wow. just wow. you should have told us you work atat sony hq in the op

According to Sony's own numbers ( http://www.sony.net/SonyInfo/IR/financial/fr/08q4_sony.pdf ) the operating loss of the gaming division for the year that ended March 31st 2009 was $529 Million ...

I think that it is reasonable to assume that the PS2 and PSP in hardware and software sales are (at least) breaking even, which would imply that after software sales were considered for the PS3 Sony was losing $50 for every console they sold. Even if Sony was profitable at this point in time on combined PS3 software and hardware sales, their numbers alone tell me that they're (probably) still losing a lot on each PS3 they sell.

^ well according to Sony themselves they are only losing 10%. Guess we are just gonna have to go on another witch hunt (I believe last modification to the ps3 was in the beginning of fall so theyve been selling at 40 dollar loss for 9 months now)

The base cost of the console without taking into consideration the Yen would continue to drop. You have cheaper parts, depreciation on the capital, yields for the chips get better over time and the fab costs per wafer go down.

True but without a modification how much cheaper can it get?

Maybe on physical manufacturing costs, but not on all costs associated with hardware ...

People often don't realize that it can cost hundreds of millions of dollars in R&D to reduce the size, energy use and manufacturing cost of a console. and there are marketing (and other) costs to consider too.

HappySqurriel, do you agree with the OP when he thinks the PS3 will only last till next year?

I'll put it this way, the 65nm RSX is probably cheaper to make than a 40nm RSX by the time you consider wafer costs, yields, and design for the shrink at least initially. The chips inside will simply get cheaper without them having to 'do' anything. The Blu Ray drive = ditto. I won't speculate on 'how much' because I simply don't know.

The death spiral that was posited in the OP is not going to happen in this case, simply because the PS3 and Xbox 360 support each other. By which I mean, developers don't make Wii, 360, and PS3 games - they make Wii games and HD games, both of which they have 50m customers for. The current shift toward Wii development is simply a shift toward the equal balance Wii deserves, because as well as it is doing, it's nowhere near well enough to blow the HD twins away (in fact, it's not even beating them overall, which the PS2 did easily).

The moral of which is, as a Sony loyalist, I say: HOORAY FOR XBOX 360!!!

This is a reply to my post how, exactly? General statements like these are quite useless to debate upon, unless you put them in the real context.