GameDaily BIZ: Let's start by talking about the PS3 price cut. This is I think the earliest in a console's life that it's had its price reduced. Are you worried that this looks like a move out of desperation?

Phil Harrison: We launched PlayStation 1 in September of 1995 and at E3 in May of 1996, we dropped the price by 100 bucks... So it's exactly the same business plan that we have followed for PlayStation 1 and PlayStation 2. This is not a new path for us; it's a well trodden path. Because we control the manufacturing and we control the design of the machine, we can engineer out cost quickly and pass that on to the consumer through a price cut, or add value, which is what we've done with the 80GB SKU and Motorstorm. So I think it's a good strategy.

BIZ: Most people would say that $499 is still quite expensive for the average consumer, and some would argue that in order for Sony to really make an impact you'd need to match the Xbox 360 at $399. Would the financial hit at $399 be too much for Sony to take? What went into the decision to drop to $499?

Harrison: I think just looking at the cost of the components and the value of the machine, a $100 price cut is a great achievement � adding that value, reducing the price to the consumer, so we're really happy with that approach. And the reaction from the very fastest sales channels that we can measure, like Amazon and some of the other online retailers... [he makes "whoosh" sound while pointing up].

BIZ: How much do you anticipate this boosting sales through the rest of this year?

PH: A lot. I'm probably the wrong person to ask from a North American perspective but I can see that the [initial reaction] is pretty strong, so it's off to a good start. [Note: Sony more recently said sales at their top 5 retailers increased 135 percent - Ed.]

BIZ: Can you talk about how much it costs Sony to make the PS3 now? Is the box still selling at a loss at $499?

PH: If you look at the price and cost curve of PlayStation 1 or 2, the most expensive machines are the ones you make at the beginning and the cost basically goes down like that [angles hand downward]. However, if you look at the line in detail it actually has some variation up and down as time goes on because of open market issues like currency, because of supply of commodity components like memory and things like that. So, although the downward trend is the right direction to be headed in, within the trend there's going to be some dynamic range. We don't actually disclose the details of this because it's our competitive advantage, but we know what the business model is, which is to get the installed base grown quickly and then we make money, lots of money, from software and services. [Note: Sony recently said its Q1 loss in the gaming division was mostly attributable to "the strategic pricing of PS3 at points lower than its production cost." - Ed.]

BIZ: An executive from a publisher this morning � I think it was Capcom � said that he'd expect another PS3 price cut some time later this year. Any thoughts on that?

PH: I have no idea. Also, my stock answer to those kinds of platform questions is I'm a software guy and I'm completely the wrong person to ask...

BIZ: True, but Sony has made you one of the key spokespeople, one of the faces of PlayStation...

PH: Well, from a software point of view, anything that drives greater installed base of PS3 is a good thing, and we're really happy with a $100 price cut. But I think from an industry point of view and a consumer point of view, the price cut is only one moment in time; what people should really focus on I believe is what we showed yesterday, which is a price cut supported by a slew of incredible games. Those two things combined is what makes a platform.

BIZ: It seems like the trend for third parties is to develop for 360 and then bring those games to PS3, which means the games are not taking full advantage of the PS3's power and it's up to the first-party games to show off the PS3's power. How will you convince third parties to design specifically for PS3 instead of porting or tweaking code? How can Sony reverse this trend?

PH: Well, I'll take the compliment � if it was intended anyway � that the first-party titles [look great]. We are clearly demonstrating the PS3 is capable of some amazing things and if you approach the architecture from the right direction, your games will shine on the platform. It's very natural, however, to see what some of the third parties are doing. They started to work on Xbox 360 before they did on PS3; they got some tools and technology and know-how established on the format before PS3. That situation will reverse fairly quickly organically, but what we're doing from a worldwide studios point of view is we're actually shifting some of our core technologies from exclusively being available to our studios to supporting third parties as well � all third parties.

BIZ: Right, Edge...

PH: Edge, exactly. And that is delivering some of the core technologies that you saw here this week. Those same technologies are now available to our third parties.

BIZ: As an example of what I was talking about, the Call of Duty 4 trailer at the Microsoft conference looked amazing, but the game for some reason just didn't look as solid when it was shown at the Sony conference. But you believe this will even out as time goes on and developers take advantage of Edge?

PH: Exactly, and perhaps not surprisingly, I didn't get an invite to the Microsoft conference so I didn't get a chance to see that.