Now that Sony has reduced the price of the PlayStation 3 console to $499 (from $599), many are wondering what the response from Microsoft will be. As it turns out, the response may very well come out later this year as a result of an internal Microsoft project code named Falcon. According to Dean Takahashi of The Mercury News, Microsoft is currently qualifying a new generation of Xbox 360 electronics utilizing shrunken IBM processors and ATI GPUs. These new processors are being manufactured with a 65 nanometer production process as opposed to the current 90 nanometer process used in today’s Xbox 360 systems.

Why shrink the processor die you might ask? The most obvious answer is heat reduction. The smaller the processor die, the less heat it generates. The less heat there is – the less of a need for big fans and massive cooling systems and heatsinks. This translates to smaller system form factors and cooler running quieter systems. As Takahashi points out, Microsoft also has the option of bringing the external power supply into the console now if the overall motherboard is shrunken significantly enough. More importantly – the processor heat reduction should hopefully alleviate many of the support issues that have plagued the current generation of Xbox 360 consoles.

Another side benefit for shrinking the processor die. Many more processors can be manufactured per silicon wafer which means the cost per process actually diminishes. Yields should also improve simply because you can manufacture many more processors now. Thus, shrinking the processor die amounts to a cost reduction in processor fabrication which translates to lower overall system costs.

Of course “mums the word” right now with Microsoft and project Falcon, but one can expect a response from the company later this year. Something else to consider – Microsoft is definitely ahead of Sony here when it comes to reducing the system cost. Make no mistake about it – Sony will continue to lose money with the PS3 until it figures out a way to reduce the system cost while at the same time boost overall sales of the console.

[Check it out via DailyTech]

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