I thought that with the discussions about price reductions for the PS3 that an analysis needed to be done on how a price reduction would impact each of the companies. First, I will explain the terminology:

Initial Price is the price of the system if it doesn’t see a price reduction

New Price is the price after the price reduction

Cost is the manufacturing cost of the system

Sales Rate is the ratio [Sales after price reduction] / [Sales without price reduction]

Loss per system is the reduction in profit (or the outright loss) for each additional sale that is generated from reducing the price of the system.

PS3 $50 price reduction:

PS3 $100 price reduction:

XBox 360 $50 price reduction:

XBox 360 $100 price reduction:

Wii $50 Price reduction

Wii $100 Price Reduction

So for example if Sony cut the price by $50 and the system costs $500 to make, boosting sales from 200k to 250k, they'll lose an additional $17.5 million per week or almost a billion dollars per year due to cutting the price.

If the price cut is $100 and it boosts sales from 200k to 300k the cost is $40 million per week or $2 billion a year.

Of course, added software sales will take part of this impact away, but those numbers are eye opening. There are also cost reductions during the year, but holiday sales boosts also take at least part of those savings away.

Where you getting the cost per system figures from? Like you have Nintendo losing $300 per each Wii system sold. You have any indication Nintendo has ever lost any money on each Wii they sold?

I don't have a source for the manufacturing cost for the systems, which is why there is a variety of manufacturing costs for each system. For example:

Depending on whether you think the PS3 costs $500, $450, $400, $350, $300, $250 to manufacture and whether you think the PS3 would see a 25% or a 50% boost in sales from a $50 price cut would determine which loss per system you were looking at.

My analysis is pretty simplistic, and doesn't take into account fixed expenses (like marketing costs) and was done on a per-system basis so that people could understand just how much software would need to be sold for each company to break even ...

Now, the important thing for people to get out of this is that the difference in sales "boost" has to be great enough of the manufacturing cost low enough in order to justify a price reduction. If you're only dealing with a 25% boost from a price reduction of $50, or a 50% boost from a price reduction of $100, it is difficult to justify until the console costs less to manufacture than your new price.

Sony need to make the ps3 cheaper to make before making it cheaper to sell....look at that, im an analyst and i didnt even know it!

Yes, your way of calculating it makes sense. I don't think many people expected such big amounts of required additional spending from the new customers.