Sony loses $3.3 Billion, Xbox Price Drop Imminent?

There is one truism about video games that most people don't know - Buying a console at or near launch is usually a steal. In order to get the best market penetration they can, most manufacturers release their consoles at a loss. This has historically been the model. That money is made back as production is ramped up and costs decrease and (mostly) through software sales. Sony has the added benefit of making money on Blu-ray disc sales as well since they are one of the founding members of the Blu-ray Disc Association.

That hasn't stopped them from losing an estimated 3.3 billion dollars in console sales alone.

Yes, that's billion. How is this possible? Well, the PS3 has cost more to produce than almost any other console in history. At launch, the 20 gig version cost nearly $806 but was sold at $500, the 60 gig cost $840 and sold for $600. Doing the math there, all those that paid $100 for the larger drive lost $60 in the transaction.

Nintendo has been famous for selling consoles at or near cost and their Wii is no different. At launch it was selling for $250 but only cost $158 to produce. Xbox 360 has been making about $75 per unit but when you factor in the estimated $1 billion in losses from the "Red Ring of Death" failures, it probably means that Microsoft is "in the red" so to speak. Microsoft is reporting that failure rate has officially dropped but "dropped" doesn't mean "stopped." Expect that $1 billion number to get a few decimal places after it at the very least before all this is over.

Don't kid yourself, these estimated costs don't factor in the years of research and development that took place to get the console to market to begin with.

At this time it seems like manufacturing costs for the PS3 have almost halved which means that Sony's losses have reduced from a gushing artery to a oozing sore. As much as the hardcore PS3 fans like to tout the hardware advantages of their console of choice, most of the best selling games have either been Xbox 360 exclusives or released on both consoles. This will make it harder for Sony to convince their potential customers that their console is the best choice. With the hype around Metal Gear Solid 4 and some of the great ratings that it is getting, Sony is surely seeing a bit of a boost in sales (reportedly up to 700% increase in Japan though only 7% in the UK).

Microsoft probably isn't going to sit on its laurels, however, and very well may lower prices to force Sony either to lose more money and follow suit or risk the 360 outselling them as it has whenever the price difference has been large enough (2:1 when the difference was $200). With Sony's Chief Executive Howard Stringer promising not to lose money this year on the PS3, the stage seems set for an Xbox 360 price drop.