5G Smartphone Manufacturing Puts the Pinch on Next-Gen Game Console Pricing

According to a Bloomberg report, Sony Corporation (SNE) is facing high manufacturing costs of PlayStation 5, with scarce components and erratic supply of raw materials compounding its problems to set a balanced retail price. In addition, the impending launch of Xbox Series X by arch rival Microsoft Corporation (MSFT) has forced the company to adopt a waiting game in its price-setting decision to avert being too overpriced.

Death Knell for PS4?
Sony aims to gradually replace PS4 with PS5 in the upcoming holiday season. Since its retail debut on Nov 15, 2013, PS4 has been a key revenue driver with sales recently topping 106 million units, making it the second best-selling home console in the history of video games. In addition, more than 1.15 billion games were reportedly sold for PS4, generating additional revenues for the company.

However, with PS5 launch in the horizon, sales have been on the wane as players seem more eager to wait for the new product. Sony had earlier disclosed the product features of the upcoming model with various market teasers, revealing its several hardware enhancements. These include a faster hard drive that will significantly reduce or eliminate load times, a 4K Blu-ray drive and a more adaptive controller. The company is also reportedly splurging on the cooling system to ensure that heat dissipation from powerful chips inside the console does not cause any issue for gamers.

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Breaking Tradition
Traditionally, Sony finalizes the pricing of a console, scheduled to be released in a particular year, in February and follows it up with a mass production in spring. With PS5, the company, however, is likely to deviate from this pattern and employ a cat-and-mouse approach. Various insiders familiar with the proceedings have revealed that the dearth of a steady supply of DRAM and NAND flash memory, due to burgeoning demand from 5G smartphone manufacturers, has escalated the production costs of PS5 to around $450 a unit. Experts opine that this is likely to force the company to set the retail price at $470 per unit with similar profit margins as that of PS4. This, in turn, is likely to make it hard to sell as even the most expensive console of Sony to date – the PS4 Pro at $399.99 per unit – is often discounted to generate sales.

Moreover, the imminent launch of Xbox Series X by Microsoft has forced Sony to hold back its pricing decision. Sony and Microsoft have often crossed swords with each other with respective gaming consoles — PS4 and Xbox One. The company apparently does not want to set the price too high to be viewed as being overpriced, thereby losing on market competition.

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Worth a Gamble?
Sony has reportedly shelved plans to develop a new mirrorless camera this year owing to the constrained DRAM supply. The company is instead focusing on the launch of PS5, keeping the pricing factor under wraps. Notably, videogame companies often keep slender profit margins from hardware sales or even undercuts the production costs to rake in more money through additional sale of lucrative gaming software and online subscription services. Sony is likely to employ this tactic for PS5 with its CEO even hinting that the business should be gauged by the number of active users and not by the quantum of hardware units sold. The ploy appears to be all the more likely with Microsoft launching the updated Xbox version sometime in June.

Meanwhile, Amazon.com, Inc. (AMZN) has forayed into the gaming domain with its nearly $1 billion acquisition of Twitch, a leading live streaming platform for gamers. Alphabet’s (GOOGL) gaming platform Stadia has also outsmarted rivals by enabling users to stream games online on any device like smartphones, laptops, desktops and tablets or on televisions with the aid of Chromecast media stick connection, without shelling out extra money for expensive gaming consoles and PCs.

With rivals creating such significant inroads in the gaming domain, critics wonder whether Sony’s PS5 gamble would be worth it.

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Read more from Supriyo Bose at Zacks.com

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