Toshiba losing money on first HD DVD players

Share on facebook
Share on twitter
Share on linkedin
Share on whatsapp
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.”

Related article:
First reviews positive for Toshiba HD DVD as supplies sell out fast