PlayStation3: Costs and PlayStation3: Costs and Pricing AnalysisPricing Analysis

Ahmed Zeeshan SheikhAhmed Zeeshan Sheikh

Denis MysenkoDenis Mysenko

Miguel GonzalezMiguel Gonzalez

Sony productsSony products

CONSOLIDATED SEGMENTSCONSOLIDATED SEGMENTS Q2 FY06Q2 FY06 Q2 FY07Q2 FY07 ChangeChange

ELECTRONICSELECTRONICS SalesSales 1,378.41,378.4 1663.11663.1 20.7%20.7%

Operating Operating IncomeIncome

8.08.0 106.9106.9 +1,231%+1,231%

GAMESGAMES SalesSales 170.3170.3 243.4243.4 42.9%42.9%

Operating Operating IncomeIncome

-43.5-43.5 -96.7-96.7 --

PICTURESPICTURES SalesSales 178.2178.2 189.6189.6 6.4%6.4%

Operating Operating IncomeIncome

-15.3-15.3 2.72.7 --

FINANCIAL SERVICESFINANCIAL SERVICES SalesSales 168.1168.1 157.5157.5 -6.3%-6.3%

Operating Operating IncomeIncome

24.624.6 23.123.1 -5.8%-5.8%

ALL OTHERSALL OTHERS SalesSales 81.581.5 95.295.2 +16.8%+16.8%

Operating Operating IncomeIncome

6.56.5 10.810.8 65.9%65.9%

Sony performanceSony performance

Sony PlayStationSony PlayStation

Games division Games division has been one of the most has been one of the most profitable divisions of Sony Since the break profitable divisions of Sony Since the break through success of PSthrough success of PS®2®2 followed by the PSP followed by the PSP®®. . Following that tradition Sony Released PSFollowing that tradition Sony Released PS®®3 with 3 with an Aim to change the gaming world.an Aim to change the gaming world.

Sony PlayStation3Sony PlayStation3

PlayStation®3 is one of the most sophisticated gaming consoles with high resolution, multi processor Gaming functions.

Main Market Competitors of PS®3 are Microsoft’s X-Box360 and Nintendo's Wii.

PS®3 was released in the American, European, Australian and Asian Markets at the end of last year and beginning of 2007.

Sony PlayStation3 salesSony PlayStation3 sales

World Wide hardware Sales,

Q1 Q2 Q3 Q4 Q1 Q2

PS2®2.33 3.41 6.75 2.42 2.7 3.28

PSP®1.41 2.02 4.71 1.63 2.14 2.58

PS3®1.66 1.91 0.71 1.31

World Wide hardware Sales,

Q1 Q2 Q3 Q4 Q1 Q2

PS2®2.33 3.41 6.75 2.42 2.7 3.28

PSP®1.41 2.02 4.71 1.63 2.14 2.58

PS3®1.66 1.91 0.71 1.31

World Wide Software Sales,

PS2® 32.7 47.2 78.6 35.1 31.1 38

PSP® 9.3 13.2 21.3 11.1 9.9 12.6

PS3® 5.3 8.1 4.7 10.3

World Wide Software Sales,

PS2® 32.7 47.2 78.6 35.1 31.1 38

PSP® 9.3 13.2 21.3 11.1 9.9 12.6

PS3® 5.3 8.1 4.7 10.3

Costs Break DownCosts Break Down

Market Price for PlayStation®3 with 80 GB memory. $500.00 .

Product Final Sale Price $850.00***Assuming that the Purchase cost for the Whole Sale distributor includes the Transportation Costs from the Factory location to the whole seller and same as in other downstream members of the value chain. Hence we are not considering the distribution costs a significant portion in this case, but it can account for 2 % if considered significant.

Purchase Price of the Retailer (@ 5 % Markup.) $40.48

Purchase Price of the Whole Sale distributor ( @ 8 % Markup.) $59.96

Sales and Value added Taxes. $124.93

Ex- Factory Price. $624.63Profit margin on the product.( @ 15 % Profit + @ 10% for

Miscellaneous interests, + Income Tax. And Corporate Taxes. ) $124.93*** The Assumptions according to various Costs are rounded to get the best approximation in High Technology, sector.Administrative Costs, and Selling Expenses.(( @ 20 % of Net

Costs) $83.28

Manufacturing Costs of Components. $166.57(@ 40 % Total Product Cost Before Administrative Expenses.)

Variable Costs ( Including Material, Energy). $63.30 (@ 38 % Manufacturing Costs.)Fixed Costs ( Including Plant and Machinery, Maintenance,

Permanent Labor, Office and Building , Overhead Costs) $74.96 (@ 45% Manufacturing Costs.)Semi Fixed Costs (Labor, Internal and External Logistics and

Associated Costs) $28.32 (@ 17 % Manufacturing Costs.)

Non-Manufacturing Costs $249.85(@ 60 % Total Product Cost Before Administrative Expenses.)

R&D$124.93

(@ 30 % Total Product Cost Before Administrative Expenses.)

Inventory Handling Costs$41.64

(@ 10 % Total Product Cost Before Administrative Expenses.)

Product Development and Designing.$41.64

(@ 10 % Total Product Cost Before Administrative Expenses.)

Miscellaneous Costs, Patents and Contracts, Packaging$41.64

(@ 10% Total Product Cost Before Administrative Expenses.)

Market Price for PlayStation®3 with 80 GB memory. $500.00 .

Product Final Sale Price $850.00***Assuming that the Purchase cost for the Whole Sale distributor includes the Transportation Costs from the Factory location to the whole seller and same as in other downstream members of the value chain. Hence we are not considering the distribution costs a significant portion in this case, but it can account for 2 % if considered significant.

Purchase Price of the Retailer (@ 5 % Markup.) $40.48

Purchase Price of the Whole Sale distributor ( @ 8 % Markup.) $59.96

Sales and Value added Taxes. $124.93

Ex- Factory Price. $624.63Profit margin on the product.( @ 15 % Profit + @ 10% for

Miscellaneous interests, + Income Tax. And Corporate Taxes. ) $124.93*** The Assumptions according to various Costs are rounded to get the best approximation in High Technology, sector.Administrative Costs, and Selling Expenses.(( @ 20 % of Net

Costs) $83.28

Manufacturing Costs of Components. $166.57(@ 40 % Total Product Cost Before Administrative Expenses.)

Variable Costs ( Including Material, Energy). $63.30 (@ 38 % Manufacturing Costs.)Fixed Costs ( Including Plant and Machinery, Maintenance,

Permanent Labor, Office and Building , Overhead Costs) $74.96 (@ 45% Manufacturing Costs.)Semi Fixed Costs (Labor, Internal and External Logistics and

Associated Costs) $28.32 (@ 17 % Manufacturing Costs.)

Non-Manufacturing Costs $249.85(@ 60 % Total Product Cost Before Administrative Expenses.)

R&D$124.93

(@ 30 % Total Product Cost Before Administrative Expenses.)

Inventory Handling Costs$41.64

(@ 10 % Total Product Cost Before Administrative Expenses.)

Product Development and Designing.$41.64

(@ 10 % Total Product Cost Before Administrative Expenses.)

Miscellaneous Costs, Patents and Contracts, Packaging$41.64

(@ 10% Total Product Cost Before Administrative Expenses.)

Sony PlayStation3Sony PlayStation3

An Operating Loss of ¥96.7 million. Was recorded, a ¥ 53.2 Billion deterioration year on year. The deterioration was primary due to the loss arising from the strategic pricing of PS®3 at points lower than its production cost and the increase in PS®3- Related inventory write- downs during the current quarter

compared to the same quarter of the previous year.

Overall Inventory Buildup.Overall Inventory Buildup.

30 September, 30 September, 20062006

30 June, 30 June, 20072007

30 30 September, September,

20072007

ChangeChangeSep07-Sep07-June07June07

59.759.7 227227 247.8247.8 9.2%9.2%

Sony PlayStation3: ResultsSony PlayStation3: Results

* Sony is loosing money on each console they sell.

* The announcement of the early “retirement” of the Gaming division President, Ken Kutaragi.

Main factorsMain factors

- Fluctuation of Yen against Foreign Currencies.- Problems with Late introduction in market compared to X-box 360 and Wii.- Problems with estimation of costs as well as potential future sales.-Huge unsold inventory, due to overestimation.-High prices compared to its competitors.