In my mind there is no doubt they can get production costs down, its a matter of how long will that take them and are they going to be willing to take the hit to the wallet if that timeline is going to take too long?

Console component costs are the same as computer component costs. For instance, I bought a videocard for like $300 in April 2006. Now, like 15 months later, it costs like $150 for the exact same card.

Blu-ray has alot to do with the PS3 price, and that tech is constantly coming down in price. Then you add the 65 nm stuff, removing EE, and its quite possible to be $499 by november 2007 (80gig), and $349-399 by november 2008.

Of course, sony will still be LOSING money at that price, but the amount of money they lose will remain close to the same by the time they lower the price. They've dumped so much money into the PS3, they would be silly to worry about just losing a little bit of extra money. Whats worse, losing more money, or making the other money you lost count for nothin'.

I keep on hearing about Sony's factories. Just about everything Sony makes is not made in Sony factories. The diodes, drives, processors, cases, etc., even the PS3 itself, is made by other companies. Sony contracts out the manufacturing to various companies in China, Taiwan, Korea, etc.

 You are mixing up two different concepts. Market price and production costs are not the same thing. For instance the market cost of the video card you bought dropped 150 dollars in that time. In reality, production costs were likely much lower than what you bought it for, and despite the 150 dollar drop, the actual production costs probably dropped considerably less, and less than the same percentage that the card lot its value. 

You seem to think that production costs drop linearly, which they do not. Just as computer power increases exponentially (power = year^2, the price of producing hardware drops inversely price=(1/year). Prices drop rapidly when the hardware is cutting edge (like the newest $600 video card), then reaches an asymptote where the price remains fairly constant (like the cost of a couple-generations old $50 video card).

 Who was this directed at?