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Toshiba losing money on first HD DVD players

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Toshiba losing money on first HD DVD players

El Segundo (CA) – The first generation of HD DVD players are priced 50% below their Blu-ray rivals. While it is no secret that the HD DVD camp is using a lower price to make up for feature disadvantages, a market research firm today reported that Toshiba in fact is taking a loss: The actual cost of the device may be 40% higher than the retail price.

Bringing a product to market below actual cost has been a common sight in the game console industry for several years: Sales of games support the sales of consoles, which are initially priced substantially below production cost: Over time the cost of individual components of the console eventually drops and revenues catch up with production cost, resulting in gradually increasing profits.

Toshiba apparently hopes that a similar concept may work for its HD DVD player in the battle against competing Blu-ray devices, according to Isuppli. However, Toshiba does not have product sales to make up for a loss the company may be taking for its first-generation players – the incentive is rather to provide consumers a convincing reason not to buy expensive Blu-ray players. The first generation of HD DVD players are priced at $500 and $800, while Blu-ray players are selling for at least $1000.

According to Isuppli, the bill of material (BOM) for Toshiba’s HD-A1 clearly exceeds its $500 U.S. retail price. The market research firm estimates the player’s material cost at $674, which excludes costs for manufacturing, testing, cables, remote control and packaging. Those additional costs could easily push the total cost of the HD-A1 to more than $700 per unit, Isuppli said.

“The Toshiba HD-A1 is basically a combination of a low-end PC and a high-end DVD player,” noted Andrew Rassweiler, and senior analyst at Isuppli. At its core there is an Intel Pentium 4 processor whose cost is estimated at $119; Broadcom video decoding and Analog Devices DSP add $18. The HD-A1 also uses $125 worth of memory, including a 1 GB DIMM from Hynix and three other types of DRAM, a 256 MB flash memory disk from M-Systems and 32 MB of Mirrorbit flash memory from Spansion – bringing the integrated circuit cost and processors to about $366.

Then add HD DVD drive at about $200 as well as necessary electro-mechanical, mechanical passive and discrete semiconductor devices – for an estimated BOM total of just under $674 – and include manufacturing, packaging, shipping and marketing (which typically adds another 20% to the cost) and you end up with a cost that is well above $700 and may be even touching $800.

“It’s unusual to find this level of subsidization outside of the video-game console and mobile-phone markets,” explained Chris Crotty, senior analyst, consumer electronics at Isuppli. “Presumably, Toshiba anticipates making back any initial HD-A1 losses with subsequent products. There is little question that Toshiba had to use a high-cost design for its first model. But there is a big question as to whether pricing its player so much less than Blu-ray is worth the financial risk,” Crotty added.

Isuppli expects factory shipments of all next generation DVD equipment – both HD-DVD and Blu-ray – will reach 65 million units in 2010, up from 1.6 million units in 2006. Eventually, there will be a succeeding technology that is pushing the other one out of the market, but it is unclear which one that may be: “This is not a repeat of VHS vs. Beta,” Crotty said. “The market dynamics are very different. The most likely outcome is stalemate, with the savvy manufacturers introducing dual-format players as early as the 2006 holiday season.”

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