Now that we (finally) have some next gen prices from Microsoft, let's make some wildly baseless predictions on the cost of the PS5! For those who missed it, the beefy Xbox Series X will drop at $499 and the small, yet mighty Series S will land at $299. We haven't seen any reports on manufacturing costs for the X, but I can't imagine Microsoft is making any money on the consoles at those prices given the crazy specs. In fact, many people actually thought the MSRP could be as high as $600. I suspect they are selling at the break even cost for each of these, but it's also possible that Microsoft may be subsidizing the red ink through the rest of their business empire or through future projected revenue from subscription services (Game Pass, Live, etc). Regardless, I think both of these consoles are aggressively priced and the ball is firmly in Sony's court.
Not too long ago, it was revealed that Sony was struggling with component availability and build costs, in large part due to their lightning fast SSD. Estimated manufacturing cost is around $450, although we don't know if that is for the full fat PS5 or the discless version. The console space has changed a lot in the last ten years and no company wants to lose money on hardware sales (although this had been the strategy in many previous generations). While the Playstation brand is hugely successful and a very dependable money maker, Sony is not the trillion dollar behemoth Microsoft has become over the last five years. It takes a LOT of traditional games sales (AKA a very high attach rate) to make up for a $50 loss on hardware. As we approach the end of the PS4's lifespan, the attach rate is around 10. With licensing fees hovering around 10% of sales price, Sony only brings in $6 per sale of a third party game that costs $60. Do the math and that's a total of $60 revenue for all ten copies of Madden purchased by a casual PS4 sports fan (10% x $60 x 10). The numbers get worse if those games cost less than $60 and better if they are first party games (70-95% to Sony?) or third party PSN digital sales (~30% to Sony). When you consider those numbers, a $50 loss on a console is actually pretty daunting, even when you attempt to subsidize it over the lifespan of a console.
So we've established that it doesn't make much sense for Sony to take a loss on selling standard consoles, but the all-digital console and our looming all-digital future make this a more difficult math problem. Things are changing on the retail landscape and more than half of all games sales are now digital. Every game sold for the discless console will be digital while 60% or more of the copies sold for the regular console will also be digital. Sony could net a much more palatable $18 (~30% of $60) per third party sale due to the favorable economics of the Playstation Store.
So where does this leave us? I predict Sony will sell each console at the break even cost (factoring in logistics, retail partners, etc).
PS5 All-Digital: $450