Hardware Losses
The cost of a mass market player can be reasonably approximated from industry sources familiar with the block diagram of the system. Based on interviews with knowledgable industry executives, we conclude that the Sony Playstation has a manufacturing cost at the factory of $40 or more higher than its suggested retail price of $299. This assessment is based on the bill of materials for parts in the unit, plus factory assembly costs, plus factory profit.
* In terms of the bill of materials, OEM prices for the MIPS, ASIC, graphics controller and video turner chips, the CD-ROM drive included with the Playstation, and other components total (aacording to our estimates) about $230. The MIPS chip, the ASIC chip and the CD-ROM drive may account for nearly $200 of that amount, so the final estimate of $230 may be somewhat low.
* Assembly or "build out" costs according to manufacturing experts for this system in quantity might run about $30 per unit. This estimate is based on time to assemble, labor and a capital charge for the automated production facilities likely to be employed.
* Factory profit as a percentage of FOB costs can vary widely, but a factor profit target of 15 percent (which is a reasonable target with respect to absorbing factory overhead and contributing to profits) suggests a delivered price of $305 per unit.
These cost estimates do not include the impact of the yen/dollar relationship -- a matter which was covered by us in an earlier issue. (See Interactive Update, April 18, 1995.)
Sony is attempting to offset this loss by requiring retailers to buy a bundled package of one player and two games, permitting them to sell the games separately from the player, but requiring the player to be sold at $299. This strategem is intended to provide Sony will a somewhat higher total sale, deliver the retailer a profit opportunity, and still maintain a target hardware price of $299. Assuming a 40 retail percent margin (off SRP) on hardware and a 30 percent margin on software (for two software titles with an SRP of $50), Sony's revenue on the package would be $250. This would be $55 below estimated manufacturing costs on the hardware alone. If Sony insists on a package price of $300, then the manufacturing costs of the hardware plus the manufacturing costs of the software plus mandatory software royalties would still be "underwater" by at least $40.