When PlayStation 3 was first sold by electronics giant Sony in 2006, it was at a loss when it was first released with the hope of making money back on individual games.
That’s pretty close to what Sony is doing again with the PS4, although it’s not as extreme. At least that’s the finding of the research firm IHS, which will later today release the findings of a teardown analysis of the PS4 and the combined cost of the components used to build it.
AllThingsD got an early look at the analysis in which the firm estimates the cost of those parts, plus what it costs to assemble them, at $381. That is only $18 shy of the PS4′s $399 retail price, leaving Sony little profit margin on the sale of the device itself.
Such thin gross margins on a consumer electronic product are a rare. Apple’s iPad Air, for example sells for a minimum of $499 at retail, yet costs up to $274 to build, leaving a considerable margin, according to previous IHS reports.
However, it’s a better picture now for Sony than it was in 2006, when its predecessor game console, the PS3, was first released. Back then, the firm conducted a similar teardown analysis of the PS3 and determined it cost about $805 to build a console that sold for $599. Over time, of course, the costs came down, but when they did Sony cut its retail price accordingly in order to encourage more sales. By late 2009, the PS3 was selling for $299, even though it cost $336 to build.
“If Sony could build the PS4 for a lower cost it would do so, but if history is any indicator, it would also lower its retail price,” says Andrew Rassweiler, an analyst with IHS in Los Angeles who oversaw the teardown.
To get into the particulars, chips take up a big proportion of the cost of the internal components. An unusually large microprocessor that is manufactured by chipmakers Advanced Micro Devices costs about $100 to build. When combined with the cost of memory chips, at $88 for 16 individual memory chips, you have more than half of the cost figured in, Rassweiler said.
The AMD chip is 350 square millimeters, making it the physically the biggest chip that IHS has ever seen built on a the relatively new 28-nanometer manufacturing process. “This chip is just gigantic,” Rassweiler said. “It’s almost three times as big as the next biggest chip we’ve seen.”
But, in the complex world of chip manufacturing, bigger isn’t necessarily better. Chips with a larger surface area have a higher probability of suffering from manufacturing defects, Rassweiler said. That, in turn, means that the number of good chips on each silicon wafer tend to be lower, meaning more chips overall have to manufactured, raising costs overall.
IHS estimates that roughly a third of the chips are likely to suffer from these defects and therefore aren’t used, lowering the overall manufacturing yield on the chips. “When the yield goes down the price goes up,” Rassweiler said. “It’s a well-established principle of chip manufacturing.”
The other big cost is memory chips. There are no fewer than 16 individual memory chips in the PS4, costing Sony about $88. The cost of the processor and the memory works out to $188, nearly half over the total cost, Rassweiler said.
After chips, the parts inside the PS4 become somewhat less unusual. There’s the hard drive from Seagate ($37), wireless chips from Marvell and Skyworks and an optical drive that costs about $28.
Then there’s the controller, which costs another $18 to build. It contains Bluetooth chips from Qualcomm, an audio chip from Wolfson Microelectroncs and a motion sensor chip from Bosch. The system ships with only one controller in the box.
With the component cost and the retail price so close, it’s possible, Rassweiler said, that Sony is taking a very small gross margin or even a possible loss on the console in hopes of making it back on games. “If your cost is within 10 to 20 dollars of the retail prices, there’s very little chance you’re making a profit on the console,” he says.
The practice would be consistent with the way Sony has done business in the past, although with a smaller differential between cost and retail price on the PS4 versus the PS3. “It looks like once again, when it comes to profits, it’s all about the game titles,” said Rassweiler.