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Prices for integrated MPEG-2 chips used in DVD recorders are expected to drop from about US$40 currently to below US$30 in the second half of 2004, as a result of intensified competition and greater pressure from clients to lower costs, according to DigiTimes.

The integrated MPEG-2 solution for DVD recorders combines the functions of a decoder and encoder. While international companies dominate the market, major Taiwanese optical storage IC design firms, including MediaTek and ALi, are expected to join the competition in the second half of 2004, sources said.

The international companies, including ESS Technology, Royal Philips Electronics, LSI Logic and Cirrus Logic, are selling MPEG-2 and servo IC chipsets at about US$40-45, but expect the prices to drop to about US$35 in the first half of next year and to around US$30 in the second half, sources said.

In addition to rising supply, optical storage drive makers have faced rising pressure to cut production costs as they see rapidly falling average selling prices (ASPs). Lite-On IT, a major Taiwanese optical storage drive maker, has recently priced a DVD recorder at about US$299, and many industry observers project market prices for DVD recorders will fall to about US$250 in the first half of next year.

As Taiwanese IC design companies usually price their products at 10-15% lower than international suppliers, they have a greater chance to land deals from drive makers.

Anticipating the MPEG-2 challenge from Taiwanese companies, major international suppliers have geared up to offer more advanced products. Companies including Philips, Cirrus Logic and LSI are expected to start sampling MPEG-4 chips in February, with volume shipments scheduled in the first half of next year, according to sources at Taiwanese optical storage drive makers.

Currently, most of the companies produce their MPEG-2 chips based on 0.18- to 0.25-micron processes, sources said. According to Philips, its MPEG-4 solutions will be produced with a 0.13-micron process. Other companies are also reportedly considering upgrading their manufacturing to between 0.13- and 0.15-micron processing.