The PlayStation 5 is off to a fast start for Sony Interactive Entertainment. The company reported its first quarterly financial results since launching PS5 in November. And, as expected, the company sold a lot of hardware and is making a lot of money. When it comes to gaming, Sony doesn’t have much holding back its profitability. Software sales are up and network services are generating more revenue. But one of the pain points Sony did mention is the price of its newest gaming console. The PlayStation 5 hardware is selling at a loss.
“[SIE experiences] loss resulting from [the] strategic price points for PS5 hardware that were set lower than manufacturing costs,” reads the investor report.
The PlayStation 5 hardware is selling at a loss.
The PS5 is $500, and the PS5 Digital Edition is $400. And while that is a lot of money, it’s not enough to cover what it costs to produce the system. Now, the PS5:DE does drag down the average sales price of the PS5 overall. So that “strategic price point” is probably somewhere between $460 and $490. So the PS5 costs more than that to produce.
It’s not surprising that Sony is taking a loss on hardware. Microsoft confirmed it is doing the same thing with Xbox Series X/S. And in February 2020, Bloomberg reported that PS5 has a unit cost of $450. But it’s likely that was the cost of goods and not a figure that represents the full cost incurred from manufacturing, packaging, and delivering the console through the retail chain.
While Sony claims that it used cheap and “eco-friendly” packaging material for the PS5 because of the environment, this is likely an example of corporate green-washing. The flimsy PS5 box likely also saved the company a significant amount of money.
Sony (and Microsoft and Nintendo) won’t get any relief on manufacturing costs any time soon. Some of the most expensive components in the PS5 may actually go up in price.
Taiwan Semiconductor Manufacturing Co. (TSMC) is experiencing huge demand for its fabrication facilities that produce the system-on-a-chip (SOC) for the PS5. TSMC also makes the chips for the Xbox Series X/S, Nintendo Switch, iPhone, M1 Mac, and AMD’s CPUs and GPUs. Thirst for processors is at such a high that TSMC is reportedly suspending volume pricing for its partners.
Now, Sony likely has millions of PS5 SOCs already paid for and ready to go, but it also wants to meet consumer demand for PS5s. It’s not going to sit on any components for long. Once it burns through its current stock, Sony will have to go back to TSMC and pay the higher price for PS5 processors.
Memory prices are also going up, so Sony may have to start paying more for the PS5’s GDDR6. Again, this is not a cheap component, and fluctuations in pricing of RAM can cut deep into margins.
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 bottom line 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 dip in sales that was traditional during a transition from one hardware generation to the next. Instead, the company is maintaining most of its momentum, and it’s likely OK with losing money on PS5 if it means consumers are excited to buy games and subscribe to services.
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