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Analysts Discuss the Impact of Blu-ray on the Industry at the CDSA Confab

7 Mar, 2008 By: Chris Tribbey

LA QUINTA, Calif. — Charles Van Horn, president of the Content Delivery and Storage Association (CDSA), thinks Stephen King would have a field day turning Blu-ray Disc vs. HD DVD into a horror story.

“For those of us who have long been involved in the media business, the story of this format war is worthy of the horror novelist who knows how to scare the bejesus out of all of us and knows the true art of a scary ending,” he told attendees of the 38th annual Content Delivery and Storage Forum March 7. “The war isn't over, mark my words … That's because this format war was unlike any other we've seen before.”

No, HD DVD likely won't rise from the grave to haunt the home entertainment industry. But by choosing the more expensive, more complex format, and by allowing for consumer confusion and indifference during a nearly two-year-long format war, the industry could be looking at a scary and uncertain future for Blu-ray, Van Horn said.

“Blu-ray and the HD DVD format war confused buyers and delayed purchases,” said Frank Russomano, chairman of the CDSA and president of Imation. “I don't think we did a good job in this area.”

Studio representatives, replicators and analysts discussed Blu-ray's victory and pondered what's next for high-definition media at the confab. The CDSA also called for a meeting among all the major home entertainment industry groups to present a unified voice for Blu-ray.

A Blu future?

Tom Adams, president of Adams Media Research, probably summed up best the feelings expressed by speakers regarding the end of the format war.

“It was an unprecedented quick knockout blow for a format war,” he said.

Disbelief was widespread when news first emerged in February that Toshiba was giving up on HD DVD, effectively killing it. The abrupt end of the format war caused every research firm to take a second look at the future forecast for Blu-ray, and the results are a mixed bag. There are already nearly 100 devices in the market that play Blu-ray, but all remain expensive for the average consumer. Blu-ray replicators are pushing out product at a rapid pace, but capacity will be strained soon if more production lines aren't created quickly. And the studios need to decide how long Blu-ray remains a value-added proposition and how long before it should replace DVD.

David Hoffmann, VP of Nielsen Home Entertainment, said the PlayStation 3 was what killed HD DVD.

“Shortly after it launched, Blu-ray sales overtook HD DVD and never looked back,” he said.

Hoffmann added that, despite some reports, high definition is actually lagging behind where DVD was at two years after it was introduced.

“The benefits of DVD over VHS were easily communicated,” he said. “With Blu-ray it's a little different.”

Because Blu-ray players are backward-compatible with DVD, consumer adoption of high-def will be slower than it was for DVD over VHS, Adams said.

“We sat down post-Warner [Bros.' decision to go Blu-ray exclusive] to see how that affected our models,” Adams said. He said that by 2016, 90 million Blu-ray players will be in U.S. households, playing a total of 900 million discs sold. By 2012, consumer spending on Blu-ray will outpace that for DVD, he added, and total Blu-ray units will pass DVD units sold a year later. The CDSA forecasts that 922 million Blu-ray Discs will be sold by 2012, compared to only 7.8 million in 2007.

Hoffmann also shared that the top 20 markets for Blu-ray sales — New York City, Los Angeles, San Francisco, Chicago and Washington, D.C. — represent nearly 60% of the national market, and that specialty stores, while key in the launch of DVD, have struggled to sell high-def. The Best Buys and Targets of the world have led the way.

“People just aren't going to the specialty retailers any more,” Hoffman said.

One big problem that may confront Blu-ray is replicators' ability to meet demand.

“By the time we get into [the fourth quarter of 2008], there will be a problem with capacity,” said Jim Bottoms, co-managing director of research firm Understanding & Solutions. He said it will take 80 new Blu-ray production lines in the next two years to meet the demand for Blu-ray in the United States.

“Can the manufacturing industry really gear up to meet the demand?” he asked. His firm estimates it'll take an investment of $250 million for new Blu-ray production lines and testing equipment.

Michael Mitchell, CTO and EVP of Sony DADC, said his company has churned out more than 115 million total Blu-ray Discs, at an average of 5.8 seconds per disc.

“Since August we've been completely loaded,” he said, adding that the company's employees only took New Year's Day, Christmas and Thanksgiving off in order to fill all the orders. “The demand has been so high.”

There's hope consumers will adopt Blu-ray en masse down the road, mostly because of HDTVs.

Bottoms said because consumers are buying bigger and bigger HDTV sizes every year, their standard DVDs are going to look less and less impressive on the screen. He called it a “consumer con” because they'll have to upgrade to Blu-ray in order to match the quality offered by their TVs. And in five to seven years, “people will automatically replace their DVD players with Blu-ray players, because they'll be under $100.”

A digital future?

Everyone attending wondered whether high-def discs would be just a footnote in a digital world.

“I think we're at a crossroads in the home entertainment industry,” said Eric Rodli, EVP and GM of Macrovision. “We're a long-standing member of the physical world, yet we're moving into the digital world.”

Studio representatives discussed their experiments with including digital copies of movies on DVD and Blu-ray, expressing certainty that the two won't be replaced by digital downloads any time soon.

“[Digital downloading is] not going to hockey stick soon, in our opinion,” said Ben Carr, VP of new technology for Walt Disney Studios. “The interoperability of [digital rights management] is critical to the success of digital downloading. If you jump into this too quickly … it's not going to be too pretty.”

Adams, of Adams Media Research, said by 2012 the dominant form of digital entertainment will remain ad-supported streaming video, worth $2.5 billion. But for now, he and others agreed, digital distribution is a tiny piece of the studio revenue pie.

“The online business, while growing, isn't generating large amounts of revenue,” Bottoms said.

Yet if the home entertainment industry doesn't push Blu-ray quickly and with fervor, digital entertainment just might take over, Adams said.

“If the industry hesitates on this Blu-ray opportunity, it's going to go the other way,” he said.

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