PS3 launch, price doubts batter Sony stock

February 21st, 2006, 02:13 Posted By: wraggster

Across the United States, most Americans were relaxing this Monday, courtesy of the long Presidents' Day holiday weekend. Not so across the Pacific in the corporate offices of Sony. The electronics and entertainment giant saw its stock price sink 3.6 percent, dropping to 5,300 yen ($45) per share. The fall affected the entire Tokyo stock market, with the Nikkei index dropping 1.75 percent to 15,437.93 yen ($130.57).

Monday's drop follows a 2.8 percent decline in Sony stock on Friday, after Wall Street stock-brokerage firm Merrill Lynch published a report skeptical of the company's next-generation console plans. It predicted the launch of the PlayStation 3 console could be delayed by 6 to 12 months from its current spring 2006 window, resulting in an autumn launch in Japan and a late 2006 or early 2007 launch in the US.

"We wrote last November that Sony’s design choices for the PS3 had resulted in an expensive and difficult-to-manufacture product," read the report, "and we think that we’re seeing the consequences of those choices play out now. In particular, we think the problem points are the Sony Cell processor and the Blu-ray drive." Merrill Lynch also cited heat-generation issues with PS3 hardware and the far-from-finished state of most games for the platform as factors.

While other analysts have predicted that the PS3 might not hit North America until Q4 2006 or Q1 2007--which would miss the all-important holiday shopping season--Merrill Lynch's stature made many-a-trader skittish. The fires of unease were fueled further by another component of the report, which predicted the manufacturing cost of the console could be much higher than previous estimates of around $500 per unit.

"Our updated analysis indicates that the initial bill of [production] materials for PS3 could approach $900," read the report. The report said that the production cost of a single Cell processor will be $230 at launch, with the Blu-ray drive setting Sony back $350 per unit. If that estimate is correct, that means the PS3 would have to sell for around $775-$800 to maintain a $125-$100 per-unit-loss similar to that of Microsoft's Xbox 360.

Merrill Lynch expects PS3 production costs will start falling after 2007, when Sony can shift the Cell chip's manufacture from the complex 90nm process to the more cost-effective 65mn process. Scaling Blu-ray to other devices will also bring down the drive's price. Merrill Lynch predicts that the PS3's production cost will fall to $320 in the three years after its launch, by which time the Cell will only cost $60 per unit and the Blu-ray drive $100 per unit.

In the wake of the report, Sony issued a series of contradictory statements. In Japan, Sony Computer Entertainment spokesman Kei Sakaguchi flatly denied that there would be any delay to Bloomberg News and other press outlets, saying, "there isn't any change in our plan to release the console in spring 2006."

However, a Sony Computer Entertainment America spokeswoman was more cautious when she spoke with USA Today. "We're aiming for spring, but we haven't announced specific regions," she told the daily broadsheet. "We're waiting for [final PS3 specifications] until the last possible minute, but the launch could be pushed back if they're not decided soon."

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