A look at how the PS3 got to be $600

While the entire internet (at least the gaming part) continues to reel from Sony's $600 price announcement, we have to consider just how it came to be that the video game console leader decided to create such an expensive piece of machinery. There's no confusing this: Sony has known for some time that the PlayStation 3 would cost more than any game system before it (two jobs, remember?). But what corporate machinations influenced that decision?

Last week, Next Generation ran a fascinating article written by David Cole, of strategic market research firm DFC Intelligence, following the circumstance that resulted in the unpopular price tag. With the growing homogenization of consumer technology, and increased competition, Sony -- under the direction of Ken Kutaragi as head of Sony's semiconductor operations -- looked to custom-built technology like the Cell processor and Blu-ray to distinguish their product from the others (compare this to Microsoft's more nimble strategy of outsourcing the 360's chip-design to IBM).

Kutaragi was demoted after being passed over for the role of CEO and, when former Sony Pictures head Howard Stringer assumed the position, the relationship between the content and technology divisions of Sony became even more intimate. Stringer "quickly dubbed the PlayStation 3 as one of the company's 'champion' products." Kutaragi's desire to stratify the console market with Cell technology in effect wed Sony to the unpalatable prospect of charging an unprecedented price. Coupled with Sony's desire to not only push their own content on HD discs, but to control that medium with their proprietary Blu-ray format, the final price was escalated by two very advanced (and very expensive) pieces of Sony technology.

Continue reading for some thoughts on why the price may not matter ...

During the hectic Xbox 360 holiday shopping craze, Slate's "Everyday Economist" Tim Harford wondered, considering the prices they were fetching on eBay, "Why doesn't Microsoft price them at $700 instead?" Microsoft was already losing money on every console sold and, as a public company, that's got to be a hard thing to shrug off. If 360s were netting in excess of $700 on eBay, shouldn't Microsoft have taken advantage of that demand to help offset the initial investment?

Like consumer electronics (DVD or, perhaps, Blu-ray players), prices start off high -- appealing to the early-adopter audience who absorb the brunt of the cost -- only to lower to more palatable mass-market prices once efficiencies of scale are reached and manufacturing processes are streamlined. Sony could be modeling their admittedly very high-tech PS3 after this model (which has earned them some small amount of success in the similarly competitive world of consumer electronics), opting for more gradual price adjustments instead of the long term static prices we're used to today.

The problem is, if Sony chooses to follow this model (that is, if the price will drop after initial peak demand is fulfilled and then continue to drop) will consumers know enough to base their purchasing decisions on that future possibility when an Xbox 360 will cost them significantly less now? In a follow up to his Xbox 360 piece, Slate's Harford returned to the question with some more input on the high demand on eBay being related to the paucity of gamers willing to resell their newly earned 360s: "only a few consoles are up for sale and only the most desperate buyers compete for them. If more people put their consoles up for auction, the price would drop."

If consumer perception reflects a belief that Sony's price will remain static, a larger worry for Sony may be waning publisher support. With next-gen development costs increasing, it will be proportionally difficult to persuade publishers to isolate their titles to one platform, especially when that platform is being sold as a (relatively cheap) next-gen movie player and not a gaming console. As Cole concludes in Next Generation, "The PlayStation 3 needs to justify its price difference as a game machine." They haven't done that yet ... but there's still time.