.  It's not like the lowest common denominator with no HDD has held the 360 back at all... Oh wait it did.  EA and Warner Bros. already said they are not releasing DLC on the Wii U (I wonder why).  The fact it is rediculous to expect people to half to buy their own external HDD when the console costs more than competor that include up to 500GB!

It is projected to only cost around $450-$500 to make.  Expect a $400-$450 price point (Depending on if MS does end up selling their console for a rediculous $500).

So in your small and very naive world, you sell your goods at (or more precisely, below) manufacturing costs?

Toddifer is quite right in his assessment, over the long run. However, the initial batches of consoles usually carry a much higher loss, depending on the planned time span (and batch size) the manufacturers want to recoup costs. My estimate is that initial PS4s carry a production cost around $550-$600 (always keep in mind these complex SoC are completely new and untested so there is quite a risk of extremely low initial yields).

I'm really tired of those people here who say "anything over $299/$399 is too much". For both XBox and PS4, a price of $600 would be more than fair (considering a similarly equipped PC costs you more).

$399 is the sweet spot.

You're right.
The PS4's soc is going to be relatively massive, 2.5-3 Billion transisters for the GPU and possibly 900 million - 1.4 Billion transisters for the CPU, in a single chip that's going to be bloody massive, could almost push towards 4-4.5 Billion transisters when other silicon is taken into account. (I.E. Logic, controllers, spare area, de-activated hardware etc'.)
It's going to be expensive initially if those yields are bad, then again 28nm is getting fairly mature anyway so it may counteract the low-yield issue.

What they could do though to reduce costs and get around the low yield issue is to resell those APU's into the PC space, if a few cores aren't working sell it as a Quad/Hex Core with a Radeon 7850' APU etc'.
Would beat throwing them into the bin...

it cost's that to sony, retailers have to buy it and then raise the price for profits. you don't seriously believe that if sony sells the ps4 to retailers for $399, those same retailers will sell it for 399, do you?

The only 28nm fabs that really run are those few of tsmc. However, they operate with a still limited number of lines, and operate them for various customers (MS, Sony, NVidia, AMD, andwhatnototherstuff). So they can't tweak the lines because they have to "switch customers" from time to time. Makes yields stay lower than possible and introduces dead-times while switching (customers have to pay for that, too).

I don't think MS/Sony would find customers for "not quite working" SoC. Apart from needing completely new pc boards, no customer could rely on a constant stream of "similarly bad" chips which makes no good business plan right from the start.

$449.99 would be perfect. they wont take too much of a loss and sales will be decent.