High Definition TV and DVD's future

The High Definition Television picture has evolved considerably over the past year. The global audience for HDTV broadcasts more than doubled during 2004, from 4.7 million households to nearly 11 million. Nearly all of this growth originates in the US and Japanese markets. Other HDTV markets are still in their infancy, although they will begin to have an impact during 2005. DAVID MERCER explains.

In the US, the industry is finally beginning to see the effects of the various regulatory measures that have been introduced in recent years, although they are not having the effect that was originally envisaged.

The US industry had expected that many viewers would choose to watch HDTV programmes using the terrestrially-delivered digital TV services based on the ATSC standard, and the mandated inclusion of ATSC tuners in TV sets is beginning to take effect. In spite of this, the majority of HDTV viewers are choosing to take HDTV programmes from their cable or satellite provider. Cable companies in particular have seen great success with HDTV over the past year and both they and satellite providers DirecTV and EchoStar view it as a strategic priority to support customer retention in the future.

In Japan, government-led collaboration with industry and broadcasters is also having an effect on HDTV demand. We estimate that four million Japanese households were receiving HDTV services by the end of 2004, or nearly 10% of all households. Broadcasters now transmit most programming in HDTV format, not only movies and sports, but also news, documentaries and other genres. There seems little doubt that the Japanese market will make the complete transition to HDTV within the next few years, more or less according to the schedule illustrated below.

The HDTV transitions in the US and Japan are beginning to have a global impact, not least in the production environment. Not only in the movie and sports industries, but in many other video sectors, it is now becoming more or less normal to expect production in an HD format.

There may be continued debates as to what the precise “best” HD format should be, and advocates of different standards such as 1080i or 780p will put forward strong cases for their own preferred solution. But these debates are likely to remain transparent to the end user, since most HD systems will convert the original format as necessary for best possible presentation.

Since so much content is now distributed and purchased globally, the requirements of two major markets like Japan and the US are having an impact on countries where HDTV is not yet a market reality, including Europe. European television producers are finding that they are required to offer productions in HD format if they expect to achieve sales in overseas markets. The cost of making the transition from traditional standard definition (SD) formats is declining all the time, and new HD cameras in particular are improving the financial viability of HD production for programme makers working in many genres.

With a large installed base of widescreen TV sets and a standard definition PAL system that already offers 100 more lines of resolution than the NTSC standard in use in the US and Japan, the move to HDTV does not represent the quantum leap that characterises the transition from SD to HD in the 525-line territories.
Also, the fact that they burned their fingers with HD-MAC some 10 years ago is not encouraging European broadcasters, especially the large public-service ones, to rush to HDTV.

However, Europe’s television industry has been feeling the impact of the HDTV transition elsewhere, in spite of having little HDTV broadcasting of its own. The European HDTV broadcast pioneer has been Euro1080, a Belgium-based broadcaster that has been offering HDTV channels for the past year to European viewers. One of the company’s primary objectives has been to stimulate wider interest in the European HDTV market, and on that score alone it has clearly been a success.

But Euro1080’s attempts to acquire viewers have met with a disappointing response. The company claims currently between 30,000 and 35,000 viewers, and a majority of these are retail outlets using the service as a promotional tool. Euro1080 is now awaiting the availability of MPEG-4 decoder devices before moving into the next phase of its development.

In the meantime during the past year, major European pay TV broadcasters have made commitments to introduce HDTV services. The big three, BSkyB, Premiere and Canal Plus, have all announced plans to launch HD services either in late 2005 or during 2006. Not suprisingly, most will focus their services on movies and sports programming. Germany’s Premiere in particular views the 2006 World Cup Football tournament in that country as a key driver of HDTV uptake of its new service.

It is not surprising that the pay TV operators are the first to jump on Europe’s HDTV bandwagon. They are able to commit the necessary resources, and see HDTV as a key strategic weapon in their battle to stay ahead of current and future digital TV competitors such as cable, xDSL and even mobile or wireless operators. As largely satellite-based operators, the capacity to offer attractive HD programme packages will be available to them from satellite operators SES Astra and Eutelsat.

We view the operators’ plans to launch HDTV before the end of 2005 as ambitious, since a number of technology hurdles still need to be overcome. In particular, the supply of advanced MPEG-4 decoder chips is likely to come on stream only in the second half of this year, so it seems uncertain as to what quantities of digital set-top boxes are likely to be available during the first few months of a service launch.

Europe has made great progress during the past year in moving towards a common set of technology standards with which HDTV services and products can be launched. This initiative has been led by SES Astra, and in coordination with manufacturers, broadcasters and industry bodies such as EICTA, has led to the establishment of the “HD Ready” logo. This is intended to reassure buyers of HD devices that they will be compatible with HD services planned for future launch.

The HD Ready initiative has been an important step forward, but a number of issues remain. During the first part of 2005, TV manufacturers will continue to sell old stock of flat panel TV sets which are not HD Ready. There is clearly a risk therefore that consumers looking to buy devices compatible with future HD services may be confused or disappointed. Retailers and manufacturers certainly face a challenge to effectively communicate the capabilities of these devices.

A key element in the HD Ready specification is that displays should incorporate the copy protection technology developed by Intel and Silicon Image, known as HDCP (High-bandwidth Digital Content Protection). HDCP is already becoming a de facto copy-protection standard in the US market, and has been approved by Hollywood studios in their attempts to prevent the sort of digital piracy that has affected the music industry in recent years.

HDCP is designed to work with the digital connectors between the display device and the output device (eg set-top box). Europe’s HDTV service providers are therefore expecting that their viewers will have TV sets equipped with one of two types of digital connector: DVI or HDMI, together with HDCP.

The problem is that the vast majority of HD-capable displays sold so far in Europe (more than 600,000) do not come equipped with these key technologies and will therefore be unable to receive HDTV services via a digital connection. The alternative is to use an analogue component output, and service providers are will need to verify that this option will be available.

Europe’s HDTV services remain for the future. But the HD-capable displays are already being sold in ever-growing volumes. As a result of exploding demand for flat panel TVs, many Europeans are buying HD-capable TV displays without probably realising it. We estimate that close to one million HD-capable large screen television sets are now installed in European homes, and this number will more than double before the end of 2005.

High definition television is not emerging out of a vacuum. The success of DVD, with its high-quality anamorphic picture and surround sound, has certainly contributed to raising consumer demand for a better-quality home-entertainment experience, especially in NTSC countries. There, HDTV broadcasters now find a more receptive market.

But the provision of HD material may not be the exclusive preserve of the broadcasters and cablecasters for much longer. Packaged media will soon be competing in the form of next- generation optical disc formats such as Blu-ray and HD-DVD. It is generally accepted in the industry that both formats cannot survive. A rapprochement is possible, but both camps currently seem entrenched.

Hollywood studios have already committed to one format or the other, but nothing is cast in stone as the economic and strategic scene is still much too fluid. And do not leave out interlopers pushing Versatile Multilayer Disc format (VMD), that would bring true HD for a fraction of the competitors’ price.

The penetration of HD-capable TV displays is good news for hi-def DVD. Owners of such displays will clearly wish to make the most of them. We are certain that they will be interested in upgrading to a hi-def DVD platform if both content and price are right. They may also be keen to start making home recordings of HD content for achiving and timeshifting purposes. We assume that any future HD recording platform will incorporate adequate copy protection mechanisms; if it doesn’t, it is unlikely to receive official sanction.

Europeans will have to wait some time before they can buy their first hi-def DVD player or recorder. While Sony has launched the first Blu-ray recorder on the Japanese domestic market, most players in both camps do not expect to launch hi-def DVD players until later this year or 2006, even in those markets, such as Asia and the US, where HDTV has established a foothold.

Given Europe’s laggard status as far as HDTV is concerned, it would therefore be reasonable not to expect the first significant launch of hi-def DVD in this region until 2007 and beyond. Both Hollywood and the CE manufacturers are likely to want to test the market in the US and Japan before committing considerable resources to a European launch.

We believe that sales of hi-def DVD player/recorders will begin in earnest in 2007, and reach annual sales of 590,000 units in 2008, by which time the installed base will have reached 730,000 units. This would represent 4% of the European homes which have acquired HD-capable TV displays by this time.

The HDTV message will eventually become pervasive in Europe, and more and more consumers will witness high definition video quality at first hand, either through in-store demonstrations or through experience of devices owned by friends and colleagues.

The high definition explosion will create a sizeable opportunity for whichever of the formats eventually holds sway. And sooner or later the packaged media industry will be forced to respond to the new video quality benchmarks being set by HDTV broadcasters.

Once consumers experience high definition, they will expect nothing less, and the DVD industry will be left behind if it doesn’t respond.


David Mercer is Vice President, Principal Analyst – Digital Consumer Practice at Strategy Analytics. He has 17 years’ experience in analysis and consulting within the digital consumer broadband and media industries. David has worked with major global players across the value chain. dmercer@strategyanalytics.com...

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