Submitted By: Vicky Varun Sharma

Roll#: 1014066
EPGP 2010-11

News Article
SONY LOSING ON PS3
Shortly after the PlayStation 3 launched in November of 2006, iSuppli broke the onyx behemoth down to its
various components. The hardware research firm determined that it cost Sony more than $840 to produce
a single 60GB version of the system, each of which then sold for $599.

According to iSuppli, the hardware and manufacturing costs for the 120GB PS3 Slim add up to just over
$336. Given that iSuppli's analysis doesn't include other expenses, like software and transportation, the
actual loss on each PS3 Slim sold in the US is even greater. However, iSuppli noted that the PS3 is more
expensive in a number of other countries, and the cost of materials will only fall in the next year.

"In light of these factors, the PlayStation 3 probably is already at or near the tipping point for profitability,"
iSuppli director and principal analyst Andrew Rassweiler said in a statement.

As for specific improvements under the Slim's hood, iSuppli underscored the benefits of Sony's 65-
nanometer and 45-nanometer semiconductor chips. Not only are the chips cheaper than their counterparts
in the original PS3, but they also require less power (and thus created less heat) to achieve the same
results. That allowed Sony to get by with less expensive cooling solutions and a cheaper 220-watt power
supply. The older PS3 models had a 400-watt power supply.

As previously revealed, CEO Sir Howard Stringer has faced stiff resistance from entrenched Sony
management, who oppose the company's first British-born executive's plan. The FT notes that Stringer
believes the stalwart electronics company should shift its focus toward the software market, whereas
dissidents maintain the value of its hardware-creation business. Another reported cause for tension
between Stringer and upper management is his belief that Japanese staff should be subject to head-count
reductions

Analysis

Sony bases its strategy on rapid introduction of innovative consumer products. IT gains
competitive advantage over its competitors by launching new products. In 2006, Sony launched
Play Station3 in the gaming segment. It was analyzed that the overall cost of PS3 was way above
the selling price. Within 4 months Sony reported a huge loss and Sr. managers were debating if
Sony should focus only on software market where they were making profit. But as we all know
PS3 is one of the major profit making unit of Sony today.

Even though PS3 was initially making loss company decided to still go ahead with
manufacturing. Some of the reasons for the company’s decision are

 The total cost was calculated by including raw material, direct labor,
manufacturing overhead and higher level sustaining cost. This higher level
sustaining cost was the technology cost such as Blu ray , wireless console etc.
Although these cost were directly attributed to PS3 they had been developed and
were used in many other products that Sony manufactured. Moreover, much of
the technology was leveraged from PS2. Not including this cost Sony saw they
were still making profit on PS3.

 Initial advertisement cost was high for PS3. With more popularity for the product
advertisement cost (PERIOD COST) reduced.

 In 2008, Sony went re-structuring its gaming division. Also, plans to phase out
PS2 were made. One of the reason could be that cost allocation earlier that was
done for entire gaming division followed traditional job costing. The major
difference between PS3 and PS2 is technology. Rest all manufacturing cost are
almost the same. Use of appropriate cost driver/ABC costing would have resulted
in management decision to phase out PS2 and continue with PS3.

Submitted By: Vicky Varun Sharma

Roll#: 1014066
EPGP 2010-11