The game console business is kinda crazy considering that the typical model is to lose a ton of money early then hope the console is successful enough to be profitable later in it's life cycle.  Forbes has announced that Sony has lost $3.3 billion since the launch of the PlayStation 3.  Part of the reason they have lost so much money is to be competitive with the Xbox 360.

It is common to initially sell your console at a loss then as you start saving money on cheaper manufacturing price vs cost balances out.  Sony chose to drop the price of the PS3 $200 in it's first year to compete with the Xbox 360 without introducing $200 in manufacturing saving.  The problem with this strategy is the more consoles you sell, the more money you lose.  You also hope to sell a lot of games to offset this initial loss.  In Sony's case they they have not sold enough games to cover the loses make selling the game console. 

I think that part of the reason all this news is coming out now is to lessen the blow that there will probably not be a price cut by Sony at E3.  It has been leaked that the 360 will be getting a possible $30 price cut at E3.  One might think that Sony would respond with their own price cut but this news makes it sound like that may not be possible.  Now the Xbox 360 is currently a profitable business for Microsoft and they will have their first fiscal year end this month were they did not have a single quarter of loss on the books.  It will be interesting to see if Sony will continue to lose billions on the PS3 or if they will find alternatives to help cover the loses on hardware.

wired.com - sony-loses-33-b