Sony is selling PS5 hardware at a loss and costs could rise even further

The PlayStation 5 got off to a quick start for Sony Interactive Entertainment. The company released its first quarterly financial results since the launch of the PS5 in November. And, as expected, the company has sold a lot of hardware and is making a lot of money. When it comes to games, Sony doesn’t have much to contain its profitability. Software sales are on the rise and network services are generating more revenue. But one of the pain points Sony mentioned is the price of its newest gaming console. The PlayStation 5 hardware is selling at a loss.

“[SIE experiences] loss resulting from [the] strategic prices for PS5 hardware that were set below manufacturing costs, ”says the investor’s report.

PlayStation 5 hardware is selling at a loss.

The PS5 costs $ 500 and the PS5 Digital Edition costs $ 400. And although it is a lot of money, it is not enough to cover the cost of producing the system. Now, PS5: DE reduces the average selling price of PS5 in general. So, this “strategic price” is probably between $ 460 and $ 490. So the PS5 costs more than that.

It is not surprising that Sony is losing out on hardware. Microsoft has confirmed that it is doing the same thing with the Xbox Series X / S. And in February 2020, Bloomberg reported that the PS5 has a unit cost of $ 450. But it is likely that it was the cost of the goods and not a value that represents the total cost incurred in the manufacture, packaging and delivery of the console in the retail chain.

Although Sony claims to have used cheap and “environmentally friendly” packaging material for the PS5 because of the environment, this is probably an example of corporate green washing. The PS5’s fragile casing probably also saved a significant amount of money for the company.

PS5 may continue to sell at a loss while component costs remain high

Sony (and Microsoft and Nintendo) will not have any relief in manufacturing costs anytime soon. Some of the more expensive components of the PS5 can actually go up in price.

Taiwan Semiconductor Manufacturing Co. (TSMC) is facing great demand for its manufacturing facilities that produce the system on a chip (SOC) for the PS5. TSMC also manufactures chips for Xbox Series X / S, Nintendo Switch, iPhone, M1 Mac and AMD CPUs and GPUs. Processor thirst is so high that TSMC is suspending the volume price for its partners.

Now, Sony probably has millions of PS5 SOCs already paid for and ready to use, but it also wants to meet consumer demand for PS5s. It will not sit on any component for a long time. As soon as it runs out of its current stock, Sony will have to go back to TSMC and pay the highest price for PS5 processors.

Memory prices are also rising, so Sony may have to start paying more for the PS5’s GDDR6. Again, this is not a cheap component and fluctuations in RAM prices can cut margins deeply.

Of course, Sony understands as well as any company that all of this is the cost of doing business. Arguably, treating hardware as a loss leader is less detrimental to Sony’s results than ever before. The company spent the PS4 generation establishing a strong digital sales business with services like PS Plus, as well as selling microtransactions for games like Fortnite.

These service-based revenue streams have enabled Sony to avoid the traditional drop in sales during the transition from one generation of hardware to the next. Instead, the company is maintaining most of its momentum, and there is likely to be no problem with losing money on the PS5 if it means consumers are excited to buy games and subscribe to services.