The market clings on to any hope of PS3 price drop

These days, literally the smallest whisper about falling costs of blue-violet laser diodes will set off speculation about a PlayStation 3 price drop. Yesterday, Sony announced that it would be shipping its second-generation Blu-ray Disc movie player for $100 less than initially announced, fuelling talk of possibly the same cut being applied to the PS3.

Analysts sure seem to think that the lowered price of BDP-S300 is a sign of PS3 things to come. Arvind Bhatia, an analyst with Sterne Agee & Leach Inc., says in a Dow Jones story, "If the cost of Blu-ray is coming down, you can drop the price of anything with Blu-ray in it. "

What some analysts may be overlooking is that falling costs for Blu-ray components do not mean a higher profit margin on the PlayStation 3. While standalone Blu-ray movie players are sold at prices above costs, the PlayStation 3 is sold at a considerable loss – a common penetration tactic in the video game console business.

The PlayStation 3, compared to its competition, is performing below expectations, leading to a conclusion that the video game market is highly price sensitive. Regardless of Sony Computer Entertainment Inc.’s bottom line, analysts have repeatedly called for a lower price in order to stir PS3 sales. "Feedback from retailers continues to indicate that a price cut on PS3 will be important," Bhatia astutely pointed out.

Wedbush Morgan Securities analyst Michael Pachter said in a previous story, "The right question to ask is whether the full bill of materials is below $499, allowing them to cut price and still avoid losing money... The point is that if they're ramping capacity to [5 million diodes], they probably are coming down the cost curve for MPEG chips, dedicated disc drive processors, and every other component. Hard to say for sure, but I'd guess that Sony could squeeze a hundred dollars out of its cost by mid-year, maybe more."

"My guess is that you will see a price cut this year," he continued. "I think that the introduction of the Xbox 360 Elite gives Sony an opportunity to cut price and claim that they offer Blu-ray for only $20 more."

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