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Monday, May 13, 2002
DVD player contract prices for new Xbox machines may drop by 30%

Taiwanese DVD-ROM makers are eyeing outsourcing opportunities as Microsoft is planning the launch of second-generation Xbox game consoles this summer. The new game machine’s cut-rate price, however, is likely to drive down contract prices of its DVD drive by as much as 30%, local manufacturers reported.

Currently Thomson, Samsung and Philips make the DVD drives in the Xbox. It has been speculated that Benq, which handles part of the manufacturing for Philips, is able to quote a higher price for the game system-based DVD drives than the US$40 for the PC-use DVD-ROM counterparts. Benq refused to comment, but industry sources said the company fetches US$42-45 per unit.

How long that high margin can continue is unclear. The Xbox’s lackluster performance in the global market, plus escalating competition with rivals like Nintendo and Sony, has led Microsoft to cut prices of the console and demand savings from suppliers.

On May 10, Reuters reported sources as saying that Microsoft had told major US retailers that it plans to cut the price of the Xbox within days. In Japan, where the Xbox was introduced in February, Microsoft slashed the launch price to US$262. In Europe and Australia, Microsoft cut the price of the Xbox by as much as 38% within six weeks of launch.

Microsoft last month said it would sell only 3.5 million to four million of the consoles this fiscal year, down from the 4.5 million to six million units that it predicted earlier.

Industry sources said contract prices of second-generation Xbox machines, to be launched in September, will be roughly US$249 or even lower. Based on that calculation, contract prices of key components for the new model, such as the power supply, cable connectors and DVD drives, are dropping by 20-30%, people familiar with Microsoft’s procurement plans said.

Local DVD drive manufactures said that despite the contract price declines, they should still maintain their former profitability level because prices of pick-up heads (PUHs) are dropping and chipsets will possibly become cheaper in the future.

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