The PS3: More than a game
Will the high price scare gamers away or will the PS3 be the salvation of Sony?
By Peter Lewis, FORTUNE senior editor

(FORTUNE) - If Sony suffers any more missteps in bringing its PlayStation 3 video game console to market, its entire consumer electronics business strategy could be in jeopardy.

Now delayed until mid-November, the PS3 is more than just the next generation of game machine for the $26.6-billion-a-year video game industry that Sony dominates. It's also the centerpiece of Sony's (Research) plan to own the global standards for high-definition video and consumer-data storage and to create a common microprocessor platform that will enable Sony products to share music, video, and data seamlessly, thus becoming the master controller of the digital ecosystem.

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But the Blu-ray Disc high-definition DVD player and the Cell microprocessor, the heart and brain of the PS3, are expensive to make, forcing Sony not just to delay the PS3 to the brink of the 2006 holiday season but also to price the basic and enhanced PS3 consoles at $499 and $599, respectively, much higher than any previous game machines and at least $200 above their next-generation rivals, Microsoft's (Research) Xbox 360 and Nintendo's Wii.

Analysts at Merrill Lynch calculate that the Cell microprocessor costs $230 to make, and the Blu-ray optical drive about $350. Along with a hard drive, memory chips, and other costs, Merrill Lynch says, Sony's bill of goods for each PS3 could be more than $715.

If those numbers are correct - Sony declines to comment - and if Sony hits its target of shipping four million PS3s by the end of the year, Sony could lose close to $1 billion this year on the hardware alone, adding to huge costs for PS3 development and marketing.

Despite the losses, Sony could win big by populating the world with millions of Blu-ray high-definition DVD players, tipping the advantage to Sony in the battle to establish Blu-ray as the global standard for next-generation DVD systems, over the rival HD-DVD format supported by Toshiba and Microsoft.

Microsoft executives are gleeful at Sony's delays and high pricing for the PS3. Bill Gates says his company will have sold ten million Xbox 360 systems by the time the PS3 and Nintendo's Wii reach store shelves.

Conceding that the PS3 is "very expensive," Ken Kutaragi, head of Sony's games business, told a Japanese Web site earlier this year that he expects "consumers to think to themselves, 'I will work more hours to buy one.' We want people to feel that they want it, irrespective of anything else."

He has also said the PS3 is "not a game machine." Rather, he says, it is a "machine with supercomputer calculation capabilities for home entertainment."

If Kutaragi-san's calculations are wrong, the big game could be over. If he's right, Sony could once again become the world's dominant consumer electronics giant. Top of page

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