Quote Originally Posted by Groundbeef
But the 360 uses many more parts "off the shelf" than the PS3. Many of its components are designed specifically for the PS3.

For example, the 360 uses a standard DVD-Rom Drive. Blu-Ray will not be nearly as inexpensive as an off the shelf DVD-Rom drive for the forseeable future.

The 360 uses a standard albiet powerful graphics accelerator, while the PS3 uses a custom made graphics accelerator from ATI. Because it is designed speciffically for the PS3, the only volume discounts and production experience gains will be from increased PS3 sales. The 360 will enjoy lower costs sooner as the graphics chip is used in other computer related graphics cards.

As far as "wiggle room", currently MS holds the cards on this one. It is making a small profit on each unit. Theoretically if MS cut the retail price of the premium unit it could compete with the Wii.

This however, could backfire as consumers may decide that the price discrepancy between the PS3 and the 360 is too much. It may appear that the 360 is "cheap" or not as tech capable. I think that MS will wait out Sony before dropping prices. It has already been over a year and MS hasn't cut it yet, although they are doing some bundle deals with games included and such.
You're right about the standard DVD-Rom drive being cheaper for the foreseeable future - but at the same time, DVD-Rom drives aren't gonna get much cheaper than now. DVD players fell, what, 90% in 5 years? Next year's PS3's are almost certain to be cheaper to build than this year's. This will narrow the gap by some amount between PS3 and XBOX 360. Who knows how much though?

The bundles thing is pretty common to see - adding things while protecting the base price. Those additional games or controllers or both are extremely cheap to throw in a box. In a few years it'll probably Final Fantasy and Metal Gear or something vs. Halo 3 and Knights of the Old Republic. Sweeeet.

The ATI/off the shelf stuff isn't much of an advantage really - and price advantages from volume discounts and production advancements will be equal for either..when you get into the millions of sales numbers, you've already exhausted price cuts - ATI doesn't sell millions of any one of its graphic card models. PS3 could very likely be it's highest production unit unless a single onboard graphics processor has a great run a single year on a few motherboards.
Most of those proprietary components are derivatives of existing components and share in production advancements, components, and technology anyway. They don't re-invent the wheel to make something proprietary, just tweak existing units. Making them smaller, cooler, more reliable, etc.

I think it does pose less risk to XBox 360 in the long run though, as we've already seen - finding critical components for production isn't easy if a supplier can't meet your demand for whatever reason.

Your missing the point on "wiggle room". How much profit you make on a unit today has little affect on competitive pricing strategy.

In a fixed cost loaded industry, prices are set to maximize revenue, and the cost on each unit has no effect on price at all. This is why salaries in pro-sports have no effect on ticket prices. In a variable cost industry with heavy fixed costs like electronics, prices are adjusted to maximize marginal revenue which should maximize profit. Even if price cuts lead to Sony losing billions (which I think is possible for PS3), they'll drop the prices willingly taking a huge loss provided that decision minimizes the aggregate loss on Electronic Gaming operations as a whole. Put another way, if matching XBOX 360 price means Sony sells enough PS3 to lose 6 Billion dollars, they'll do it, if not matching XBOX 360's price meant losing 6 Billion and one dollars. Or whatever number you want to plug.

There's a lot of guesswork involved and companies miss the boat often enough. There's also implicit collusion. Microsoft has the least to gain from a pricing war if their making profit on each unit, and currently outselling PS3. I don't think they're eager to give up a cash flow just to put a squeeze on Sony just to boost the ego by gaining a bit of market share at the expense of profit. If they could see a monopoly in the gaming industry's future, maybe, but that's not going to happen. Demand elasticity produces diminishing returns from price cuts, too. It behooves both Sony and Microsoft to keep their prices high enough as long as possible to make money, but low enough to lure market share. I'm thinking the difference in price will shrink, but XBOX will always be cheaper. It's up to the consumer to put a value on the PS3's supposed advantages.

I read an article yesterday from The Yankee Group market research firm that predicts Sony will sell 30 million units by 2011, with 44% market share, to XBOX 360 27 million units and 40% market share, despite the early lead XBOX 360 enjoys. It talked about the price pressure Microsoft will put on Sony, quite a bit. I'm sure it can be found via google, Yankee Group is pretty well known. That's a huge victory for XBOX 360, IMO, and positions MS to overtake Sony next time around.