Tuesday May 27, 2008

DTC’s analysis of converter-box costs paints a pretty grim picture for manufacturers and retailers hoping to make money selling converter boxes for the U.S. analog TV shut-off next year. Those selling the boxes at or near the government-issued coupon value of $40 will realize miniscule profit.

So, coupon in hand, we went to a Best Buy store last week to see if we could walk out with a box without having to open a wallet. Our buyer walked out empty handed because she didn’t want to spend the $59.99 Best Buy required for its box.

After a little digging, she found places to buy a converter box for around $43 discovering that even this early in the transition, consumers can buy for just a few dollars over the coupon amount.

So how much did it cost to make those $43 converter boxes? DTC’s analysis of general component and royalty costs points to a total bill of materials and royalties of about $28-$32 per box. These are estimated costs for the boxes’ major components and don’t include assembly, shipping and tariff costs. It also doesn’t account for any markup by manufacturers or retailers. About $18 is attributed to component costs with about $12 attributed to licensing fees.

DTC does believe that some participants will realize benefit despite the dismal profit picture. TV suppliers and retailers who can convince D-to-A converter box shoppers to upgrade to a $40-discounted digital TV instead of buying the box will likely make better margins on the TV sale. And, assuming that all the converter box makers play by the rules, the owners of the technology intellectual property that goes into the boxes should enjoy a nice spike in licensing revenue in 2008 and 2009.