It is not unusual for consumer electronics manufacturers to pour money into research and development, sell at a loss when a new product is released and make up the deficit with high-volume sales in subsequent years.
However, the magnitude of Sony's PS3 losses, and the length of time it will take to recoup them, have startled games sector analysts.
Sony's admission that clawing back the cash will have a negative impact on the group's financial results for some time came to light in its most recent filing to the US Securities and Exchange Commission.
The Form 20-F filing, which is mandatory for non-US companies with US-based shareholders, revealed losses in the year ending 31 March 2007 (the first financial year in which the PS3 figured) of ¥232.3bn (US$2bn).
Although this figure is high, a substantial loss is to be expected. R&D costs for the relatively simple PS1 launched in 1996 were estimated at close to US$500m.
But the PS3 was a far more ambitious product. Sources close to the company estimate that each PS3 console cost US$800 to manufacture when it was launched in 2006, let alone multi-billion dollar R&D costs.
That production bill will have reduced as Sony refined the manufacturing process. But losses for the year ending 31 March 2008, by which point over nine million PS3s had been sold, were still running at ¥124.5bn (US$1.1bn).
The PS1 and PS2 will have paid back their R&D and early manufacturing costs because they sold in such high volumes over a long period of time.
While this business model has been standard among consumer electronics firms, the problem for the PS3 is that product cycles are becoming shorter as competitors leapfrog and customers become more demanding.
This leaves fewer years to recoup R&D losses with high-volume sales.
Howard Stringer, chief executive at Sony, stated last week that returning the games division to profit is a top priority for Sony.
Sony will look to recoup losses on sales of consoles and software. Currently PS3s are on sale for between US$500 and US$700, depending on which games the retailer has bundled with the console.
Popular PS3 games sell at between US$60 and US$80, and less popular titles as low as US$30. After retailers and distributors have taken their cut, Sony is likely to make anything from 40 to 75 percent margin on these sales.
At this rate, the PS3 may never be anywhere near as profitable as earlier PlayStation models.
However, with every console sold Sony is also seeding homes with Blu-ray players for which it can sell Blu-ray DVD movie titles at much higher margins.
Thus, while the games division loses money on PS3s, the benefits to other parts of the Sony empire may outweigh the losses.
PlayStation 3 costs Sony dear
By Andrew Charlesworth on Jun 26, 2008 7:40AM