Friday, July 07, 2006

The Pricing Impacts of Network Effects

I've talked before about the foolishness of the next generation DVD war, and a recent article at highlights the first salvo in the war between HD-DVD and Blu-Ray. They cite a study done by a analysis firm (iSuppli) which finds that Toshiba is pricing its introductory HD-DVD player (the HD-A1) far below cost.

The HD-A1 retails at $499 and iSuppli estimates that the parts in the machine cost $674, while other costs associated with the device (packing, cables, remote control, etc.) push the total cost of a unit over $700. So why is Toshiba willing to price this thing over $200 below cost? (And that's just at retail - surely the wholesale price Toshiba receives is even lower.) The answer is simple: the loser of the next-gen DVD war ends up with nothing, so Toshiba needs to bank on early adopters tipping the market to HD-DVD. If lots of people buy HD-DVD players, then that will lead to more HD-DVD software, which will increase the value of the players, et cetera.... But it's a risky gamble (and one that the makers of Blu-Ray players, which are priced near $1000, don't seem to be taking).


Anonymous Anonymous said...

Wait until you see how much Sony stands to loose on the new PS 3 that will include a BD player.

The payoff is the format licensing royalties and equipment sales that accrue to the patent holders. Both Sony and Toshiba have already made very large investments to develop their formats. If either fails to gain strong consumer adoption, the associated company stands to loose a lot of money. Sony is in very, very deep. I suspect Toshiba less so.

Personally, my prediction is for HD-DVD to win this battle for one simple reason. HD-DVD is the format that the adult entertainment (AE) industry is favoring because Sony has kept them from accessing authoring capabilities. There are already new HD-DVD lines installed in major porn replication houses in CA. The AE industry has a long track record of being early adopters of winning distribution formats. Many have credited the AE folks with having determined the outcome of the classic VHS vs. Beta battle.

7/07/2006 11:38 AM  
Anonymous Anonymous said...

A follow-up -- here are some details on the cost that Sony is likely bearing with the launch of PS3.

The expected price at launch in the US is marked at $499 for the "standard" version

Merrill Lynch has estimated that PS3 will cost Sony $800 for the standard versions (and their analysis did not include cost for a hard drive).

If Merrill is accurate in their analysis and the price remains $499, this means Sony will loose more than $300 per PS3 at launch. If we allow $50 markup for sellers, and 3MM units for 4Q06 launch volume, then Sony stands to loose $1.05 billion in 4Q06 alone.

7/07/2006 4:01 PM  
Blogger Tony Vallencourt said...

That's a big undersell....

Of course, Sony does not just have the Blu-Ray movie business that it hopes to win with these sales, but is also trying to get the units into homes so that they can earn from the sales of all games purchased from the system. So it's really not that surprising that they'll be underselling even more than Toshiba is with the HD-A1. But that's a lot of loss leading...

7/07/2006 4:10 PM  

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