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The strangest thing about the PS4: It actually looks profitable

Sony PlayStation 4 Pricing Analysis

Back in 2006, a TechInsights teardown showed that it cost Sony about $688 to build the PlayStation 3 console it launched at $599. Locked in a tough battle with Microsoft, Sony’s decision to sell the PS3 at a loss was widely viewed as a prudent move. But in 2013, TechInsights estimates it costs Sony only $296 to build the PlayStation 4, which launched at $399. Sony could be launching the console at $299 or even $249, but is electing to price it high. This is a bit surprising for several reasons.

Unlike in 2006, Sony’s television business is in a grim state and has little chance of stopping Samsung’s formidable momentum. Sony’s portable game console PS Vita is doing only tolerable business in Japan and is facing extinction in the United States and European markets. Smartphone and tablet markets have matured astonishingly rapidly and have started wresting control of consumers’ living rooms from television sets.

You’d think that Sony would feel extremely motivated to price PS4 as low as possible to maximize hardware sales and thus maximize future software profits. Yet Sony is demonstrating remarkable sangfroid by pricing the console at twice the level of a budget tablet.

There are several possible explanations for this. Sony may have early order and consumer survey data that indicates demand for the PS4 is running so high the console can soar even at $400. Maybe the plan is to sell the first 3 million to 5 million units at top price before a price drop to $300. It’s also possible that after being weighed down by debt and unprofitable divisions, Sony simply needs the cushion that the instantly profitable PS4 console provides.

Whatever the reason for the gutsy pricing is, it’s clear that Sony can afford an early, steep price cut for the PS4 should it need one. This is a console that may be possible to sell at $199 by the end of 2015 as component prices decline and economies of scale for custom parts kick in. In that sense, Sony has ample room to maneuver if PS4 demand softens next spring or later. Sony may well need that pricing latitude as it tries to maintain consumer interest in the home console market over the coming years.

After launching mobile game company SpringToys tragically early in 2000, Tero Kuittinen spent eight years doing equity research at firms including Alliance Capital and Opstock. He is currently an analyst and VP of North American sales at mobile diagnostics and expense management Alekstra, and has contributed to, Forbes and Business 2.0 Magazine in addition to BGR.