Don't think Sony will - they already claim they don't break even

Yeah, but if the ps3 is cheaper, due to material cost, vice production efficiency cost, then there is no advantage to ps3 over it's competitors.  It's great for consumers, and hopefully, the market does see lower cost to be passed on to the consumer.

Ehem guys you understand that every bussiness needs margins? So there's no freaking way Sony gets $400 from each console sold.

sony is losing more money now than b4...it may get complicated...but here it goes....

b4 the recession..... for every $1...yen was worth 140 yen....now since the recession $1 = 93 yen.....let's say production used to cost $600(82000 yen).... and sold for $400(56000 yen@140yen per $1)....production cost doesn't go down for sony...still is 82000 yen to produce...but now since yen is worth more...they are losing more....$400(37200yen@93yen per $1).....so they went from losing 26000yen to losing 44800 yen...these are just rough #...not exact...but u get the idea...

and with that said...sony cannot afford a price cut anytime soon...unless $1 goes up in value...or they cut the cost of production drastically

This is not that simple, first we need to know where Sony gets the parts for the PS3, like the Cell, last time i checked IBM made those, then if the production costs really went down with this economy, how much of that is an advantage against the strong yen... The other thing is the yen vs the euro/pound/dollar...

We can keep speculating about this, but we are not inside Sony so we can't know for sure how are they handling that, we only get the financial report and that's that...

The costs of production generally goes down over time.

The main driver for cost reduction is volume production. The more units produced, the faster the fixed costs of setting up the manufacturing line are ammortized and costs can go down.

Your theory is that a recession will make it easier for Sony to get its components cheaper and reduce labor costs. But this is much harder done than said. Most of the component are specially manufactured for Sony and their prices are guarantied with long term contracts. There are relatively just few "off the shelve" parts that Sony can buy from any manufacturer. The Cell, the BDR, the casing, the circuitry assembly lines, the power supply and fan were all designed specifically for the PS3 under the promise of volume manufacturing. Labor costs are rates are not very flexible. Hourly wages do not go down easily, recession or not.

As part of such typical supplier contract are the accelrators for price reduction. Basically, the more Sony orders from a supplier, the lower it's price drops as the supplyer is recapturing his initial setup costs. These contracts were no doubt done with a PS2-line production volumes in mind and Sony expected rapid cost reduction within a year or two. But the PS3 sales are much slower than the PS2 and therefore the cost reduction is much slower than Sony had anticipated. Now Sony is trapped in a vicious cycle: Sony does not sell enough to reduce its cost fast enough, and therefore it is less uncompetitive and sells even less than before, slowing the cost reduction further.

As you can see from these graphs, in the last 3 months, 1 Yen has been buying 18% more Yuan, 1 Yen has been buying 23% more TWD, and 15% more USD.  Those should be the majority of the costs, but this analysis can not estimate how much cost is in each currency, or other currencies used. Further, raw materials will be variable and have the potential to either help or hurt.  Considering they likely in-house most of the electronics, the cost will remain pretty much unchanged to them.  There will also be increased costs in Japan, which will include some manufacturing and maybe some more that i'm not familiar enough with Sony's structure to comment on.  Figure potentially a rough 5-10% drop in manufacturing due to these factors.

This, however, is not nearly enough to counter the 25% drop in the value of the Euro in relation to the Yen, or the decreased power of the dollar mentioned above.

Remember that cheaper component costs will be offset by lesser volume.