Analysts: High-def formats will remain at parity

Blu-ray hardware is dominant, but consumers buy movies slowly

By Susanne Ault -- Video Business, 12/4/2007

DEC. 4 | LOS ANGELES—Despite overwhelming Blu-ray hardware dominance, software for the two high-definition formats will be selling nearly equally for several years, according to sister companies Screen Media Digest and Adams Media Research.

That stalemate, compounded by the continuing attraction for standard-definition DVD, will work to undercut the potential revenue upside of high-def for the home entertainment industry, explained the research groups during Tuesday’s High Def 2.0 conference, produced here by Home Media magazine.

By the end of 2008, the installment base for the PlayStation 3 will top all HD DVD devices combined, including set-tops and Xbox 360 drives, by about eight times. The format war will still remain far from resolved, however. Regardless of that huge capability of consumers to utilize Blu-ray, software sales in the format will represent just a two-to-one leading margin over HD DVD, the analysts predicted.

Blu-ray and HD DVD software buy rates overall are lagging from where the industry stood in the second year after standard DVD’s introduction. During that time for standard-definition, in 1998, the average DVD household bought 8.9 discs. But in 2007, the average high-def household (including set-tops, PS3s and Xbox 360 add-ons) bought only 3.6 high-def discs.

The main factor eating into high-definition adoption is standard-definition DVD. Consumers can upscale standard-def titles into near high-definition quality on high-def players, which makes spending the money to upgrade libraries to BD and HD DVD less of a priority for consumers, the analysts said. Similarly, relatively cheap upconverting DVD players remain competitive to BD and HD DVD players. Additionally, increasingly better game offerings for PS3 are becoming rivals to BD and HD DVD software for consumers’ discretionary dollars.

“Both formats will be established and co-exist for the foreseeable future,” said Helen Davis Jayalath, senior analyst at Screen Digest. “By 2012, U.S. high-def software will be evenly split between the two formats, where Blu-ray represents 55% of the market and HD DVD represents 45%. But high-def formats won’t boost volume sales [for home entertainment] to the degree that DVD did [over VHS]. Backwards compatibility and upscaling reduces consumers’ desire to replace existing DVDs.”

Globally the software split will be 60% Blu-ray; 40% HD DVD, she added.

By 2012, standard DVD discs will total $10 billion in U.S. consumer sales, HD DVD $5 billion and Blu-ray $5 billion, estimates Adams Media Research, which recently became a subsidiary to Screen Media.

“Sales of both formats have been below analyst expectations,” added Jayalath. “You would think that [large demand] for high-def TVs would help adoption more.”

Boosting high-definition disc sales rests on the shoulders of the studios, insisted the two research groups. Screen Media’s Jayalath is pushing for studios to mirror Warner Home Video’s strategy of generating titles in both Blu-ray and HD DVD formats.

She also recommended that the two camps lay off the war mongering public dialog as it discourages consumers from buying into either format.

“It’s natural for consumers to be concerned of the two formats because of the extensive press coverage of the format war,” Jayalath explained. “Both camps are publicizing every little victory, and that reinforces the idea of war and the consumer then is sitting tight. That is why there is eight-to-one BD dominance, but only two-to-one dominance in software.”

Adams president Tom Adams hopes many studios lighten up on their strict anti-copying stance so consumers have more ways of enjoying physical media on other portable devices. 20th Century Fox Home Entertainment and Warner, for instance, are pioneering the addition of a digital copy to DVDs, starting with Nov. 20 release Live Free or Die Hard and upcoming Dec. 11 release Harry Potter and the Order of the Phoenix, respectively.

“Once studios can work out their phobias over copyright theft that can get us back to growth,” said Adams.

He indicated that studios need to work hard at maintaining a vibrant physical business, including spurring high-def growth, as other electronic content delivery methods remain small. In 2007, Internet-delivered films will represent less than 1% of studios’ revenue; and video sell-through retail will command the biggest piece of that pie at 48.2%, Adams said. The remaining revenue categories stand at theatrical distribution, 24.7%; pay TV, 11.4%; pay-per-view/video-on-demand/download-to-own, 3.7%; and free TV, 2.9%.

“The ultimate driver of packaged media depends on the strategic decisions of the studios over the next few years—the consumers haven’t chosen,” said Jayalath.