November 21, 2013
Sony Almost Breaks Even On PlayStation 4 Hardware
Sony has reported strong first weekend sales of its next generation PlayStation 4 video game console, and on Tuesday IHS iSuppli offered the first cost breakdown of the new console. Not so surprisingly Sony isn’t making a huge profit on each console sold. It isn’t really making any money on the system.
Video game consoles very much follow the razor and razor blade business model where you lose money on the former and make it back in droves with the latter. Sony, and for that matter rivals Microsoft and Nintendo, actually make it back even more this way because of licensing fees.
The exact costs that each third party publisher – such as Electronic Arts, Activision, Ubisoft, etc. – pays per title isn’t exactly known. While it certainly ranges based on the title, the development costs and sales projections, it isn’t exactly small change.
Nearly a decade ago, IGN explained this in an article on the economics of game publishing:
“In order to release a game on any of these videogame consoles, the publisher must pay a royalty to the manufacture, whether Microsoft, Sony, or Nintendo, for distributing a game on their system. And as part of the deal, the game must also meet with all of the strict quality standards and guidelines as set by the manufacturer for it to be approved and released. The exact licensing fee varies based on the manufacturer, as well as any deals they may give a publisher, but it can generally be anywhere from $3 to $10 per unit.”
This still holds true today, but what is remarkable about the PlayStation 4 is that Sony is losing money with each console it sells, but not all that much.
IHS iSuppli noted, “The bill of materials (BOM) for the PlayStation 4 amounts to $372. When the manufacturing expense is added in, the cost increases to $381. This comes in $18 lower than the $399 retail price of the console.”
So Sony could actually be making $18 per system! Now that’s before shipping costs, marketing and all the other overhead associated, not to mention the R&D costs. In other words Sony is still in the red.
Yet the fact that the hardware is actually $18 below cost is actually truly remarkable, because Sony didn’t come close to making money – let alone breaking even – with its previous system.
“When Sony rolled out the original model of the PlayStation 3 in 2006, our teardown analysis revealed that the console delivered supercomputer-class performance at a price equivalent to a notebook PC,” said Andrew Rassweiler, senior director, cost benchmarking services for IHS. “However, this achievement came with a major downside for Sony, as the BOM costs for most of the different versions of the console were in excess of the retail prices, in some cases by more than $100. Although Sony brought the PlayStation 3’s costs down significantly during its lifetime, the company’s intent was never to make money on the hardware, but rather to profit through sales of games and content.”
This time Sony has shortened the path to the hardware break-even point, and could even reach the point where the systems end up being profitable.
Analysts credit this to a much more cost-conscious design. This included the integration of the central processing unit (CPU) with the graphics processing unit (GPU), and to a large degree that makes sense. While PC gamers may upgrade the GPU at least once on really advanced gaming machines in its lifetime and thus need the two to be individual boards, this doesn’t hold true with the console systems, which are rarely upgraded beyond installing a larger hard drive.
Sony – and Microsoft as well with its Xbox One – have benefited from the falling prices of computer hardware across the board. Processors, memory and hard drives have all fallen in price, even as performance has increased.
One factor in this is that PC sales have been stagnant, which certainly only helps matters as Sony’s (and again Microsoft’s) orders for this hardware come as supply is good and demand has been anything but demanding.
The end result is more powerful systems – and in the case of Sony – at a cheaper cost for consumers. While Sony won’t ever give away the PS4, the lower cost could allow it to drop the price if competition with the Xbox One becomes serious enough.
Finally, if the company can actually make a profit – that is an even bigger profit than it has been making – than that only serves as a factor for Sony to remain in the game’s business and develop a PS5 down the line. Surely someone at Sony Computer Entertainment is already thinking about what that system might offer, and more importantly what it might cost.
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