SharkJumping

The news coming out of CES regarding possible pricing for next generation DVD players continues to grow, but I'm more curious about what it means for Sony and the cost of the PS3.  Toshiba HD-DVD models for a March launch at $499 and $799 - that's high, but maybe not outrageous for a next gen platform with very cool capabilities, if not a lot of content.  Pioneer announced the first Blu-ray DVD model for the astonishing price of $1,800, presumably with a launch date around the Summer, which is when Sony announced they would ship their first models, as will an announced $1,000 player from Panasonic.

What's interesting is that analysts seem to feel that Toshiba will actually lose money on the $499 model, but is selling it below cost to jump start the HD DVD marketplace to keep Blu-ray from running away with it when PS3 ships.  The first question is "what costs so much in a next gen player?" I assume the casing, power supply, external connections, and basic memory/chip are not radically different than today's $100 DVD players - it's the laser and related new technology parts which cost so much more, as well as the need to ramp up overall production and pay off the cost of new equipment, but that's a huge jump in cost, some of which is due to royalties, mostly paid to Sony.

So let's assume the raw cost of the new core technology components of a Blu-ray DVD machine is $400-500 if Pioneer and Panasonic are selling the initial SKUs above $1000, and if Toshiba is supposedly losing money on a cheaper HD DVD player priced at $500.  iSuppli did a thorough teardown of an XBox 360 in November, estimating that the motherboard components (core processor, graphics processor, memory, etc.) cost around $370, with an overall cost of $525 - but that was with a simple DVD-ROM costing an estimated $25.  So for PS3 add in the guts of a next gen Blu-ray drive costing $400-500, as well as a presumably more expensive Cell processor and graphics CPU, and Sony is looking at a Bill of Materials above $1,000 for the PS3 - that is compared to an estimated $499 retail price point.

It's normal to lose money on consoles for the first few years since manufacturing efficiencies bring the cost down once tens of millions of units ship (and software royalties kick-in), but I don't know that there has ever been a loss of this magnitude on a per unit basis.  This starts to make that Blu-Ray bet look more expensive than I first thought, although I'm sure Sony regards this as one of the key wars they need to win since the royalties from a winning bet would more than pay for the PS3 subsidies.  If you're Microsoft and Intel, they're probably going to go out of their way to subsidize HD-DVD in order to increase the pain threshold for Sony, so it's going to be a bloody battle for everyone.  Unfortunately, consumers will inevitably lose out while the battle is waged, just as we did with the DVD Audio/SACD fiasco, which destroyed that promising market and left the music labels with today's non-secure music CDs since consumers became so confused that the machines never caught on.