Gearing up for a Blu future

As the industry hopes for a Blu Christmas in 2008, Screen Digest’s HELEN DAVIS-JAYALATH and RICHARD COOPER assess the issues facing Blu-ray Disc as it seeks to achieve mass market acceptance.

Less than six months after Warner made its pivotal decision to support the Blu-ray Disc (BD) format exclusively, bringing the hi-def format war to an abrupt end, HD DVD already seems like a distant memory. But the legacy of 18 months of intense format rivalry should not be under-estimated. Had the industry united behind a single format from the start, it is extremely unlikely that player prices would have fallen as fast as they did. When they first launched in mid 2006, BD players cost around $1,000 in the US.

By the time Toshiba effected its dignified withdrawal from the race in February 2008, US consumers could buy a standalone player for as little as $400. A similar trend could be seen in Europe, although actual prices were, inevitably, higher. By comparison, it took about five years for DVD prices to fall to similar levels.

And there is a clear correlation between hardware price and take-up. Screen Digest analysis of early DVD data shows that in both the US and Europe, sales began to accelerate once average (rather than entry-level) prices reached around €350.

However, since the resolution of the format war removed the element of competition, our research suggests that like-for-like BD player prices may actually have risen in the US in the first few months of 2008. Analysis of data from price comparison website PriceGrabber.com indicates that the lowest weekly selling price of four BD players—the Samsung BD P1400, Sony BDP S300, Sharp BD-HP20U and Panasonic DMP BD30K—rose by as much as 34 per cent between January and end April 2008. Overall, however, the trend is still downwards, with the first sub-$300 players emerging in Wal-Mart in late May: the MagnaVox NB500MG9 and Sylvania NB500SL9 are both profile 1.1 machines manufactured by Japan’s Funai.

BD growth is behind DVD… or ahead of it!

By the end of 2007 around 56,000 European households had acquired a dedicated BD player according to Screen Digest data. This is substantially lower than the penetration achieved by DVD at the equivalent stage in that format’s evolution; by end December 1998 over 200,000 European homes had acquired a DVD player. However, the real difference between the two technologies is the fact that Sony’s BD-enabled PlayStation 3 games console launched right at the beginning of the BD story, rather than several years later as was the case for the DVD-capable PS2, adding a further 3.2m BD-equipped homes in Europe by end 2007.

Bearing all this in mind, Screen Digest anticipates that by the end of 2008 just over 1m European homes will have acquired a standalone BD player, compared with almost 8m who will have a PS3. However, the cyclical nature of the games business means that PS3 sales will start to slow down just as dedicated players get into their stride, meaning that we expect the number of standalone BD players to overtake the installed base of PS3s in early 2011.

Harnessing the power of PS3

It’s no secret that it was the potential of tapping into the vast installed base of PS3s that persuaded Warner to throw its weight behind the Sony-backed BD format at the expense of its old ally Toshiba. However, so far BD buy-rates among PS3 households have been substantially lower than those in standalone BD player homes, reflecting the fact that the majority of PS3s are bought first and foremost for their gaming capabilities. Furthermore, even in standalone BD households, buy rates still lag behind those seen in the early days of DVD; the backwards compatibility of BD hardware means there is no need to replace existing DVD libraries.

However, research from the US suggests that it may be possible to increase movie-watching activity among PS3 homes. Speaking at Screen Digest's PEVE Digital Entertainment conference in Paris in April 2008, Warner Home Video President Ron Sanders unveiled consumer research indicating that between the last quarter of 2007 and the first two months of 2008 the amount of time US PS3 households devoted to watching BD movies on the games console rose from around 15 per cent to 23 per cent.

The research also indicates that the proportion of US PS3 households using the console as a BD player rose steadily over the same period, from 53 per cent in September 2007 to 80 per cent in January/February 2008. Sanders also revealed that, following a Sony TV ad campaign encouraging people to 'watch movies on PS3', the incidence of US PS3 households buying BD movie discs apparently rose from less than 10 per cent in October 2007 to over 15 per cent in December.

It is, of course, impossible to quantify how much the usual Christmas gift-giving season (and subsequent increase in new BD homes) would have increased consumer spending on BDs without the promotions, and indeed how much of an impact the relative lack of strong PS3 games titles over this period contributed to the console's use as a BD player. Nonetheless, the research suggests that there is potential for increasing BD activity in existing PS3 households.

Furthermore, we anticipate that in the mid-term the PS3 and will become increasingly popular among consumers seeking an entry-level Blu-ray player. Not only does it cost about the same as an entry-level dedicated player (around $400) but, crucially, it can be upgraded via firmware updates to cope with the still-evolving BD specification, something not available to most standalone models. This in turn would also help raise average buy rates in PS3 households.

And the sheer size of the PS3 installed base means that even a minimal increase in buy rates could have a substantial impact on total hi-def software sales. Screen Digest has modeled the potential impact of an uplift in BD buy rates in both standalone and PS3 households on total European BD software sales.

– Consumers in Western Europe bought 2.2m BDs in 2007, a figure which is set to rise, based on current Screen Digest forecasts, to 14m in 2008 and 143m in 2010.

– If the average buy-rate in European PS3 households rose from the current level of less than one unit per household per year to just 1.5 units, software sales could rise to 18m units in 2008 and 170m in 2010.

– And if, in addition, owners of standalone players could be persuaded to raise their average BD buy-rates to the levels seen among DVD owners at the equivalent stage in that format’s development, total BD sales could reach 22m units this year and 214m units in 2010 – 50 per cent higher than our current forecasts.

Does Europe have the capacity to meet increased BD demand?

These forecasts reflect only BD video units (movies, TV series, non-fiction titles, etc.). However, since all PS3 games are also released on BDs, the fledgling BD replication sector is also gearing up to meet the needs of the games industry. Screen Digest estimates that, based on current forecasts, demand for BDs from the home video and games sectors combined will increase from 13m units in 2007 to 43m in 2008, with games accounting for 60 per cent of the latter figure.

Furthermore, these figures are for stock keeping units (SKUs) only; the actual number of discs required will be higher still, reflecting the fact that some SKUs (like the BBC’s four-disc Planet Earth series) will more than a single disc. And, of course, demand from the end-user is only part of the story; as the format becomes more mainstream retailers will require a steady stream of additional copies to create or expand BD games and video displays and to build sufficient copy depth.

Concerns have been expressed as to whether the fledgling BD replication sector will be able to handle this simultaneous demand for both games and video on a new format. However, competition between the two sectors for BD replication capacity may not be as intense as it first appears.

Screen Digest research indicates that - despite recent claims by the producers of Metal Gear Solid 4 that some material had to be lost in order that the game be ‘squeezed’ onto a BD – most games will be published on single layer BD25 discs, at least during 2008. Meanwhile, while a single layer BD25 is more than adequate for a full-length hi-def feature film, most replicators expect BD50s to be the US studios’ disc of choice for video content.

This reflects the desire of Hollywood to include additional bonus hi-def content and value added material (VAM) to BDs, thus increasing consumer perception of value and requiring higher capacity discs. And, since the US studios account for 90 per cent of BD video replication to date, their approach currently defines the market. Indeed Sony DADC, dominant replicator of PS3 games, anticipates that 90 per cent of its BD25s will be games discs.

As independent video publishers enter the market, the lower cost of BD25s may increase demand for this configuration for BD video, although we anticipate that over time demand will swing back to BD50 as confidence in the format and availability of material builds.

Inevitably, Sony DADC is expected to account for the lion’s share of BD replication at this early stage of the market. The company already boasts worldwide production capacity of 6m discs per month from 41 BD replication lines and expects this to rise to 38m discs by October 2008. Screen Digest’s research indicates that this would enable DADC alone to satisfy around 60-70 per cent of demand based on current forecasts.

In addition to the locally-based divisions of other multi-national players such as Technicolor and Cinram, Europe boasts a strong independent replication sector, reflecting the fact that, irrespective of format, games and video product for consumption on this side of the Atlantic is typically manufactured in the region. Differences in video playback standards and the need for alternate language soundtracks and subtitles necessitate local authoring and thus replication. It will therefore fall to European-based replicators to meet the 43m BD SKU consumer demand.

The number of replicators able to produce BDs is increasing steadily, although there is still a long way to go. By the end of the first quarter of 2008, six Western European replicators (including Sony DADC) had signed up to the Format and Logo License Agreement (FLLA) required for BD ROM production. By mid May the number had risen to 11, eight of which had active BD replication lines in place. Meanwhile, over 90 different companies are currently involved in DVD replication in the region. A key issue for would-be entrants to the BD arena is the high installation cost and lack of backwards compatibility of BD replication lines.

Since BD requires a completely different replication technology from its predecessor, DVD lines must be replaced, not upgraded. Moreover the current generation of BD replication lines cannot be re-configured for DVD replication, meaning that unless additional floor space is created to house BD lines, replicators must replace existing DVD lines and thus reduce capacity for the standard format. In other words, for most companies the price of getting ahead of the field will be a trade-off between more certain demand for DVD and speculative demand for BD.

In the future, increased flexibility may be possible; M2 Engineering is working on a bolt-on upgrade unit that will enable existing DVD lines to be upgraded for BD production. However, a prototype is not expected until September 2008 and delivery is unlikely before 2009, meaning that this will not address the immediate capacity issues.

According to Screen Digest research, a single layer (BD25) BD production line costs around €900,000 with a dual layer (BD50) upgrade available for a further €600,000. Both Anwell and Singulus are also now offering BD 50 lines that can be reconfigured to BD25 if required, although our research indicates that list prices for these second generation machines are in the €2m range.

By the end of the first quarter 2008, an estimated 15 BD replication lines had been installed in Europe. Sony DADC again dominates, operating a combination of BD25 and BD50 lines for game and video replication respectively. Many independent replicators, on the other hand, have installed BD50 lines whilst our research suggests that several who initially opted for BD25 production are now upgrading to BD50 to meet the anticipated demand for higher capacity video discs, primarily from the US majors. As the BD market matures and more independent European publishers becomes involved, demand for the lower cost BD25s may increase, but since BD50 lines can be reconfigured to produce BD25s the higher spec lines are proving more popular.

Screen Digest has modelled total European production capacity for BD based on daily replication capacity, current yield rates and estimated up-time (the proportion of the time any given line can be expected to operate non-stop), assuming a constant rate of 24 hours-a-day, 7 days-a-week production. At the time of writing, based on available data, our model indicated that Europe replicators could produce around 80 per cent of anticipated demand in 2008.

However, when seasonal demand for discs is taken into account, there is likely to be a need for further capacity still. While consumer demand for both games and video BD will grow throughout 2008, it will be disproportionately high in the fourth quarter as hardware price cuts and gifting drive BD into early mass market. The capacity issue will become increasingly evident as production bottlenecks affect both disc and title availability. One thing is certain: European publishers hoping to take their first steps into BD production in time for Christmas 2008 need to act now to secure the necessary replication capacity.

Helen Davis Jayalath is Head of Video at Screen Digest. Richard Cooper is a Video Analyst with the company. Screen Digest is the pre-eminent source of business intelligence, research and analysis on global audiovisual media. Based in London, the company has tracked the development the world's media markets for more than 35 years and employs a team of 40 specialist analysts covering film, television, broadband, mobile, cinema, home entertainment and gaming. For more information see www.screendigest.com...

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