Killing the Golden Goose

Although European Blu-ray Disc sales tripled in 2009, year-end sales figures fell short of pre-recessionary forecasting, leading to a significant over-supply of discs. Was the industry's reaction to this situation - to slash the price of the new format - in the best interests of the market? RICHARD COOPER, Senior Analyst at Screen Digest, takes a hard look.

By 2009, four years from launch, the average price of a Blu-ray Disc across Europe had fallen to €21.28, down 23% compared to the launch price of €27.61. By comparison, DVD prices fell just 11% in the first four years, to €23.27. This is despite a stronger product mix on BD, including more special edition films and expensive TV boxsets, compared to the feature film-heavy skew of early DVD. The biggest reason for this difference is that pricing strategies developed for the decade-old DVD format-aggressive pricing of new releases and rapid progression to catalogue promotions-are already being applied to BD.

The rationale behind such price promotions is simple; lower pricing will increase sales and encourage format adoption. It's true that retail analysis has shown that such strategies used towards the latter end of DVD's growth cycle did help maintain sales volume. However, for when applied to BD, which is still essentially at the 'early adopter' stage, there is a strong argument that this approach simply risks leaving money on the table.

Of course, average BD prices were always going to fall; Screen Digest forecasts anticipate an annual decline of up to 10% across Europe over the next few years. Even if new release prices were to remain unchanged (which is highly unlikely), lower average pricing is inevitable as the proportion of the market accounted for by cheaper catalogue product increases. But the current promotions, which are driven by retailers and content owners alike, go much further. If the trend continues there is a real risk that the price premium enjoyed by BD over DVD could be irrevocably undermined, making it much harder, if not impossible, for the newer format to restore the packaged media market to growth.

In 2009, consumers paid on average twice as much for a BD as for a DVD - €21.31 compared to €11.30, according to Screen Digest analysis, a premium of 92%. Our current European forecasts assume that average prices for both BD and DVD will continue to fall throughout the forecast period, and that the BD premium will fall to 33% by 2014, when the average BD will cost €12.06 compared to DVD at €9.05.

Screen Digest's forecasts are underpinned by a proprietary mathematical model that uses current BD sales numbers and the historical performance of DVD, combined with a number of competitive, economic and market factors, to generate consumer unit sales forecasts. Consumer price is one of the most influential factors in this forecasting methodology, second only to the size of the installed base of BD hardware. The construction of the model enables us to adjust these factors to ask 'what happens if ... ?'

In common with our current forecasts, both the scenarios outlined below assume that European DVD prices will fall by an average of 4.2% per year between 2010 and 2014. The only difference is the speed of the BD price decline and thus the BD premium.

What if BD prices fall more steeply? Reducing the price premium in 2014 from 33% to 13% changes the 2014 BD price from €12.06 to €10.31, making a BD only slightly more expensive than a DVD. However in real terms this equates to only a moderate adjustment to pricing, representing an annual decline of 15.7% compared with the 12.1% in our current forecasts.

As might be expected, adjusting prices by 3.5 percentage points per year only increases BD sales marginally, adding 7.3m units over the five forecast years and raising 2014 BD unit sales to 173m from 170m. Although the number of DVD units is adversely affected (down 1.7m over the forecast period) the net impact is an increase of 5.6m units. However, the upturn in volume fails to offset the lower spending per disc, reducing total European consumer spending on physical video in 2014 from €5.9bn to €5.6bn, and effectively leaving up to €756m on the table over the five years.

What if BD holds its price better? If we assume that the BD premium only slips from today's 92 per cent to 53 per cent, the annual price decline is around seven per cent, resulting in an average BD price of €13.93 in 2014. BD unit sales are inevitably lower, reaching only 166m by 2014-a net loss of 8.9m units over the five years. Meanwhile DVD sales rose 2.4m due to the slower transition to BD, but the net result is a loss of 6.5m in total video volume sales. The effect on consumer spending is, however, positive, with total spending increasing to €6.2bn in 2014, representing a net gain to the industry over the whole forecast period of €808m.

Some observers might argue that the model underestimates the importance of price to consumers. However, we firmly believe that the installed base of hardware, not software pricing, is by far the most critical factor for near-term market growth. Moreover, an annual difference in price of three per cent either way as described here is likely to go entirely unnoticed by all but the most price focused consumer-and this type of consumer is by definition less inclined to buy into a premium-priced upgrade to their existing home entertainment system.

In fact both scenarios show that the number of BD-enabled households is still too small for even substantial price reductions to drive volumes sufficiently to boost spending. We are still a long way from this being a mass-market product, and the majority of today's BD consumers are buying the format because they want it, not on impulse.

Thus, despite its minimal impact on individual consumer behaviour, such price erosion can significantly affect the bottom line. With the decline in spending on physical media now unlikely to be reversed, the industry desperately needs the boost in consumer spending that only BD can provide. Slashing BD prices at this stage is a short-term patch, not a long-term driver, and one which risks reducing revenues throughout the supply chain in the longer term. (Published in the PEVE 2010 conference brochure; re-published with permission).

Contact: www.screendigest.com
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