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ISuppli ripped apart one of the devices and found that components cost $674, far exceeding the $499 retail price. Add in manufacturing, cables, remote control, and packaging, and the cost could easily exceed $700.

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SAN FRANCISCO — Toshiba Corp. is taking a substantial loss on sales of its new HD DVD player in hopes of buying a head start in the battle for the next generation of DVD technology, according to a "teardown" analysis conducted by market research firm iSuppli Corp.

According to iSuppli's teardown analysis, bill-of-materials (BOM) costs for Toshiba's HD-A1 HD DVD total an estimated $674, far exceeding the unit's $499 U.S. retail price. The estimated BOM figure excludes costs for manufacturing, testing, cables, remote control and packaging—costs that could easily push the total cost of each unit to more than $700, iSuppli (El Segundo, Calif.) said. iSuppli's analysis suggests that Toshiba is subsidizing the HD-A1 in an attempt to gain early market share over players that use the rival Blu-ray high-definition DVD standard, the firm said. Initial Blu-ray players, which are slated to cost $999 or more, are scheduled for launch by Samsung Electronics Co. Ltd., Sony Corp. and others this summer. iSuppli's analysis also revealed that, like many early models, the HD-A1 does not have an especially efficient design, the firm said. "The Toshiba HD-A1 is basically a combination of a low-end PC and a high-end DVD player," said Andrew Rassweiler, teardown services manager and senior analyst for iSuppli, in a statement. The HD-A1 utilizes a general-purpose microprocessor instead of more cost-effective application specific standard product (ASSP) semiconductors typically used in consumer-electronics products, iSuppli said. The HD-A1 also employs an Intel Corp. Pentium 4 as the main microprocessor, as well as Broadcom Corp.'s BCM7411 for high-definition video decoding and four ADSP-2126x SHARC programmable DSPs from Analog Devices Inc., according to iSuppli, which estimated that the total cost of these chips is $137. The HD-A1 also uses $125 worth of memory, including a 1-gigabyte dual inline memory module (DIMM) from Hynix Semiconductor Inc., three other types of DRAM, a 256-megabyte flash memory disk from M-Systems and 32 megabytes of MirrorBit flash memory from Spansion, iSuppli said. Adding the memory chips bring the total cost of ICs used in the HD-A1 to roughly $247 per unit, according to the firm. "It's unusual to find this level of subsidization outside of the video-game console and mobile-phone markets," said Chris Crotty, iSuppli's senior analyst covering the consumer electronics segment. "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." Product reviews of the HD-A1 have been mixed, iSuppli said, and the unit lacks the full 1080-pixel resolution available in the competing Blu-ray models as well as in Toshiba's own $799 HD-XA1 version of the player. Unable to come to an agreement on a next-generation DVD standard last year, Toshiba and its rivals each moved ahead with their own competing technologies, creating a marketplace showdown in which consumers will ultimately decide which technology prevails. In pricing its product significantly below cost, Toshiba is apparently hoping to build a lead over its Blu-ray rivals, some of which have recently announced further product launch delays. Next-generation equipment is one of the few remaining growth segments in an otherwise peaking DVD market, which is facing increasing competition from alternative content-delivery mechanisms, including video-on-demand, Internet downloading and even Disney's resurrected MovieBeam service, according to iSuppli. iSuppli forecasts that 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. But unlike other industry experts, iSuppli's Crotty doesn't foresee a clear winner in the battle between HD-DVD and Blu-ray. "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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