Teardown of Sony's PlayStation 3

According to iSuppli, the device costs significantly less to build than when it was first released in 2006, and is nearing break-even

By Arik Hesseldahl

One of the great articles of faith in the consumer electronics industry might be stated thusly: "Time heals all costs."

Basically it means that over time the parts used to make a popular product will become less expensive, or that two parts might be combined into one, or that better parts will become available at the same cost and so improve the product.

And it's proving to be true for Sony (SNE) and its flagship gaming system, the two-year-old PlayStation 3. According to a teardown analysis of the latest generation of the product conducted by the research firm iSuppli, the device now costs significantly less to build than it did when it was first released in 2006.

Profiting from the Games

Back then, an iSuppli analysis pegged Sony's "bill of materials"—the total cost of all the components used to build it—at more than $840 for the model that sold at the time for $599, and $805 for the starter model that sold for $499, making it a money-loser for Sony. It still appears to be a loser two years later, iSuppli says, but the loss is shrinking: The PS3 now costs $448.73 to build while selling for $399. Sony subsidizes the hardware price but makes its profits on the many games that it and other game publishers sell to run on the machines.

Having sold the PS3 at a loss for its entire life span so far, iSuppli says, Sony may reach the break-even point with the PS3 in 2009, and start turning a profit on the consoles after that. "Every time we do a teardown, it's sort of backward-looking," says iSuppli analyst Andrew Rassweiler. "Sony is one step ahead of us and probably has plans to re-spin the hardware to reduce the costs yet again," he says.

One key difference in the latest console, Rassweiler says, is that Sony has in many cases combined two or more chips into one, or integrated some low-level chips. When it was first released, the PS3 sported a total of 4,048 different parts, including those in the handheld controllers. Now, that number has come down by about 30%, to 2,820. "At the end of the day the PS3 is doing the same thing it did before, but with two-thirds as many parts," Rassweiler says.

Fewer Chips Inside

On top of that, two key chips in the PS3 have moved on to more advanced manufacturing technology. In 2006, the main chips in the console, like the Cell processor and the Nvidia (NVDA) Reality Synthesizer, which handles graphics, were built on 90-nanometer manufacturing technology. Now they're even smaller, and are built on 65-nanometer processes, meaning they cost less to make than before. ISuppli estimates the Cell chip costs Sony $46, down from the $64 in 2007, and $89 in 2006.

The Nvidia chip has come down in price, too. It now costs $58, down from $83 last year, and $129 in 2006. In both cases, Rassweiler says, the chips have been significantly redesigned with new features for functions that used to be handled by separate chips inside the system, which also helps reduce costs.

And smaller chips require less power. That means Sony now ships the device with a less beefy—and less expensive—power supply that costs $21.50, vs. $30.75 before. "It's a slightly greener machine than it was before," he says.

Hesseldahl is a reporter for BusinessWeek.com.