Toshiba is gunning for an early lead in the high-stakes battle for share in the market for the newest high-definition DVD players. The Japanese consumer electronics giant got its HD-A1 HD-DVD player onto retailers' shelves before the competing flavor of DVD player. It's also selling the machines at a loss.
That's the verdict of market research firm iSuppli, which carried out a so-called teardown of the machine, picking it apart to determine what's inside and how much it cost to build. iSuppli analyst Chris Crotty reckons the internal electronics cost about $674, bringing the total to more than $700 when components such as packaging and manufacturing are included.
The players sell through retailers like Best Buy (BBY) and Target (TGT) for $499, leaving Toshiba (TOSBF) with a per-unit loss of $200 or more.
STAKING OUT TERRITORY. Competing players using the rival Blu-ray format favored by Sony (SNE), Samsung, and others are expected to hit the market soon with prices of $999 or more. “Toshiba wants to get a head start and build an early lead,” Crotty says.
This kind of pricing strategy has been tried before, most notably by Microsoft (MSFT), which took a loss on its first Xbox gaming system and later the Xbox 360 (see BusinessWeek.com, 11/22/05 “Microsoft's Red-Ink Game”) in hopes of making a profit on associated games. “You don't usually see a manufacturer subsidizing a product like this except in the video game space,” Crotty says. A Toshiba spokesman reached in Boston had no immediate comment.
What's at the root of the costs? Inside the player are chips from companies like Intel (INTC), Broadcom (BRCM) and Analog Devices (ADI). The Intel chip is a Pentium 4, which goes for about $65. The Broadcom chip is used for high-definition video decoding, or presenting the data from the disk as video. ADI's digital signal processor chips (there are four) convert real-world analog data into digital information and vice-versa. The unit also contains memory chips from Hynix Semiconductor, Spansion (SPSN), the former memory units of Advanced Micro Devices (AMD), and M-Systems (FLSH).
FIRST OUT OF THE GATE. Toshiba is also selling another player, the HD-X1, for $799, and is pressing ahead to build a lead as rivals in the Blu-ray camp struggle to get their products out the door. Sony includes Blu-ray-capable computers in its Vaio notebook line (see BusinessWeek.com, 6/19/06, "Sony's Pretty, Pricey Picture") but recently announced that the release date of its first dedicated Blu-ray player has slipped to October. Samsung is expected to be the first to bring a Blu-ray player to market at a price of $999.
Some observers are comparing the battle between HD-DVD and Blu-ray to the 1970s tussle between the VHS and Betamax videocassette formats. Crotty says those comparisons aren't valid. “It's a completely different market with very different dynamics,” he says. “Instead of one format beating the other, I expect there to be a stalemate. Smart manufacturers will be building dual-format players soon.”
Later in the year, some dual-format players that support both Blu-Ray and HD-DVD are expected, and at least one may come from Samsung.
AN IRONIC TWIST. Crotty reckons that consumers will snap up a combined 1.6 million Blu-Ray and HD-DVD players by the end of 2006, and that the market will reach 65 million units by 2010.
All this presupposes that manufacturers get the parts they need. It turns out there's a huge shortage on a key component known as a pickup unit. This is the part used to shine the laser on the disc and read the data, and is used in both Blu-ray and HD-DVD drives. A Japanese firm called Nichia makes them, and demand is currently outstripping supply, he says.
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