As most of you may remember recently we did a piece called “Why Does The PS3 Need To Be Slim“, in that article we pondered the question as to why does the PS3 need a slim model, I mean really. As you will see from reading it, we didn’t and still don’t think they need one but what we did think they needed if they were going to do anything was a price cut. Now people can feel how they want to about that position but what really surprised us about the responses was the number of people who assumed that if Sony came out with a slim PS3 then it would definitely be cheaper. And that my dear friends is a fallacy.
Smaller doesn’t always mean cheaper, just check the price of the iPhone WITHOUT a contract.
To think that because a PS3 could be smaller means that it definitely will cost less is a misconception. It may drive down the cost of older models, but the odds of the new model being cheaper is not high. That in fact is not true, at least not in most instances. To produce a component of significantly smaller size at a cost savings you need to be able to leverage a concept called “economies of scale”. When more units of a good or a service can be produced on a larger scale, yet with (on average) less input costs, economies of scale are said to be achieved. To be specific we argued in that article that Nintendo, Sony, and Microsoft should team up and standardize on certain core components thus creating what is called an external economy of scale and thus decreasing production cost for all of them.
We don’t want to go too far into all of that but what we do want to get across and make sure everyone understands that smaller doesn’t necessarily mean cheaper. More importantly, just because they can produce it for less doesn’t mean they will past the cost savings on to the consumer. It does look like Sony may soon debut its Slim PS3, however, its looking more and more likely that they will just drop the prices of the older models and put the price point for the new model at $399, though that is all still speculation. In fact until you can achieve some measure of an economy of scale, smaller will mean higher cost and usually much higher. To find examples of these we don’t have to look far at all, because almost everyone owns or knows someone who own an iPhone or an iPod Touch. So think about those devices, I mean right now the 32GB iPod Touch cost $399 and that is the exact same price as the 80GB PS3 and why is that?
Here’s another example, the PSP Go will retail for as much as a Wii or a basic X-box.
At first it doesn’t seem to make any sense as the majority of the components in the iPod Touch are the same as in the iPhone and the basic 8GB iPhone retails for $99 (but that cost can be deceiving). It’s actually quite simple and there is one component that drastically increases the cost of the 32GB iPod Touch and that is the hard drive. That hard drive is a very expensive component to produce, not in general though because most laptops and even netbooks come with over 150GB’s of hard drive space so what gives right? While its not expensive to produce cheap storage these days because everything has them, it does become expensive to produce storage drives that are that small and that is what drives the price of the entire device up. The storage units for the iPod Touch and iPhone are a non-standard size and even with all the people that own one judging from the current price that number is still too small to have achieved an economy of scale on those babies. Another thing to keep in about the iPhone also is that a lot of that initial cost is deferred and iPhone owners end up paying for it through their monthly plans, so that’s why they “seem” to cost less but they don’t because without a plan like if you wanted to buy one as a gift even the 8GB iPhone would cost you $299 and you don’t even want to know how much the 32GB will cost you, can anyone say a cool $699. Now that may be moot because I mean who buys an iPhone without getting a plan from AT&T, but looking at that cost gives you a real idea of the actual cost per unit and you really can get an idea of how much it cost them to produce the actual device.
With all of the said, this is an economic question. Even in cases where the cost of producing the products decreases, companies may not decrease the selling price. The selling price is at the discretion of the producer. In many cases, the companies will continue to sell at the higher price until any close substitutes enter the market forcing them to lower prices. Well that’s all folks but we look forward to hearing your thoughts on this one.