Merrill Lynch Analyzes PlayStation 3/Xbox 360 Conflict

Merrill Lynch, the investment advice firm, has published a detailed analysis of the potential fortunes of Sony and Microsoft in launching the next generation of PlayStation and Xbox consoles. Though the report mainly focuses on the near-term window of the next one or two years, the evidence cited indicates a belief that the Xbox 360 will win out over the PS3 in the early stages of the next generation. The thrust of Merrill Lynch's argument is that Microsoft's first-to-market advantage isn't as important as its cost benefit and pricing strategy. The analysis cites multiple expensive components of the Sony hardware, including its Blu-Ray drive and Cell processor, as factors which may drive the PlayStation 3's launch price point up to around $500. "Based on the cost analysis as well as our analysis of the two companies' strategies," reads the report, "we think that the Xbox 360 (including the detachable hard drive) could be selling for $249 by the time the PS3 launches for approximately $500." Key to that hypothetical $249 Xbox 360 price point, in the analysts' estimation, is Microsoft's ability to loss-lead with its system. "[Sony's] financial situation raises questions about just how much money Sony is going to be willing to lose," says the analysis. "CEO Howard Stringer has made some public commitments regarding the target level of profitability for the March 2007 fiscal year, and we're not sure those targets are consistent with large losses on PS3 hardware. Meanwhile, Microsoft has a less expensive platform, a 6-month lead on PS3 and the willingness to forego margins in the near-term in order to pick up market share." Though the report paints an accurate-seeming picture of the near-term war between the two systems, the analysis does neglect Sony's current PlayStation 2 system, which continues to be profitable. Sony has previously spoken of its desire to maintain a 10-year lifespan for the platform, and will continue to earn revenue on the back of the admittedly aging hardware with a continued stream of new and exclusive software, whereas Microsoft appears, according to many analysts, to be focusing its attention more extensively on the new hardware, which will have a limited install base for the first year of its lifespan.