@josh.

The key word is "will." They are a considerable distance from actual cost-savings

I've been saying it for almost 2 years now and it looks like I'll be saying it for some time yet, I'm glad I don't work in Sony's accounting department.

Another question to ask, what if this doesn't work? There's been a lot of discussion about whether it could work or what the effect of it working would be but I think the impact of it not working could be massive. Just a few points:

- Sony just broke MS' record for most money lost in a single year in the video game industry.
- The company as a whole is not in the best fiscal shape.
- Sony's shareholders cannot be happy with the recent stock slide (admittedly following a rise but people care about today not yesterday).
- Sony recently sold off 2 parts of the company, presumabely to help finance PS3 R&D debt and pay for the upcoming price cut.
- Shareholders like it when a company sells off a money losing part of the company to help money making parts but they usually don't like it when a company sells off money making parts to help money losing ones.

Given that, what happens to the Playstation brand if the PS3 doesn't see a large enough sales increase to overcome the extra $100 in loss on each PS3 sold? Sony is a large company but it doesn't make $12 billion a year and have 0 debt like MS, they can't afford to lose over $1 billion again on video games. If this prevents the video game division from reaching pofitability until late in this generation will Sony shareholders tolerate Sony spending $2 billion or so on a PS4? It's too early to say whether they would or even that it would get that bad but I do believe we may be seeing the beginning of the end of the Playstation brand. Time will tell.

1. A single year loss doesn't matter in the console industry, which is driven by long-term sustainability. Sony booked one year of losses, but has earned high profits in the game biz in other years - by contrast, Microsoft has had consistent losses since 2000 (-$6.5 billion and counting) and still isn't turning a profit. 

2. Sony's overall margins and earnings are up - way, way up. They sold a few underperforming divisions, but are doing extremely well in TVs, screens and audiovisual tech. The PSP is becoming a huge cash cow, and the PS2 continues to sell well. Sony's vast studio network is producing some stellar games.

3. Sony is not losing money on the PS3. Here's why: electronic components drop in price 30% a year. The Bluray drive cost $120 in Nov 2006, today it's not more than $20. The EE/GS chips will be gone, that's a savings of $27. Total manufacturing cost of a PS3 this November: maybe $450 or so. What this means is that Sony can reduce the price to $499/499EUR for high end 80GB model, and $399/399EUR for a 40GB model. At current exchange rates, 399EUR = $559US. Profits in Europe offset losses in the US (total sales are about the same in each region) for the low-end models, and Sony turns a profit on both high-end models. By November 2008, further cost reduction will drop the manufacturing cost to around $315, making a $299/299EUR model possible.

If the price cut is for real, and all the evidence from retailers suggests that, yes, it's going to happen, things could get real ugly for Microsoft real quickly.

Im seeing HUGE numbers IF they advertise for the 40gb ps3. The week after its release. HUGE NUMBERS.

I agree with rocketpig.

I say again - MS will be *very* happy to see Sony make this move. It shows a lack of confidence in their 10-year, overall PS3 business plan. It also annoys customers (less features in new PS3 - not a premium device anymore), and annoys existing customers (who paid $200 more not that long ago!).

MS has a vastly superior software lineup, which is what deliver them Xmas (over the PS3) this year. Not hardware pricing.

And MS is much better placed to survive/win a pricing war.
...

This is a marathon - not a sprint. We are basically seeing Sony admit short-term DEFEAT - and take extraordinary measures to catch up. Measures that have long-term ramifications - rather than short term benefits.

 There's no doubt that MS CAN drop the price.  The only question is WILL they drop the price.  Given their 7 mil. sales lead and the juggernaut that is Halo 3, I can't see them dropping the price until the ps3's big hitters like MGS4 start hitting next year.  They just have no real reason to. Sure, they could try to put further hurt on Sony, but with them finally making $50 or so on every 360 they sell, I'm sure they'll try to recoup some of their many losses over the holidays.

 Sony has to drop the price of the ps3.  MS doesn't, and won't need to for a good while.

@Shams

Micro$oft is underestmating sony. Just like sega did before them.

No one is sure how much the Blu-Ray drives cost right now. However, it was estimated back in April that by June the blue laser diodes, one of the main parts of the drive, would have gone down in cost from $125 to $8 a piece. If true, they would be even cheaper now.

Standalone players are still very expensive for the same reason that they were being sold for $1000 when the ps3 only cost $850 to manufacture back in November. CE manufacturers sell new technology at a profit to make back all the money they spent on R&D. The only reason the players are as cheap as they are now is because Toshiba keeps dropping the price of their HD DVD players in an attempt to counter-act the PS3 effect, so the BDA must react. It's rumored that Toshiba has been subsidizing their players for months now in an attempt to save their asses.  I wonder how long they can afford to keep taking losses like that?

Blu-Ray standalone player manufacturers could easily drop the price on their players if they wanted to, and they will do just that come the holidays, says a top Panasonic executive.

To quote the article:

"Blu-ray manufacturers are going to start cutting prices and go out on a promotional binge this holiday season, Matsushita Electric Industrial's Kazuhiro Tsuga said during a briefing with reporters at Ceatec, a large tech trade show that started here Tuesday."

(Warning: The following rant is not aimed specifically at you. :P)

To begin with the Blu-Ray drive wasn't the thing driving up the price of the ps3. It was a combination of things that were responsible, from the Cell, RSX, and blue-tooth, to any number of other extra features Sony threw into the machine. The RSX was estimated to cost more than the Blu-Ray drive at launch. Take out Blu-Ray and the ps3 would have still cost over $600 to manufacturer, which is why it never made sense to me why people complained about Blu-Ray specifically. Despite it's high cost, I still think Blu-Ray's worth it purely from a gaming standpoint, because it didn't add that much to the final MSRP of the machine anyway. Sure Sony is losing a hell of a lot, but they'll make it back by selling Blu-Ray movies, and we get better games as a result.

I can understanding complaining that the complexity of the machine made it cost so much, but saying that Blu-Ray made it cost that much? BS.

I also think Toshiba is being rather foolish about the entire "format war".

But to emphasize my point, think about this:

It's rumored that Sony has been subsidizing their PS3 for months now in an attempt to save their asses.  I wonder how long they can afford to keep taking losses like that?

How are the two companies so different? They're both using the same strategy to win a market, yet fanboys cheer on one while they berate the other.

The fact is that they're both engaging in very risky behavior and one or both of them will suffer badly for it in the long run. Personally, I hope they both take a beating for it and I think they will.