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What Now For Toshiba

By David Richards and Wire Services | Tuesday | 19/02/2008

Later today Toshiba Australia will hold a press briefing to outline the impact that the withdrawal from the HD DVD market will have on the company. Analysts are saying that the company that has spent hundreds of millions fighting Sony's Blu-ray now has a lot of work to do amid the demise of HD-DVD.

HD-DVD was struck the final blow after US retail giant Wal-Mart announced recently it will sell only DVDs that use Sony Corp.'s rival Blu-ray format. Toshiba, which led the HD-DVD camp that also includes Microsoft and Intel, suffered a loss last month when Warner Brothers -- the largest distributor of DVDs in Hollywood -- pulled out of its alliance with Toshiba and switched to Blu-ray.

Quitting now is not, incidentally, particularly early in the game: Toshiba has been working on HD-DVD since the year 2000. But by doing so, the Japanese conglomerate is drawing a line under the losses that accompany start-ups. Eliminating these losses will add an estimated Y40-50bn to operating profits next year - although Toshiba will presumably need to take a one-off hit for restructuring. Die-hards who persist in dubbing Toshiba the loser should take a look at JVC, whose VHS standard triumphed in the video wars. JVC today has a market capitalisation of under $700m, a fraction of Sony's $45bn, and has reported losses at the net income level for three of the past five years.

"The big question is the impact on Toshiba as an electronics company," Carl Gressum, Ovum senior analyst, said in Ovum's report. "It has after all bet its disc media business on HD-DVD, as well as gone for HD-DVD integration into some of its laptop PCs. The channel has inventory to clear, and demands from owners of HD-DVD players."

Toshiba said that it aimed to end sales of its HD-DVD machines by the end of March, clearing the way for the Blu-ray format developed by Sony and its partners to become the industry standard.

The HD-DVD versus Blu-Ray tussle is similar to the VHS-Betamax video cassette format wars during the late 1970s and early 1980s.

"We carefully assessed the long-term impact of continuing the so-called 'next-generation format war' and concluded that a swift decision will best help the market develop," said Toshiba chief executive Atsutoshi Nishida.

Gressum said: "This once again shows why incompatible and mutually exclusive formats should be avoided at all cost by the industry. It reduces profitability and delays customer adoption."

The writing appeared on the wall last month, when Warner Bros withdrew its support for the HD-DVD technology promoted by Toshiba and Microsoft. That leaves the field clear for Blu-ray, the technology championed by Sony and the vast bulk of Hollywood studios.

For Sony, whose Betamax standard was famously trounced in the 1980s video wars, this looks like a long-overdue cause for celebration. It is not. Promoting new technologies in consumer electronics can be a thankless game: at best, a couple of years of profits and operating margins somewhere below 5 per cent. After that, the same boxes are knocked out by a rash of Taiwanese and other factories and prices fall to the floor. In the case of DVD players, obsolescence may come even sooner, courtesy of online offerings delivered to set-top boxes. Royalties are thinly spread. Toshiba's own earnings illustrate the point. Digital products, including DVD players and PCs, accounted for 37 per cent of sales in the first nine months of the year but just 5 per cent of operating profits.


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