The market for HD discs

With the pending arrival of the two competing high definition video disc formats, this is a good time to take stock of what has happened over the past few months and to look ahead at the prospects for high definition video discs in Europe, says JIM BOTTOMS, Managing Director of Understanding & Solutions.

The continued delays in bringing either (or both) formats to market are something of a cause for concern given the fact that media attention is increasingly focusing on new and alternative delivery options for video programming (online sell-through and rental, video iPods and content to mobile phones).

This, at a time when attention is frequently drawn to the fact that the DVD bubble has now largely burst, could create an increasingly difficult environment in which to launch a new packaged media
format.

Against this, however, is the growing momentum behind High Definition programming from the TV set manufacturers (HD ready sets) and the broadcast/pay TV industries. This has already started on a low key basis in Europe, whilst the profile of High Definition broadcast services in Europe is set to explode around the time of the football World Cup.

Taking all of the above into account, we remain confident that a disc based High Definition format will emerge over the next few years to re-kindle the packaged media business and help contribute to revenue growth for the home video industry, although all the indications are that any European disc format marketing will be relatively low key for most, if not all, of this year. In addition to the packaged media companies, many other industry sectors will also be boosted by the arrival of High Definition.

Overall, the battle ground for High Definition Video disc-based formats will be won and lost in the US market. If neither format succeeds in the USA there will be no long-term future in the European market. Volume cost efficiencies and content industry support issues will make any international success short lived without US adoption.

It is our assertion that the initial consumer appeal for adopting a High Definition disc based format will come from entertainment content (primarily movies, other video content and games), with any potential demand for recording or storage following at a later date.

THE FORMAT BATTLE

At this late stage it would appear that any prospect for format harmonisation is long dead and therefore it is now likely that both will come to market.

After a series of seemingly weekly announcements regarding delays to the product launches of both formats, it would currently appear that HD DVD is scheduled to make its US debut in late April/early May of this year, with a limited release of Blu-ray hardware and titles expected to follow in May/June. European launch dates are less certain but Q4 for both formats is looking the most likely at present.

HD DVD would appear to have the benefit of lower hardware prices, although in our estimation this advantage may only be short lived once the two formats come head to head in the retail environment – most likely now in 2007. Until then it is thought that relatively limited quantities of players and a reduced range of titles will be available in Europe.

Against this the Blu-ray camp still appears to have the edge as far as industry support is concerned, at least this is certainly the case at the time of writing (end of March).

The performance of PS3 and Xbox 360 is also going to have an impact on the future success of the business. All PS3 players will feature Blu-ray disc video playback capability which is almost guaranteed to put 15 to 20 million players in European homes within the first three years of marketing. This will help to achieve scale economies with key components including the disc drive and blue laser diode and help to boost demand for video content on Blu-ray as well as PS3 games. Microsoft meanwhile is planning to offer an HD DVD drive upgrade option for Xbox 360 owners later this year in the USA and potentially in Europe during 2007.

The Display Pull And Broadcast Push

Our expectation of success for a High Definition disc format is based on the fact that the consumer is, in increasing numbers, being sold on the benefits of High Definition by the display manufacturers and the broadcast community (including the cable and satellite companies). Without this push the forecasts for High Definition disc players and disc sales would be somewhat more cautious.

The prime ‘demand pull’ is coming from purchasers of large flat panel plasma and LCD TV displays. These are being acquired because of their overall consumer appeal (flat, high tech) with an increasing number being sold as ‘HD Ready’. In addition, consumers are migrating to larger screen sizes, stimulated by the availability of flat panel TVs. It is these larger screens that show off High Definition to the best effect.

Flat Panel TVs are one of the hot consumer electronic items of the moment and thus the installed base of High Definition ready TVs is projected to continue to show healthy growth over the next few years, even without a High Definition disc based format.

In parallel with this, the cable, satellite and broadcast community are launching High Definition programming channels in order to increase average revenues per subscriber and to reduce subscriber churn. High Definition broadcasting is already happening in the USA, with most cable and satellite companies offering a limited but expanding service. By the end of this year it is estimated that an estimated 16% of US homes will be receiving some programming in HD and this is projected to exceed 25% by the end 2007.

In Europe, broadcasters have been slower to get involved, although most premium pay TV service providers are gearing up to launch services to coincide with the soccer World Cup being held in Germany late this year. This traditionally results in a short term boost for TV sales and subscriptions for channels providing access to the games. Premier in Germany, Sky in the UK and Canal Plus in France are all readying for HD service launches over the next few months.

Whilst take-up is projected to be gradual over the next few years, this activity will help to create an awareness of High Definition in Europe. By the end of 2009 it is projected that some 10 million European homes will be receiving some of their TV content in High Definition.

It is clear from the US experience to date that High Definition programme viewing is generating very strong interest amongst those subscribing to these services. This is clearly not the mass market yet but is focussed towards higher income groups and the more technology /quality savvy consumers. Consumer feedback among those with High Definition services available shows a very strong preference for viewing any program in HDTV in preference to viewing specific programming in standard definition. “Consumers would rather watch nature programs in HD than sports in SD” is how one channel operator put it.

The commercial/free to air (FTA) broadcasters in Europe also recognise the need to make a move to High Definition broadcasting, although in most cases costs and available spectrum are major issues. At this point the FTA broadcasters are developing their High Definition plans.

Programme Production

The programme production community in Europe is already investing heavily in High Definition programme origination. This is having a significant impact on the equipment industry as well as the studios and post production houses.

Already much of the premium programme production is shot in High Definition, including a lot of sports, documentary, science and drama productions. In part, this is future proofing the content, but increasingly it is also a must for sales into international markets, including Japan and the US.

As a result, as High Definition services expand and the disc markets begin to emerge, there will be no shortage of High Definition content to help drive the market.

Market Outlook

Despite the delays in European launch, discussed earlier, the broadcast, display and programme production stimulus should combine to encourage a fairly rapid uptake of High Definition disc players in Europe. Whilst hardware sales this year are not expected to be significant, more than 6 million player sales are forecast in 2007 (including games consoles) rising to over 20 million by 2010.

Cumulatively over 55 million High Definition disc playing devices (excluding PC drives) will have been sold by 2010, equivalent to one player in every third home.

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