HD DVD…and the World Keeps Spinning on its Axis

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“This site also demonstrates one of the great dangers of archeology, not to life and limb, although that does sometimes take place, I'm talking about folklore.” – Indiana Jones (Harrison Ford) – Raiders of the Lost Ark (Lucasfilms – 1981)

Some called it a battle. Others a war. But the blue laser thing was more like a tussle…a two year tussle. HD DVD had Toshiba, the DVD Forum (that sure helped DVD-RAM?) and a few studios that were kinda, maybe, sorta on their side. Oh yeah…and Microsoft.

BD had Sony and its string of content owners, Panasonic, the CE industry and a lot of financially grateful production houses. On one side a technology leader who wanted to have a consumer presence. On the other…hardened marketing/sales.

Everyone (except for Toshiba) was certain BD would hold the winning hand more than a year ago…it’s called capacity. Consumers can understand that. But at CES the end was in sight.

Decent Show – While Toshiba was strong on engineering/manufacturing and short on marketing, they did put on a positive smile at their events around the globe.

The HD DVD team held their demos, scheduled their press conference. Warner issued their announcement (they had warned Toshiba) that they were going BD. HD DVD cancelled their press conference. The BD marketing/sales folks hit the streets.

In rapid succession:

Best Buy swung to BD
NetFlix signed on
Blockbuster wasn’t going to be left out
Target went BD
Wal-Mart threw its billions behind BD
Universal – oh what the heck!

That leaves all the strong players – Circuit City, RadioShack – uncommitted. Some say MS muddied the waters spending money to slow progress for both with plans to make it up on the Internet download backside. That dream exists. A lot of folks believe it is almost here. Everyone except the folks who have tried it.

Figure 1 - Yes But – Even the number of early adopters who have toyed with video (movie) downloads still prefer to have a disc in their hand, in their library. The percentages may shift but people still like physical things. Source – CEA

First of all there are pipe issues.

Pew Internet research notes that only 51% of the homes in the Americas have broadband networks. The U.S. lags behind 10 of its international competitors. Japan has 65%, South Korea 94%. The rest of the folks have dial-up or something else …we don’t want to know what that is!

So if you want to download a true high definition movie, you’ve got a LLLOOONNNNGGG wait.

Figure 2 - Dream vs Reality – HD movie downloads take a long time to download if they are to be enjoyed at their maximum clarity. Especially when you’re watching your stuff on a large HDTV screen. And that’s under ideal circumstances. Source – IDC

To make the download tolerable, they downscale the movie. Down to something “a little better” than DVD. Don’t know about you but if we’re going to watch that quality on our HDTV…we’ll rent the DVD (there will be a lot more title choices for years to come).

Fact is BD’s biggest challenge isn’t going to be holding back the flood of on-line movies but convincing folks they need to upgrade to new players.

Sure HD movies are “a little better” than DVDs. But according to IDC, 97% of the American households already have a working DVD player.

New units cost zip. Blue light specials on blue players cost (yesterday’s models) about $300. Most computers (ok so the Mac Air is an exception) comes with a DVD burner (you can buy an external for about $40, with upscaling - $80). Media…well under a buck a disc! An external BD burner goes for aahh…ooppss! BDR discs are still north of $10. That won’t change anytime soon because R media needs…widespread burner usage!

We’re still a long, long way from hitting the price point for BD-R media to achieve critical mass. But at least disc manufacturers and stores can cut down on the number of SKUs they manufacture/stock/try to sell.

Video production software sales? Sort of need the burners. Then the inexpensive media. Then you can buy the next version of the software and BAM!!! you’re ready to go.

Truth is, people are going to buy what’s readily available, cheap and has tons of “good enough” viewing/burning choices.

Figure 3 - Consumer Buying – People still like to enjoy movies, especially quality movies, at home and on their notebook computer and on their smartphone. With so many choices movie theaters are going to find it more difficult to fill the house. Source – CEA

Take the alternative offering out of the equation.

You have to wonder if there is going to be the same incentive for Sony, Panasonic, Pioneer, LG and the private label folks to be as aggressive with the sales since there’s only one side tracking numbers.

The rush to forecast sales growth now that there is “a standard” has been…heartening.

Consultants said:

$1.1 B in HD movies this year
100 M BD players (WW) by 2012
75 M BD burners (WW) by 2012

Earlier forecasts were more modest even considering the aggressive price competition.

Figure 4 - Slow Uptick – Blue laser players have been slow to gain sales with anyone but the normal early adopters. Industry analysts like to blame the standards scuffle for the problem. Or…could be slow build-up of HD TV sets, short availability of HD TV shows, lack of solid information from sales people and oh yes…ultra high cost of the players and relatively few really good HD DVD or BD titles. Source – Parks Assoc

The early adopters bought their units despite the tussle. After all the Black Friday offers and the buy 1 get 5 free offers were too good to turn down for “brilliant” HD movies. Still the numbers were nothing to cheer about.

Figure 5 - Realistic Projections – Accurate sales numbers on products – virtually anyone’s’ products – are difficult to pin down. Most companies embellish their numbers and dull the other guys. Somewhere in between the two is an accurate sales number. Source – IDC

Pick the numbers you want to believe. We’re talking 7-10 million units WW…in two years!!

The stability of a single format may help push sales up but consumers as economists delicately say are still …price conscious. And when the consumer is in the store (or online) and are ready to plunk down their credit cards they make a decision. Do they take a hard gulp and go for BD or do they take the “What the H***” way out and go with what they know…what they are familiar with…what’s “good enough” viewing quality?

Figure 6 - Price Differential – No matter how you spin it, there’s a huge delta between the cost of today’s “old-fashioned, good-enough” DVD burners and players compared to the “new” BD standards. And that’s only the device. Next comes the upgraded, new and improved media and the software. Source – IDC

BD folks now have to focus on working together and educating the public in the real enjoyment/value proposition. They have to convince us that the crisper image is worth the upgrade. They have to get a ton of content out there – compelling content – folks gotta have! They have to do it without Toshiba’s help. They have bigger fish to fry. They’ve got money – real money – to make.

Instead of wasting a few million on some Super Bowl ads…a few tens of millions on sales spiffs…a few hundred million on “other promotions they’re putting their money where they can get a good ROI. You know memory production…hard drive manufacturing…next generation CPUs…visual processing…wireless encryption. Stuff that doesn’t start losing sales value the minute it is made.

Lots of folks like to beat up on Toshiba saying they would have saved $100M or more if they had thrown in the towel 8-9 months ago. Give them a break people. For a company with a ton of corporate pride it was a fast decision. It was one stockholders liked because the market price shot up.

As for the HD DVD early adopters, Indie said it best, “You knew what you were doing.”

There are going to be some great bargains out there soon for players, burners, movies. You can add them to your Laserdisc collection.