Sony makes money on PS3 games sold by third parties because they charge a fairly heafty royalty.  The thing here is that the PS2 sells a lot of units and each unit has a very wide margin.  The PS2 also sells a lot of software, and that's pure profit for Sony, as are third party PS3 games.  The PSP is even doing well and selling some software, generating even more profit.

For them to lose as much money as they did last year, the PS3 must have a very significant per-unit loss associated with it. There's no way it's zero. 

Here is a link to Sony's earning report as covered by VGChartz:

http://vgchartz.com/news/news.php?id=1155

The PS2 sold 13.73 million units and 154 million software. It's reasonable to guess the software profit at $4/unit or so, because many of them will be sold as budget games (over 600 million). I guess I'd estimate the hardware profit at $40 or so for the PS2, all said and done. (over $500 million)

So well over a billion in profit from the PS2, based on relatively conservative estimates.

The PSP sold 13.89 million units and 55 million software. Assuming no money is made on PSP hardware (very conservative estimate) and $6/unit in royalties on PSP software: 330 million in profit.

About 300 million profit from the PSP, based on (I believe) conservative estimates.

Yet, somehow, Sony lost more than a billion dollars in that division when you add the PS3 to the mix.

Where did their money go?

If we're really looking for profitability information, why don't we just look at their financial reports and deduce software licensing revenue, software profit, and hardware profit from that?  Surely it would be more accurate than this shot in the dark.

The zero figure just indicates that manufacturing cost are now the same as the retail price. That would mean effectively they are still losing money but I have no real basis from this to estimate the loss. I know that Nintendo gets to pocket about 40% of gross and I applied that as a working figure. I have no idea how to calculate net from a gross of $0 except to call it zero. Obviously though you’ll have to do a lot better than zero to fill the piggy bank.

I agree that to see the company's overall profitability, you would have to look at their report since this in no way covers research and development, advertising etc. My title was chosen to indicate that what I really was examining was profitability of each unit sold as far as retail compared to cost of manufacturing.

This is certainly only part of the picture in corporate profits but an important one. All the other costs are to get the console in the store and sold, but if the transaction that all this effort supports doesn’t make any money or actually costs you money then you’re not making it up anywhere else. The whole PS3 program can only make money by sales, everything else is expense.

So they're losing ~2 billion in 2007 due to, uh, shipping? Neat.  (1 billion lost oerall, 1 billion lost profit that they certainly made from the PS2+PSP).

There is a lot of ways that a company can lose money even if their product makes money. Just having too much overhead, outrageous salaries, liability, litigation, lots of factors that are very individual to them. The biggest problem can be a design mistake.
Example Microsoft arguably rushed development of the Xbox 360 to get a jump on the market but apparently skimped on testing. Their console was profitable from the beginning and they would have done great except the Red Ring wiped that out and put them in the red. Maybe a bit more testing and catching the problem before full scale manufacturing and this generation might be very different.