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It looks like IBM processors are good for something else other than being the central nervous system of the Sony PlayStation gaming consoles or the Toshiba television sets. Thus, according to Reuters, the American manufacturer has struck a licensing deal with Mercury Computer Systems Inc., a medical and military equipments manufacturer.

The agreement refers to the IBM’s Cell processor, and Mercury intends for the processor to become the core technology to power a range of "embedded" computers it designs for magnetic resonance image scanners in medicine to missile radar and sonar systems for military uses.

IBM and Mercury have signed a multiyear agreement according to which teams of IBM engineers will develop Cell processors specially adapted to Mercury’s requirements.

The Cell processor will be used within the Sony PlayStation gaming consoles and the future line of Toshiba TVs, which are devices demanding a very high graphic processing capacity. Although many analysts have their doubts regarding Cell’s success beyond the limits of the gaming equipments industry, IBM’s officials are convinced that the processor will find itself multiple uses on the future. "We are beginning to expand the adoption of Cell into other industries," said Raj Desai, vice president of IBM engineering and technology services -- the custom chip design unit.

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Merrill Lynch Japan predicts Sony will lose over $1 billion on hardware during its next-gen console's first year on the market--a sum it may not be able to recoup.

According to the latest issue of Japanese magazine Toyo Keizai, Merrill Lynch Japan Securities has recently calculated an analysis that the production of a single PlayStation 3 console will cost Sony approximately 54,000 yen to make ($494), as of its initial release in 2006.

Merrill Lynch Japan estimates that the machine's main components--namely its Cell chip, RSX, and BD-ROM drive--will cost about 11,000 yen ($101) each. After adding the other electronics that will be used in the PS3, the machine's production cost goes up to 54,000 yen.

Given that Sony's PS3 will face stiff competition from Microsoft's Xbox 360, the chances that Sony will release its console at its production cost is slim. Under the assumption that the Xbox 360 is expected to sell at around $299, Merrill Lynch Japan predicts that Sony will sell each PS3 at the price of 44,800 yen ($410) in Japan and $399 in America. That would mean Sony would suffer a loss of over 130 billion yen ($1.18 billion) during the first year of the PS3's release.

By comparison, the PlayStation 2 cost 39,800 ($364) in Japan and $299 in America when it launched in 2000. During its first year of release, Sony Computer Entertainment suffered a loss of 51.1 billion yen ($458 million), but it recovered the next year with a profit of 82.9 billion yen ($759 million), followed by 112.6 billion yen ($1.03 billion) the year after.

It is normal for game companies to take a loss on hardware whenever a new console launches, since they typically focus on acquiring market share rather than generating a profit during the first year. During the second year and afterwards, they can recover the losses with the savings that come from mass production and licensing fees from publishers.

However, Merrill Lynch Japan warns the normal console business cycle may be disrupted if Microsoft cuts the Xbox 360's price when the PlayStation 3 launches. The report goes on to say such a move could hurt Sony's plans, bringing a loss of 80 billion yen ($730 million) in its first year, and 50 billion yen ($457 million) in its second year. Thus far, Sony has already invested 200 billion yen ($1.83 billion) into the development and production for the Cell chip alone.

Toyo Keizai goes on to interview Sony Computer Entertainment president Ken Kutaragi, who avoided revealing the PS3's price, but hinted that it would not be marked down excessively. "Whether consumers think a product is expensive or cheap all depends on the balance between its appeal and price," he said. "Our ideal [for the PS3] is for consumers to think to themselves, 'Ok, I'll work more hours and buy it'. We want people to feel that they want it, no matter what."

"When Nintendo was selling its 16-bit machine at around 12,500 yen ($114), we sold the first PlayStation at 39,800 yen ($364)," continued Kutaragi. "The press was saying that it was expensive, but it was a huge hit. It's the same thing with the PlayStation Portable from last year. The Game Boy Advance is a same handheld gaming machine, and it costs less than 10 thousand yen ($91). On the other hand, our PSP had cost 25,000 yen ($229). But people lined up overnight to buy it, and it sold out on the day of its launch.. It all depends on whether people want it. Of course, I'm confident that the PS3 is a product that people will definitely want."

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Executives from Square Enix, Konami, Namco, Sega, and Koei sound off on their different perspectives on the next generation of hardware.

In the latest issue of Japanese magazine Toyo Keizai, representatives of five major Japanese game publishers commented oh how the game market will be changing with the appearance of the next generation of consoles, and how they plan on adjusting their business. The magazine interviewed executives from Square Enix, Namco, Konami, Sega, and Koei, which each had different views. The following is a translation of the key quotes by each of the representatives.

Youichi Wada, President of Square Enix:

"E3 was all about next-generation console specs. That's important, but what's also important is the kind of [online] services that will be provided. Microsoft is the only one that presented a service model with Xbox Live. They're one step ahead in that point....Whether we like it or not, [publishers] will need to completely change our corporate structure, development methods, and sales methods. The market will become larger, but [publishers] won't succeed unless they understand the changes in the market, and have the ability to adapt to them. There are only a few major companies in the movie industry. Companies in the game industry will also consolidate into a limited number of major publishers. The appearance of the next-generation game consoles will be the momentum behind the change."

Michihiro Ishizuka, president of Konami’s computer & video games division:

"[We will] provide one or two flagship titles for each machine, which will take advantage of their capabilities as next-generation consoles. Most of the titles that don't require full use of technology will be released on multi-platforms, including PC. We will need to narrow down on the number of titles that we release. We will release a new Metal Gear as a flagship title for the PS3 and are developing an original product for the Xbox 360. On April, we absorbed our three development studios that are listed in the stock market, which has allowed us to prepare for development for the next-generation consoles. Our aim has been to create a framework where we can share our knowledge base, and strengthen on the development towards major titles."

Yoichi Haraguchi, company vice president of Namco:

"Our business merger with Bandai will allow use to supplement each other. Our game genres do not collide, so our core users won't overlap. One thing that's very clear about the next generation of consoles is that development costs will be extreme. Up until now, we spent a lot of effort drawing the graphics, but with the next-generation consoles, everything--such as explosions--will all be done with calculations. The method of development will change. The volume of programs will increase, so porting titles to other hardware will become difficult. Characters' [facial] expressions will be more realistic, so if the translations are wrong, it will look weird to people playing in other languages. The localization will cost more than before. From our past experiences [with consoles], we believe that one winner will take all in the Japanese market, and the publishers will have to go with that winner. The American market will be a race between multiple consoles. The European market will fall between Japan and America."

Masanao Maeda, senior executive manager of Sega:

"There's no mistake that development costs will increase for next-generation consoles. But Sega doesn't see it as a big risk. The competitive landscape will dramatically change during the shift to the next generation consoles, so it will be a big chance [for us]. Sega stopped producing its own console in 2001, so we were about two years late in entering as a game publisher. That had its effects until the end. This time, it will be a chance for us since we can start from the beginning. For the past number of years, we have released Japanese-developed games in the overseas market. While some of the games were hits, many Japanese games don't sell overseas. Our basic strategy is to develop games for the overseas market. We have already established a structure for that. We aim to become one of the top three [publishers] in both America and Japan. It may be seen as difficult, but Sega is still an acknowledged brand in America, so it should be a smooth road."

Kiyoshi Komatsu, president of Koei:

"The entertainment industry will grow with the appearance of the next-generation consoles. When looking at a worldwide scale, the market will continue to expand. In addition to Japan, America, and Europe, the market in China, India, and Eastern Europe will grow in the future. We should welcome a situation where there's multiple gaming platforms, including PC. Hardware makers and software makers grow up the market together, but their interests can clash with each other, such as with licensing fees. It's not a good environment when one [console] maker has monopoly over the market. It's best to have a situation where publishers have the option of choosing another console if one company isn't favorable. Development costs will rise with the appearance of the next generation consoles, but there's no way that raising costs by 10 times will also raise profits by 10 times. Therefore, it's important to have control over development. We have the knowledge required for development management, and in addition to that, we will also strengthen our development in overseas [studios]. Whereas other publishers will need to increase their development funding by two times, we will create a [development] structure where we can do it with just an increase of 10 percent."

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