The cost of losing the format war: Toshiba falls on its sword
Few American companies would write off the assets from a losing product as a one-time charge; the result might be disastrous, even suicidal. But in Asian business, defeat can be treated honorably when it's taken as a whole.
History will record, perhaps honorably but not without a note of astonishment, that Toshiba was willing to absorb the full blow of its huge gamble in HD DVD, as a one-time charge for its 2007 fiscal year, ending in March.
The results, from the perspective of Asian business, are breathtaking: In its annual report released yesterday, the company stated it reaped about 1.74 trillion yen (with a "t") in revenue for its electronics division last year, or about USD$16.68 billion. That includes what the division earned from the sale of HD DVD players to the consumer market, as well as manufacturing equipment to the would-be makers of HD DVD discs.
When Toshiba pulled the plug on HD DVD, it absorbed the entire cost of its dissolution in one fell swoop. The result weighed so heavily on revenue that the division eked out an operating income, before taxes, of 74.1 billion yen (with just a "b"), or about USD$711 million. While Toshiba tried to break down the cost of dissolving HD DVD at just over USD$2.5 billion, the residual effects -- the real costs of losing -- were astonishing: close to sixteen and two-thirds billion dollars.
How much is that in practical terms: Say you were to give Microsoft a call today, and tell CFO Chris Liddell that instead of everything the corporation intends to make in revenue (not earnings) for the second quarter of this year -- instead of all that -- nobody anywhere would purchase a single Microsoft product of any kind until July 1. Or maybe the company would only break even in all of its combined divisions in earnings, for about eight months. It would cripple the company if such a hypothetical situation were feasible.
What saved Toshiba? It had strong sales (2.95 trillion yen, or about USD$28.3 billion) in its digital products segment, which incorporates its flash memory-based MP3 players -- which continue to sell well in Asia. With memory prices plummeting, you'd think margins would increase; but the fact is that the market for flash devices is so competitive that manufacturers can't afford to sustain artificial premiums for too long.
Toshiba as an entire company barely broke even in its fiscal fourth quarter of 2007, reporting net income after taxes of USD$11.5 million (and that, dear reader, is only an "m").