Toshiba loses face but saves money in DVD defeat

TOKYO Mon Feb 18, 2008 12:17pm EST

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TOKYO (Reuters) - Japan's Toshiba Corp (6502.T) will have to swallow its pride, exiting from its DVD war with Sony (6758.T), but analysts say it's a smart move to cut its losses now rather than later.

By pulling the plug, Toshiba will be able to save some $450 million (231 million pounds) in the year to March 2009 that would have otherwise be spent on sales promotion and restructuring costs of its HD DVD business.

"The potential losses are small compared to the savings," said Goldman Sachs analyst Ikuo Matsuhashi. "Nobody wants this format war to drag on."

Matsuhashi reckons Toshiba could chalk up a 10 billion yen (47.4 million pound) loss to unload excess inventory and scrap assembly lines.

Toshiba shares jumped 5.7 percent on Monday after a company source told Reuters on Sunday Toshiba would concede defeat to the rival Blu-ray format, led by Sony and Matsushita Electric Industrial Co (6752.T).

The movie industry blames the format war, which triggered memories of obsolete Betamax players that lost out to the VHS videotape format, for confusing shoppers and slowing sales of high-definition DVDs.

SWIFT EXIT

The move could also mark an end to Toshiba's dreams to become a consumer electronics star, said an official at Toshiba.

Toshiba has said it wants to make home electronics a generator of growth along with microchips and nuclear power.

"Sony is hip, Panasonic tries, but Toshiba stays geeky," said the company official, who spoke on condition that his name was not used. "We learned that we need to work on marketing, but will we get more chances to do that? I don't know."

Toshiba's exit could be swift, given the small volume of production for its HD DVD players and recorders, said JP Morgan analyst Yoshiharu Izumi.

Toshiba has agreements with studios including NBC Universal's Universal Pictures, Viacom Inc's VIAb.N Paramount Pictures and DreamWorks Animation SKG Inc DWA.N to support

HD-DVD.

But a defection last month by Time Warner Inc's (TWX.N) Warner Bros studio to Blu-ray tipped the balance and prompted U.S. retailers to follow, such as Wal-Mart Stores Inc (WMT.N), Best Buy Co Inc (BBY.N) and online video rental company Netflix Inc (NFLX.O).

Blu-ray supporters include News Corp's NWSa.N 20th Century Fox, Walt Disney Co (DIS.N) and Lions Gate Entertainment Corp (LGF.N). Sony's PlayStation 3 game console also plays Blu-ray films.

A DROP IN THE OCEAN

Toshiba, which began sales of HD DVD players in March 2006, has sold 1 million units of its HD DVD players and recorders worldwide, including sales of drives for Microsoft Corp's (MSFT.O) XBox 360 game console.

That is a drop in the ocean for the world's No.2 maker of NAND flash memory, which also makes nuclear power turbines, elevators and washing machines -- but those are all products without consumer star power.

Toshiba doesn't need powerful brands to sell flash memory, which earns half its profits, or in nuclear power, said Atul Goyal, senior research analyst at CLSA.

"If Toshiba decides to exit (HD DVDs), it will be a sound decision," he said. "Very few companies are able to generate any profit from this kind of business on a sustainable basis."

Toshiba's digital products segment, which includes its Regza TVs, Dynabook notebooks and Gigabeat digital audio player, comprised 40 percent of the electronics group's sales last business year, but earned only 6 percent of profits.

That may all be true, but it would still be a wrench to see those businesses marginalized, said the Toshiba official.

"It's the closing of a door."

($1=107.85 Yen)

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