Market research firm iSuppli has torn down the PlayStation 3 to see what's inside. In doing so, iSuppli confirmed what we reported back in February: the PS3 is expensive to manufacture and Sony is taking a serious hit on each console sold.

Describing the PS3 as an "engineering masterpiece," iSuppli estimates that the more expensive $599 console costs $840.35 to build, leaving Sony with a $241.35 loss on each console. The picture is worse for the cheaper, $499 version. Sony takes a hit of $306.85 per $499 console sold, due primarily to the lack of any substantial savings from the hardware differences between the two versions of the PS3. For instance, the 40GB difference in hard drive space between the two versions of the PS3 only saves Sony $11 and omitting 802.11b/g on the cheaper console only saves Sony an additional $15.50.

iSuppli's teardown report shows three big cost centers for the PS3. Topping the list is the Reality Synthesizer from NVIDIA, which handles the PS3's graphics. According to iSuppli, Sony's cost for that chip is $129. Sony's decision to outfit the PS3 with Blu-ray costs $125 per unit, while the Cell CPU from IBM runs $89. Miscellaneous other components and manufacturing costs add another $148 to the total; the rest of the costs are broken out in the chart below.



Data source: iSuppli

If Sony is steering gamers towards the high-end PS3, it certainly makes sense from a cost standpoint as the consumer electronics giant's losses are much less on the $599 console. It also means that the major price drop for the lower-priced console for the Japanese market that Sony announced in September is an especially bitter pill for the company to swallow. With the console selling for approximately $402 in Japan at current exchange rates, Sony is losing almost $400 per low-end unit sold there.

iSuppli points out that money-losing consoles are not uncommon, with sales of games and services making up for the loss. With that in mind, the research firm says that "the size of Sony’s loss per unit is remarkable, even for the video-game console business."

Making a buck on the Xbox 360

It's a gloomy picture, but there is light at the end of the tunnel. When iSuppli tore down an Xbox 360 around this time last year, the firm estimated that Microsoft was losing $126 on each 360 sold. Microsoft is whistling a much happier tune now. Revised component costs for the Xbox 360 indicate that costs have dropped to the point where each $399 Xbox 360 sold costs $323.30 to makeleaving Microsoft $75.70 in the black on each system, before marketing and other costs are figured into the equation.

The two biggest points of contrast between the PS3 and Xbox 360 in terms of component costs are what iSuppli calls the "motherboard"CPU, GPU, memory, controllers, etc.and the optical drive. The PS3's "motherboard" costs $500 for Sony, while the Xbox 360 motherboard is only $200down from a $370 figure at launch. The Xbox 360's vanilla DVD optical drive is only $19.45, over $100 cheaper than the Blu-ray's price tag.

As we said in May, Sony's decision to use the PS3 to gain a Blu-ray beachhead is an expensive one. If the PS3 sells like gangbusters once the supply constraints evaporate sometime in the first half of 2007 and Blu-ray wins the battle against HD DVD, the decision will have been worth it.

In the short-term, Sony's earnings will take a hit for fiscal year 2006. Longer-term? Manufacturing costs will drop and some day Sony will even make a few bucks on each PS3 sale.