Sony to lose $1.18 Billion on PlayStation 3

Sony is set to lose up to $1.8 billion during the PlayStation 3’s first year on the market, says Merrill Lynch Japan Securities. The shocking figure was revealed in the Japanese Magazine, Toyo Keizai, which predicts that Sony will sell the PlayStation 3 for 44,800 yen ($399), yet the console will cost 54,000 yen ($494) to manufacture in its initial year of release.

Merrill Lynch worked out estimates of the cost of components inside the PlayStation 3, which brought them to the $494 figure. Based on the suggested $299 retail price of the Xbox 360 they predict that the PlayStation 3 will retail at $399. With such a large loss on each console sold, Merrill Lynch predicts that Sony could suffer losses of over $1.18 billion in the PlayStation 3’s first year.

Factoring in losses in the first year of a console launch is normal, with the primary aim to gain market share, rather than make profit on the hardware. Profit from the console will only be possible later in the console’s life when manufacturing costs can be cut. This was the case with the PlayStation 2, which made a loss of $458 million in its first year, but recovered to make a profit of $759 the next year and $1.03 billion the year after.

Merrill Lynch is warning that Sony’s plans may be disrupted by a price cut of the Xbox 360 come the PlayStation 3’s launch. Such a price cut could see Sony suffering losses of $730 million in the second year and a further $457 million in the third. There is no doubt that even at a high launch price of $399 the PlayStation 3 will sell well, but up against the Xbox 360, which by this time could be retailing for $250, it will face some very stiff competition. Whatever happens, 2006 looks set to be one of the most interesting years in video game history, and a key year in the next-generation console war.