Merill Lynch's Japan-based analyst Hitoshi Kuriyama predicts delays of Sony's PlayStation 3 gaming console of 'between 6 and 12 months, with the result being an autumn launch in Japan and a late 2006 or early 2007 launch in the U.S.'
Merill's US analysts say that it's now clear that the console is 'prohibitively expensive to make.' Their latest analysis of the bill of materials finds the PS3 costs about $900 apiece to Sony. The runaway expenses are tied in particular to the PS3's much-heralded IBM Cell processor and BluRay DVD drive.
In a note to clients, Merill Lynch's Joe Asha outlined what the implications of such a significant delay would be to other companies that are highly exposed to the console:
● ATI (ATYT) to benefit. from potential PS3 delay. Sony’s problems with PS III are positive for ATI in our view, as ATI is the sole supplier of graphics technology to the [Microsoft] Xbox360.
● NVIDIA’s (NVDA) royalty stream at risk. Our estimates for NVIDIA could be in jeopardy if the PS3 ramp is pushed out. Currently we estimate NVDA will earn $78 million in revenue from Sony in calendar 2006 through a combination of software license fee, non-recurring engineering revenue, and royalty revenue. We are now modeling unit shipment of only 4 million in 2006. While the company seems optimistic that a delay ramp will have minimal impact this fiscal year, we think the absence of a significant PS3 ramp could hurt NVIDIA’s progress towards the corporate gross margin target. We also think there may be a longer term impact if PS3 loses its competitiveness to Xbox360.
● Marvell (MRVL) has about $8 in PS3. We believe Marvell supplies WLAN, GigE, and SATA ICs into the Sony PS3 and estimate that MRVL's content in this console is about $8-$10. We are currently modeling MRVL's WLAN business to grow about 60% in 2006 as the company benefits from WLAN penetration in gaming consoles and other embedded applications. Needless to say MRVL will see a negative impact from any potential delays in the PS3 launch.
● Electronic Arts (ERTS) On EA’s most recent earnings call, management indicated it expects to launch 8-12 titles for the PSX III in FY07. Lower PS III hardware units would most likely cause EA to push out some PSX III title launches. If Sony were to delay the PSX III launch to early 1QC07, our total EA sales forecast could fall by $50-100mn, as we would expect stronger sales on the xBox 360 to help offset lower PSX III sales. If EA did not scale back R&D expenses to match lower revenues, lower PSX III sales could reduce EPS by $0.05-0.10 in FY07.
● Activision (ATVI) Activision has not announced the anticipated number of titles to be available for the PSX III, but we expect fewer titles for PS III relative to the xBox 360 at launch. A delay in the PS III launch to early CY07 could result in $20-50mn lower FY07 revenues.
● THQ, Inc. (THQI) THQ has traditionally not been aggressive with titles near console launches. Therefore, we are not forecasting any PS3 revenues in CY06... If the PSX III were to launch in early 1QC07, THQ could still generate $10mn in revenues from the new console. In any case, our forecast for PSX III revenues represents only 1% of FY07 sales and a PSX III delay will not have a significant impact to our FY07 estimates for THQ.
● Microsoft (MSFT) A delayed PS3 launch would provide needed room for Microsoft to consolidate its early lead in 5th generation game consoles. The Xbox 360 met strong pent-up demand in North America and Europe following the Nov/Dec.05 launch. In fact, demand significantly outstripped supply in these two core markets for Microsoft. A delay in Sony's launch of PS3 would give Microsoft additional time to capitalize on its first-mover advantage. This would be particularly true if Sony does not launch in North America and Europe until late 2006 or spring 2007, giving Microsoft a key second holiday season to sell game consoles and software. A PS3 delay could provide upside to our estimate of 10 million Xbox 360 unit sales by Dec.06, if Microsoft is able to produce enough consoles.
