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Sony to sell PS3 chip lines to rival Toshiba

by Daniel Rook Thu Oct 18, 1:01 PM ET

TOKYO (AFP) - Sony Corp said Thursday that it had agreed to sell its production facilities for the powerful computer chip at the heart of its struggling PlayStation 3 game console to rival Toshiba Corp. ADVERTISEMENT

The deal, reportedly worth over one billion dollars, is part of Sony's efforts to refocus on its core electronics business and staunch losses from the PS3 in the face of fierce competition from Nintendo's Wii.

The two companies will set up a joint venture to produce high-performance semiconductors under the basic deal, which they hope to finalise by next March.

No price tag was revealed although the Nikkei business daily reported earlier that the total deal was worth an estimated 130 billion yen (1.1 billion dollars).

"We haven't confirmed the precise asset value," said Sony spokesman Chisato Kitsukawa.

Under its first foreign boss Howard Stringer, Sony is seeking to shed non-core assets and revive its mainstay electronics business, concentrating on products such as flat-panel televisions and digital cameras which are selling well.

The electronics giant invested heavily in developing the "Cell" microprocessor -- the brains inside the PS3.

But it is struggling to make a profit from the console in the face of fierce competition from Nintendo, with Sony's game unit deep in the red.

Although the company will remain involved in the development of the Cell, it decided to sell the production lines to Toshiba to avoid further heavy investment that analysts say is needed to reduce the production costs.

"The problem for the PlayStation 3 is that the production cost is too high," said Tatsuya Mizuno, an analyst at Fitch Ratings.

"It is difficult to maintain a high price because of the competition. That means it is difficult for them to get an adequate return on their investment."

Sony refuses to say exactly how much it has spent on the PS3 but admits that it will initially lose money on each console after spending hundreds of millions of dollars on new technologies such as the Cell processor.

For Toshiba, which is enjoying soaring profits on the back of strong sales of memory chips used in music players such as Apple's iPod, the deal means that it will expand its semiconductor business and secure orders of chips for the PS3.

Toshiba, along with IBM, helped to develop the Cell processor, which Sony says is 40 times faster than the chip that runs the PlayStation 2.

But elsewhere Sony and Toshiba are arch-rivals, waging a fierce war to set the industry standard in high-definition DVD.

Sony will also sell Toshiba its operations for the RSX graphic processor used in the PS3.

With sales of the console struggling, Sony needs to reduce losses from the game division to a manageable level, said Osamu Hirose, analyst at Tokai Tokyo Research Center.

"In this context, the spin-off of the chip business, which requires continued and heavy investment, is positive for Sony," he said.

Earlier this month Sony cut the price of the PS3 in Japan and Europe as it tries to catch up with Nintendo, a move that analysts said would make it harder for Sony to turn a profit from the console.

While Sony put the emphasis on chip power and ultra-realistic graphics for the latest addition to the PlayStation series, Nintendo opted to develop an easy-to-use console that would appeal to a wider audience.

The success of the PS3 is considered vital to a revival at Sony, which under Welsh-born Stringer is in the midst of major restructuring including thousands of job cuts and the recent flotation of its finance arm.

The price of Sony shares gained 30 yen or 0.6 percent to 5,430 on reports of the deal, which was confirmed after the close of trade. Toshiba slipped two yen or 0.2 percent to 1,015.