Sony is planning to release a 40GB PlayStation 3 (PS3) later this year, according to Microsoft's director of technical strategies, Andre Vrignaud.
Vrignaud said Sony will release a new $399 (£200), 40GB PS3 in October in an effort to better compete against the Nintendo Wii and Microsoft Xbox 360.
"A single, $599 SKU [expected this fall when 60GB inventory depletes] would be untenable - if they don't move significant hardware this holiday they'll basically be dead for this generation," Vrignaud wrote in an email to Level Up.
"My prediction is that you're going to see the creation of a new, low-end SKU this holiday. It'll likely remove integrated Wi-Fi, memory card reader, and most controversially, all backward compatibility," he added.
"You'll see a new Wi-Fi dongle made available. And finally, this low-end SKU will likely come with a smaller 40GB hard drive. The low-end price will be set at $399, with the higher-end 80GB SKU dropping to $499."