PlayStation 3 component prices: Why so high?

Consumers who buy the PlayStation 3 will certainly get high-priced components in that new game console whenever it hits store shelves. The big question will be how much of a financial loss Sony will have to swallow on each box in order to get consumers to buy them.

The estimated total bill of materials for Sony's next-generation game console will be between $725 and $905, according to various estimates. In comparison, the Xbox 360 from Microsoft comes with a component bill between $501 and $525.

Though Sony hasn't disclosed the price of the PS3, analysts figure it will have to be in the ballpark of $299 to $399--the price for the two versions of the Xbox 360. PS3 pricing speculation has heated up in recent days, along with rumors that the long-awaited game console could be delayed for up to a year.

The pricing disparity between the components for the two consoles comes largely because the Sony box will contain a Blu-ray drive, which supports the new high-definition Blu-ray DVD format. That could cost $200 to $300 or more per console. The processor in the PS3 also will likely cost more.

The unusual nature of the new console's component menu makes it difficult to pinpoint the cost estimate. The PS3 will be one of the few machines on the market with XDR memory, based on designs from Rambus.

Some analysts have suffered addition problems, too. Merrill Lynch wrote in a widely publicized research note that the component bill would total $900, not including a detachable drive. But Merrill later told CNET News.com that it meant to say $800.

Nonetheless, the cost of the rest of the components is roughly equal for both the Sony and Microsoft consoles, according to various analyst estimates.

The price estimates for materials do not include marketing, software development, advertising, or other costs, which will push Sony's total cost per console even higher. A Sony representative said the company would not comment on pricing.

A mismatch between the retail price and the cost of materials for a game console isn't unusual, because console manufacturers expect to make up the difference by selling games to run on the consoles. That's what Microsoft did with the Xbox 360.

The cost of making game consoles also drops rapidly over time because manufacturers don't usually upgrade the configurations year after year, while the cost of the components they're using drops. Merrill Lynch, in fact, estimates that the component bill, not including the detachable drive, will drop to $320 in three years.

Ken Kutaragi, who heads up Sony Computer Entertainment, is counting on it. In 1999, the processor and the graphics chip inside the PS2 took up 239 and 279 square millimeters in surface area, respectively, which made them relatively large (and hence relatively expensive) chips, he noted in a speech in February in San Francisco. By 2004, the two chips were condensed into one that took up only 87 square millimeters, almost one-sixth the size.

Here's how the components stack up.

Processor: The PS3 will be a showcase for the Cell processor from the SIT powers (Sony, IBM, Toshiba). The cell consists of a PowerPC core with eight signal processing cores. While the large number of cores help run multimedia applications, they also make for one large chip. Cell will take up 221 square millimeters of space, larger than the 168 square millimeters of the Xbox 360 processor. Larger chips are typically more expensive to make.

A greater percentage of the real estate on the Xbox 360 chip, also from IBM, is given up to cache memory. Cache is typically cheaper to manufacture than logic transistors, which own more of the real estate on Cell. As a result, Sony faces two disadvantages in terms of cost.

Kevin Krewell, editor in chief of the Microprocessor Forum, estimates the chip will cost between $150 and $170 at launch. Merrill Lynch puts the cost at $230, dropping to an estimated $60 in three years. In comparison, iSuppli estimates the cost of the Xbox 360 chip at $106.

The optical drive: For the PS3, this is the killer. In 2006, manufacturers will have to pay $200 to $300 for Blu-ray drives, according to Wolfgang Schlichting, an analyst with IDC. By 2007, the price will drop to between $100 and $200. The Xbox has a standard DVD drive, with an optional HD-DVD drive.

Standard DVD drives sell for $20 or less. Even recordable DVD drives at wholesale sell for a mere $28 to $32.

Graphics chip: This looks like a tie. Microsoft worked with ATI Technologies to develop a chip that costs about $141, according to iSuppli. Sony teamed with ATI rival Nvidia for its chip, which could cost $120 to $150, according to Dean McCarron at Mercury Research. Since the two chips are based on the high-end PC chips from the two companies, and since ATI and Nvidia are such fierce competitors, it's a safe bet that the two are roughly equal here.

Memory: Looks like a tie, but Sony may take a slight hit here. The Xbox 360 will come with 512MB of GDDR (graphics double data rate memory, meant for handling graphics-intensive programs like games). The PS3 will come with 256MB of 700MHz GDDR 3 memory and 256MB of XDR memory. Bob Merritt of Semico Research says it's safe to assume that both types of memory will sell for a 100 percent premium over conventional DDR2 memory in 2006, dropping to a 50 percent premium the following year. A 256-megabit DDR2 chip sells for about $2.46 on the wholesale market, he said, leading to a price of about $79 for 512MB of GDDR (here's the math: 2.46x2x2x8; there are eight bits in a byte).

iSuppli and Merrill Lynch put the cost of memory at, respectively, $65 and $50. The average between the three is $65.

In a twist, Samsung will make memory for both consoles.

Hard drive: The $399 version of the Xbox 360 comes with a detachable 20GB hard drive. Sony will include a detachable drive but hasn't set specifications. So again, it's a draw. On the wholesale market, the drives go for about $40.

Everything else: The power supply, the chassis, the wireless components--all of these parts will come from the same (or similarly situated) competitors in China and Taiwan and will cost the same. The "other" category of parts comes to about $165, according to iSuppli and $100 according to Merrill Lynch. Let's average that out to $130.

Total: If you use the low-end figures for Cell ($150) and the Blu-ray drive ($200), the PS3 materials bill comes to $700. The high estimate, including a $230 chip and $300 drive, comes to $880. The average is $790. The Xbox 360, meanwhile, comes in at $476 through averaging prices from different analysts. A study from iSuppli puts the figure at $525.