Sony's PlayStation 3 pricing strategy to offer PS3 below its production cost has caused the company to lose around $3bn over the past two fiscal years.<>According to Sony's fiscal 2008 annual report, pricing the PlayStation 3 below its production cost caused Sony to lose 232.3 billion yen ($2.16 billion) in 2007 and 124.5 billion yen ($1.16 billion) in 2008.
"The large-scale investment required during the development and introductory period of a new gaming platform may not be fully recovered," Sony said.
Sony said that developing and providing products that maintain competitiveness over an extended life-cycle requires large-scale investment relating to research and development, particularly during the development and introductory period of a new platform. In the past, large-scale investment relating to capital expenditures and research and development for the manufacture of key components, including semiconductors supplied for PLAYSTATION3, was also recorded within the Electronics segment.
Despite the losses, Sony is still willing to offer the console even for free, according to a report by Tweak Town. Sony is expected to offer in Australia a PS3 with every purchase of a Sony Bravia TV.
"It is particularly important in the Game segment that these products are provided to consumers at competitive prices to ensure the favorable market penetration of the platform," Sony added.
Should the PS3 platform fail to achieve such favorable market penetration, there is a risk that this investment, or a part thereof, will not be recouped, resulting in a significant negative impact on Sony's profitability. In addition, even if Sony is able to sufficiently recoup its investment, significant negative impact on Sony's operating results could occur during the introductory period of the platform. Further, even if the platform is ultimately successful, it may take longer than expected to recoup the investment, resulting in a negative impact on Sony's profitability.
An example of such a significant negative impact during the introductory period of a platform are PS3-related charges that resulted in losses of 232.3 billion yen and 124.5 billion yen within the Game segment for the fiscal years ended March 31, 2007 and 2008, respectively. These losses arose from the strategic pricing of PS3 hardware at points lower than its production cost.