On manufaturing, price, competition and next-gen discs

Challenges and opportunities are the lot of independent replicators. PIERRE-ANTOINE BERTHOLD, CEO of Austria-based kdg mediatech, tells DVD Intelligence how his company is coping with change and prepares for the future.

Comparing last year's business to the previous year's business: Is the proportion of CD / DVD manufacturing changing?

It has slightly changed last year, at a lower rate than in the previous years and the proportion is now of 3 to 2.

If so, is it a small or dramatic change and is it being caused by growth in DVD production, or because of the general drop in CD sales?

In fact, we did not really see any dramatic changes in terms of output at kdg but rather a progressive swap from one format to another. Certainly the proportion of DVDs will increase further, but not to the extent we have seen over the last two years. 2006 will be a year of consolidation in which we will concentrate more on the logistic and IT services.

Is there a change in the proportion of DVD-5 and DVD-9s being produced? If so, what is the cause of this?

Since the very beginning of our involvement in DVD manufacturing, our client base has been rich of traditional Video Publishers, with DVD9 being the favourite format for motion pictures. As it is a permanent sales focus, we are of course producing more DVD9 than in the early days but it is also due to the low proportion of covermount products in our production.

Has your customer profile changed at all? For example, more or fewer games or ROM customers, or an increase in small or medium size content owners.

We have had a very balanced customer structure for a number of years. Overall, however, the average size of our orders has been getting smaller over the last few years. We still see large initial orders but as the "sell through" as been disappointing lately for a number of releases, our clients are ordering even more cautiously, asking us always more flexibility.

Our core customer base, the independent video or games publishers always have to keep a careful eye on their production planning to avoid overstocks and this is a challenge that we can only meet by being appropriately set up and by having the corresponding quality standards in place to timely process so many small orders.

Are clients asking for even shorter turnaround times and are the clients better at providing good, finished masters on time?

The most important thing at the moment is flexibility. This, of course, presupposes good, close cooperation. The better we understand our customers' needs and wishes, the better we will be able to fulfil them. The quality of the material supplied is often related to the quality of the relationship with the customer and customer communications. Every day, we work on improving the clients' understanding of what would help and we regularly introduce new tools to ease this process.

Do you think your competitors are mainly national or international replicators? Has that changed at all?

As an international group trading in several countries, we obviously have international as well as national competitors. But the national-international aspect is rather secondary. Our permanent quest for improvement requires keeping a close eye on what our finest competitors do best. Our sustainable excellence will only result from such a benchmark and the action plan that follows on our side to match/beat it.

Do you envisage greater consolidation in the replication industry with fewer replicators? How do you think that will affect the industry as a whole?

Consolidation has been quite active in the last years already. After a first run of chosen strategic acquisitions, the market is facing now opportunistic takeovers driven by the large number of casualties touching pressing plants. If it strengthens the position of the remaining "good players", we will see an improvement as only a fair competitive landscape can save this industry from the ridiculous situation in which it dwells at present. The number of players is too high and in this deflating market, further consolidation should bring quality and improve the situation overall.

Do you envisage greater consolidation amongst the content owners and is the client base increasing in number and variety? How do you think any changes are affecting the industry as a whole?

The distribution is reducing the shelves space available for media products and becomes picky. The legitimate digital distribution issue has forced (and will keep on forcing) content owners to review their mid/long term business models and this has an impact on their companies' structure.

Major companies have initiated this merging process and smaller players will follow as well. However, creativity has always been on the side of the independent and the emergence of good legitimate downloading solutions next to online ordering of physical products should improve the business opportunities for our clients and stabilize their revenues.

Kdg has developed its "End-User Fulfilment" offer and will have a lot of opportunities managing the full back-office of our client's direct online ordering.

Is it difficult to maintain reasonable disc prices at the moment?

We have left the area of reasonable disc prices a long time ago and the dumping has now reached a level at which even those with the most fertile business imaginations can no longer kid themselves into believing they are making a profit.

The structural overcapacity in the slow season is mechanically compensated only when the market is quickly growing. When the market does not grow anymore, the necessity to maintain a very high capacity to face the pre-Christmas season demand associated to ongoing price drops is suicidal as there are not enough margins left per product to offset the low season losses.

The emergence of mega plants in countries offering the "magic cocktail" European & Local Subsidies, Cheap Labour and Tax Exemptions is a nightmare because their domestic market hardly exists and their sole business model is price dumping in countries already equipped by enough replication capacity.

Regularly, clients are asking us to match these crazy prices (conveniently becoming "blind and deaf" when the question of compliance comes to disc patents' payment). They want the handiness of a local full service compliant replicator at the price level of these illegitimate manufacturers but this is madness. They have to make a choice and stop acting as if they did not know.

What has been the effect of the polycarbonate cost changes over the past year?

Replicators behave like lemmings but only when it comes to damaging decisions. Each time we can improve our operational effectiveness, we collectively reduce our sales price and the client is at the end the only beneficiary.

But when we suffer from a very adverse situation like material costs increase, we are unable to act sensibly and pass on a justifiable collective increase. Whether some of us got scared to lose their clients or wanted to gain market share is irrelevant, the result is that this sudden increase of polycarbonate has irreversibly destabilized our margin structure.

Do you expect to expand your CD or DVD production in the next year?

That would be counter cyclical planning, but not a kind that pays off.

If you needed to increase CD or DVD production, could this be done with existing production capacities, or would it need upgrades to lines or additional lines?

As a group, we can already optimize the use of our capacity by swapping between our plants. Additional lines are the next option.

What is your view on when BD and HD DVD discs will go into mass production?

Based on the latest developments, we don't think that mass production will happen before at least two years.

When would you expect to start your own production of BD or HD-DVD discs?

Three reasons to delay our decision:

The existing cacophony in the declarations of all the key players, whether they are hardware manufacturers, patent owners or studios. Obviously they did not learn from past mistakes and the fight has very little to do with customer's interest.

Looking at the dreadful way the patent owners are safeguarding the peaceful and equitable use of the very expensive licence a few of us are paying, we will need serious guarantees before considering involving ourselves in the next game.

Last, but not least, we do not see any real interest from the public for the moment as it requires also an investment in new expensive displays and they are not keen on spending again fortunes in software after having already spent a lot in renewing their videotheque.

When our customers will be ready and convinced, it won't take long for us to react.

Do you have any views from the replicator's perspective on the difference and attractiveness of BD compared to HD-DVD?

Industrially speaking, it is definitely the HD DVD format that makes sense. It would allow the replicators to provide rapidly a reasonable solution at reasonable cost for our clients and for the consumers....

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