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Europe Key HD Battleground

14 Jun, 2007 By: Helen Davis Jayalath

The war of words between Blu-ray Disc and HD DVD is intensifying, and Europe has become an important battleground.

Sony Corp.'s Blu-ray-enabled PlayStation 3 game console finally launched in Europe in late March and, as anticipated, immediately dwarfed all previous sales of high-def video hardware. Meanwhile, HD DVD is building relationships with Europe's independent publishers, authoring houses and replicators as it waits for the price of its hardware to fall.

PS3 shifts the hardware balance overnight

By delaying the European launch of the PS3 by four months to March 23, Sony was able to ensure it had adequate stock of the machine to meet initial demand — a far from usual occurrence in the games sector in recent years. Although this strategy caused some observers to suggest that the continuing availability of the console must reflect slower than anticipated demand, first weekend sales of around 500,000 units across Europe were in line with expectations, and actually broke records in some markets.

As in the United States, Sony leveraged its combined hardware and software strength to run a “soft” bundling deal designed to raise awareness of the link between the PS3 and Blu-ray. The first 500,000 European PS3 owners to register on the PlayStation Network received a free copy of Casino Royale on Blu-ray. This no doubt served to remind the first wave of owners — a majority of whom arguably bought the machine for gaming rather than movie playback — that their new console is also a Blu-ray player. A similar launch promotion in the United States resulted in the distribution of several hundred-thousand free copies of Talladega Nights: The Ballad of Ricky Bobby, along with a substantial number of money-off vouchers toward the cost of buying another Blu-ray movie.

The real importance of the PS3 launch is that it marks the first time the video industry has managed to harness the huge volume of sales that often characterize game console launches. Sony's PS2 and Microsoft's Xbox play DVDs, but their launches post-dated that of DVD by two or three years. So the consoles had no impact on early format adoption. This time, however, Sony is taking every opportunity to reinforce the PS3/Blu-ray link. And with Microsoft's hardware support for HD DVD limited to an optional add-on drive for the Xbox 360, Blu-ray will dominate the game sector.

So is it game over for HD DVD? Blu-ray's stronger line-up of both consumer-electronics brands and Hollywood support certainly seems to have convinced some observers. And the Blu-ray Disc Association (BDA) publicity machine is doing everything in its power to convince consumers and the industry alike that the war is effectively over already. However, Screen Digest, which has been commenting on the video industry since before the launch of VHS and Betamax, believes it is much too early to declare a winner just yet.

HD DVD death reports exaggerated

Although Blu-ray launched in Europe (albeit in a limited way) as early as October 2006, while Toshiba's first HD DVD player just arrived in time for Christmas (and didn't even manage that in some markets), the latter format accounted for the lion's share of HD hardware sales in 2006, according to Screen Digest research. This situation continued throughout the first quarter of 2007; by the end of March HD DVD still accounted for around 80% of the installed base of standalone high-def players.

This is not just a European phenomenon. HD DVD players are outselling standalone Blu-ray models in the United States.

This suggests that price does matter, at least for some early adopters. Following the development of a ‘system on a chip' solution for HD DVD production by Broadcom and Microsoft, several new manufacturers pledged support for the Toshiba-backed format, and Chinese companies LiteOn, JK, Alco and Shinco have all stated that they plan to launch affordable HD DVD players this year. While both Toshiba and Sony have reduced the price of their players, it seems inevitable that HD DVD will maintain its position as the cheapest way to buy into high-def video. Screen Digest expects price reductions in Europe in time for Christmas 2007.

The secret's in the software

High-def hardware is no use without software. Here again, Blu-ray occupies a commanding position. With seven of the eight major studios already publishing on the format, it can rightly claim to offer the greatest number of major titles.

Mini-major Lionsgate also is part of the Blu-ray camp while The Weinstein Co. (TWC) has aligned itself with HD DVD; New Line has announced (but not yet released) titles on both formats. Of the half-dozen smaller independents publishing in high-def, three are releasing on both formats and three are exclusive to HD DVD.

In Europe, the studios (including Lionsgate and TWC) had released 170 Blu-ray titles and 125 on HD DVD by the same date, and confirmed release dates for a further 42 Blu-ray and 48 HD DVD titles, bringing the total Hollywood slates to 212 and 173 titles, respectively.

On top of this, half a dozen independents had either begun releasing or confirmed release dates for titles on both formats, accounting for another 18 titles on BD and 16 titles on HD DVD. Three were releasing exclusively on Blu-ray (four titles in total) while, as a result of the HD DVD camp's proactive courting of European video publishers, 18 indies had either begun releasing (55 titles) or committed to firm release dates (27 titles) for HD DVDs alone.

On the surface, therefore, our analysis indicates that both formats were offering the same number of titles in Europe: 203 Blu-ray and 203 HD DVD. Furthermore, if titles with confirmed release dates are included (88 on HD DVD and 47 on Blu-ray), the total HD DVD slate actually appears to outnumber that of its rival by more than 15% (291 to 250 titles).

But the figures require closer examination. Independent video distributors, many of whom handle U.S. independent product as well as domestic titles, play a significant role in the European DVD business. In some markets (notably France), they can account for as much as half of all DVD sales.

However, few if any of these companies acquire pan-European rights to movies. As a result, the titles they release will usually be available in only one, or at most two or three, markets. Thus, the actual number of HD DVD titles released in any given European territory will be significantly lower than the total numbers quoted above. In the United Kingdom, for example, Screen Digest research shows that while the number of Blu-ray titles available was indeed 203, only 180 had been released on HD DVD by May 22.

Not all titles are equal

For most consumers, however, it's not how many titles are available that matters, but how many of them they would actually like to own. Inevitably, given the greater number of studios backing the format, the Blu-ray library boasts more new and recent releases — a fact that is as true in Europe as it is in the United States. In fact, Screen Digest analysis of U.S. data from Nielsen VideoScan shows that about two-thirds of the top 50 Blu-ray titles sold in the United States in the first quarter of 2007 were new or recent (i.e., their Blu-ray release came within three months of their DVD release). On HD DVD, by contrast, almost two-thirds (64%) of the top 50 were more than three months old on release.

Further analysis shows that the new and recent titles in the Blu-ray top 50 were more desirable than the equivalent HD DVD releases, based on average box office takings ($86 million compared to $72 million on HD DVD). Interestingly, however, similar methodology reveals that HD DVD's slate of catalog titles is significantly stronger than its rival's (average box office of $94 million compared to $72 million on Blu-ray).

One explanation for this may be that HD DVD backers have opted to throw some of their strongest catalog hits at the new format, to compensate for the less-impressive line-up of new titles, while Blu-ray supporters are holding back their biggest catalog titles either until there is a larger installed base or until the format's interactive capabilities, already a key part of the HD DVD offer, can be fully exploited.

Although the studios' European slates are slightly smaller than their U.S. offerings so far, the situation is, inevitably, very similar in regards to the relative age and quality (based on box office returns) of titles.

Europe a key market for HD DVD

In addition to courting Europe's independent video publishers, Toshiba and Microsoft are leading the European HD DVD push. The companies also have been focusing on other key parts of the video supply chain. Microsoft, keen to promote the use of its VC1 codec in HD disc authoring, has been offering free access to additional authoring tools, training and support to selected European authoring houses that have already invested in the HD DVD authoring tools available from Sonic Solutions or Memory-Tech.

The final link in the HD DVD “eco-system” is a noticeable groundswell of support for HD DVD among Europe's independent replicators. This is primarily on economic grounds: Not only are HD DVD production lines cheaper to install but, unlike Blu-ray lines, they can also produce DVDs, making it easier to amortize the cost of upgrading even if there is initially insufficient demand to run at full high-def capacity. Furthermore, with Sony's own manufacturing arm, Sony DADC, accounting for the majority of Blu-ray production worldwide, some European independents fear they may be unable to compete for Blu-ray business until the market is significantly larger.

So what happens now?

In a report published in late 2006, Screen Digest stated that the most likely outcome was that both formats would survive for the foreseeable future, eventually giving way to one or more dual format solutions (as we saw in the DVD-recorder format skirmish). Nothing has happened since then to change our view that this remains the most likely outcome. Indeed, recent developments — the incredibly rapid emergence of dual-format players from LG and Samsung, and Warner's determination to launch its Total HD dual-format disc — serve only to strengthen us in this view.

We expect the PS3 to continue to outsell standalone high-def players (of both formats) over the next couple of years, as a result of which European high-def-enabled console households are likely to continue to outnumber homes with a standalone high-def player until 2011. However, we expect the lower cost of HD DVDs to enable the latter format to keep the pressure on Blu-ray over the next few years. While price may not be a key consideration for most early adopters, falling hardware prices have a demonstrable effect in stimulating mass market adoption.

Helen Davis Jayalath is senior analyst, video, at research firm Screen Digest, based in London.

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