Merrill Lynch Japan Securities, in the latest issue of Japanese magazine Toyo Keizai, released an early analysis of that a single Playstation 3 will initially cost Sony $494 to produce in 2006, with the main components (Cell, RSX, and BD-ROM drive) costing $101.

Merrill Lynch Japan, assuming that the Xbox 360 sells for $299, predicted that each Playstation 3 will sell for $410 in Japan, and $399 in the United States, which means that Sony could suffer a loss of as much as $1.18 billion in the first year of the Playstation 3’s release.

It’s standard practice game companies to take a loss on new hardware in the first year in order to gain market share, then gain the investment back by decreasing costs in the following years, and through royalties from various third-party publishers; however, Merrill Lynch Japan warns that the console business cycle of profiting after the first year of a console life may be damaged if Microsoft slashes the price of the Xbox when the Playstation 3 is released.

Provided by Geekstreak