For a while I wondered why Sony would discontinue the $499 60 GB PS3 that seems to be selling so well. I think I’ve figured it out. The “new” 80 GB Playstation 3 costs less to produce than the 60 GB, yet it sells for $100 more. Why? Because when Sony drops the 80 GB version to $499 it will be perceived more positively than if they had simply replaced the 60 GB version with the new version in one step. How are they doing it?
1) Reducing backward compatibility – They pulled the emotion engine and graphics synthesizer chips along with the relevant RDRAM. Based on this article at X-bit labs it looks like the estimated cost of the removed chips is $30. In addition to that savings, I would assume that there are some savings associated with reduced complexity of assembly. I think the estimate of the chip-only saving is low, so I will assume $50 in total savings.
2) Increased hard drive size – This doesn’t cost Sony more than $8 or so per unit. A quick check of pricewatch.com’s notebook hard drive price chart and newegg.com both show that retail prices of 80 GB hard drives are around $55 and the price of 60 GB drives is about $47. This strange reality of the technology market demonstrates the ever-shrinking prices between legacy products at the back end of the technology curve and more current technology. If you look at 60GB and 80GB desktop hard drives, the 60GB drives are actually more expensive. It happens more than you would think. Look the great Samsung HBS case to see an example of this in the RAM market. Sony is certainly paying less than the retail prices of these drives, but the $8 increase should be directionally correct.
3) Free Copy of Motorstorm – There are two ways to look at the additional cost of providing this game. The first is to look simply at the cost of including the game. The production of an incremental Blu-ray disc is well less than $10. I’ll assume $5 for this cost. The better way to look at it from an economic standpoint is the potential Motorstorm sales forgone. So far Motorstorm has sold 1.1MM copies on sales of about 4.4MM PS3s, based on statistics from the extremely interesting vgchartz.com. This would indicate a .25 to 1 relationship between game sales and system sales. Over time, as the game ages, I would expect this ratio to drop. We’ll assume 1/5 Playstation buyers would pay for the disc. Excluding an assumed $10-20 margin for the retailer, I would estimate the cost to Sony at 1/5*$50 = $10 per bundle sold.
Total cost differential: ($50) savings on chips/production + $8 on hard drive + $10 additional cost for giving away Motorstorm = ($32) overall cost reduction
It is not a surprise that most commentary I’ve seen seems to believe that the 60 GB version is a better value. I would agree. The “new” $599 version is not worth an additional $100 over the 60 GB version, but that is not the point. Sony has positioned a cheaper product at a premium price and they can now cut the price on when the 60 GB versions are cleared out. The 80 GB version will replace the 60 GB at the $499 price point. Sony will have provided what is positioned as a premium product at the same price and receive positive press for it. Bravo Sony.
If you are thinking of buying a PS3 and care about backward compatibility, I would recommend finding a 60 GB before they are all cleared out. If you don’t care about it, you might want to wait for the 80GB version to drop. It truly will provide more value for you with a larger hard drive and free game. Sony is still losing hundreds on these systems, but this is a step in the right direction.
Note #1: I am now a small SNE shareholder.
Note #2: I edited this post on 9/15 after recognizing that the internal hard drive was a notebook drive rather than a desktop. It made an $8 difference.
