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PS3 to sell for $399, cost $494 to make

"Merrill Lynch Japan predicts Sony will lose more than $1 billion on hardware during its next-gen console's first year on the market--a sum it may not be able to recoup.

According to the latest issue of Japanese magazine Toyo Keizai, Merrill Lynch Japan Securities has recently calculated an analysis that the production of a single PlayStation 3 console will cost Sony approximately 54,000 yen to make ($494), as of its initial release in 2006.

Given that Sony's PS3 will face stiff competition from Microsoft's Xbox 360, the chances that Sony will release its console at its production cost is slim. Under the assumption that the Xbox 360 is expected to sell at around $299, Merrill Lynch Japan predicts that Sony will sell each PS3 at the price of 44,800 yen ($410) in Japan and $399 in America. That would mean Sony would suffer a loss of more than 130 billion yen ($1.18 billion) during the first year of the PS3's release."

This is a comman practice for big corporations. It's a tactic called loss-leader. Microsoft did it with the first Xbox, with an even higher loss margin by some estimates as high as $150 each unit. I wasn't a big fan of this tactic that Microsoft used, but now in order to stay competitive Sony will have to follow suit. The estimate of 1 billion dollar loss sounds a tad high, especially when you consider that the hardware pricing will come down over time. My first impressions of the hardware is that it's totally worth the $500 and a steal at $400.

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