Despite the delayed launch of next-generation DVD players in 2006 and continued concerns about the market's two competing technical standards, CE makers, retailers and content providers are counting on much stronger sales for the new blue-laser devices in the coming year.

And for good reason. Over the past few months, at least five major equipment manufacturers-Panasonic, Philips, Pioneer, Sony and Thomson/RCA-have begun shipping the high-definition DVD players to retail stores. Overcoming some early shortages of equipment components and other manufacturing delays, the new entrants joined such early market pioneers as Toshiba and Samsung, which introduced their first U.S. players in April and June, respectively.

All of the CE makers also have started plugging their new high-def players more aggressively to early technology adopters and other consumers. Just in time for the past holiday selling season, they launched splashy consumer ad campaigns, in-store demonstrations, movie give-aways and other promotions.

At least four other big CE makers intend to follow these seven manufacturers into the next-gen DVD market in 2007. The line-up of expected entrants includes Hitachi, LG Electronics, Mitsubishi Electric and Sharp Electronics.

"I think, from an early starting point, we're actually doing quite well," says Andy Parsons, senior vice president of advanced product development for Pioneer USA, who has been through his share of new format launches. "It takes time to get a new format launched."

ROLLING OUT THE PRODUCTS

Some early stalwarts already have begun to introduce second-generation models of high-def DVD players. In the fall, for instance, Toshiba came out with its new HD-A2 entry-level player and its more advanced HD-XA2 model.

"We have made significant progress in the past eight months in establishing the next-generation DVD format," says Jodi Sally, vice president of marketing for Toshiba. "Our first generation players were very successful, and we have strong placement of our second generation in all of our key retail partners."

At the same time, Sony finally has begun shipping its long-awaited new video game console, the PlayStation 3 (PS3), which features a built-in high-definition DVD player. As of November, Sony, which delayed the introduction of its new game console twice earlier in the year, aimed to start stocking U.S. stores with at least 400,000 units by Thanksgiving and millions more early this year.

Likewise, Microsoft has started producing a high-def DVD player that can be attached separately to its new Xbox 360 video game console. As this issue went to press, the computer software giant planned to start selling its external HD video drives in its initial market, Japan, in late November. 

"In 2007, the PS3 will start shipping in volume, like the Xbox 360 today," notes Ross Rubin, director of industry analysis for the NPD Group. "That'll be millions of units, rather than the hundreds of thousands projected for the (2006) holiday season." 

Besides the new breed of video players and game consoles, CE manufacturers still are working on PCs and laptops with high-def DVD drives. Sony, Toshiba, Apple, Dell and HP are all either shipping or developing computers capable of playing high-def videos. "There are a lot of cards left to play in this game," Rubin observes.

PROMOTING THE FORMATS

Just as notably, numerous major Hollywood movie studios have started pumping out titles for the new blue-laser disc players. Sony Pictures Home Entertainment, Lionsgate, Walt Disney Co., Warner Home Video, Twentieth Century Fox, Paramount Pictures, Universal Pictures and others all have begun to offer select films in either Blu-ray Disc (BD) or HD-DVD format, or, in some cases, in both. As last year drew to a close, the studios had made more than 100 titles available in each of the two formats.

"We're going to be getting more aggressive," says Lori MacPherson, North American general manager for Disney's Buena Vista Worldwide Home Entertainment, which introduced its first eight titles for Blu-ray players in mid-September and planned to release another dozen or so titles later in the fall. "We're certainly planning on having several releases each month."

Finally, both the Blu-ray Disc and HD-DVD camps have kicked off ambitious consumer education programs to promote their next-gen DVD systems. On the Blu-ray side, for instance, CE makers and movie studios have been busy blitzing consumers with ads, promotions and freebies for the past two months.

"We're certainly not going to be quiet about the introduction of our players," says Pioneer's Parsons, who's also chair of the U.S. promotion committee for the Blu-ray Disc Association (BDA). "You will hear about Blu-ray and PS3 everywhere you look."

GAUGING THE MARKET

As a result, research analysts still believe that the new high-def DVD players will likely make a big splash in the market. They just think that it's going to happen a bit later than many experts originally expected.

CEA projects that high-definition DVD player sales to U.S. dealers will nearly quadruple from an estimated 275,000 units in 2006 to almost 1.1 million units in 2007. CEA sees unit sales to dealers then jumping to 2.6 million in 2008, 4.7 million in 2009 and an impressive 7.6 million in 2010.

In line with these figures, CEA predicts that U.S. player shipment revenues will more than double from an estimated $181 million in 2006 to $417 million in 2007. The association sees shipment revenues then soaring to $1.3 billion by 2010 even as the average wholesale price of a player plunges to just $170, nearly 75 percent less than today's average wholesale price of $658.

"The industry is seeing this category pick up momentum in 2007," says Steve Koenig, senior manager of industry analysis at CEA. "All the way out to 2010, they foresee it really picking up steam."

On a worldwide basis, In-Stat sees shipments of blue-laser DVD players and recorders climbing from an estimated 200,000 units in 2006 to 10 million by 2010. Despite the various launch delays by CE manufacturers last year (2006), the market research and consulting group actually raised its forecasts for global player shipments in the fall.

"I don't have a hockey stick in there," says Michelle Abraham, a principal analyst at In-Stat. "It's steady growth."

Kagan Research remains bullish about the market as well. In its most recent study in October, Kagan projects that total high-definition DVD revenue for the home video industry will rise from an estimated $80 million in 2006 to $2.6 billion in 2009 and approximately $15 billion in 2012. 

The renewed optimism about the high-definition DVD business comes after the CE industry got off to an admittedly sluggish start in the market last year. Hindered by an unexpected shortage of blue laser diodes, limited disc capacity, other manufacturing delays, image quality glitches, few movie titles and general retailer antipathy to dueling formats, most high-def DVD player models came out months later than expected and then only in limited numbers.

In mid-October, for instance, USA Today reported that Best Buy offered just three high-definition DVD players on its website. By way of comparison, the giant electronics retailer featured 58 models of standard DVD players on its site. 

As a result, CEA chopped its original 2006 sales projections for the next-gen DVD players to less than half its initial forecast. Last January, the association projected that manufacturers would sell 605,000 units to retailers by the end of 2006 instead of the 275,000 units in July's revised forecast.  

Koenig says CEA views the recent holiday selling season as "an awareness-building exercise" that will "hopefully prime the pump for 2007."

Similarly, in October, Warner Home Video drastically cut its twin forecasts for the numbers of high-definition DVD devices and discs that would be sold in the U.S. by year's end. Like several other big studios, the Hollywood titan is producing titles in both formats to hedge its bets.

Warner said it expected only 1.5 million playing devices (including pure high-definition DVD players and integrated game consoles and computers with high-def drives) to be sold by January 1, down sharply from its earlier estimate of 4.5 million to six million devices. Likewise, it expected disc sales to generate just $150 million in revenues, down markedly from its earlier forecast of $250 million to $400 million in revenues.

Steve Nickerson, senior vice president of market management for Warner, said consumers spent $30 million on high-def DVD equipment and discs through the end of September, about half of what Warner originally expected. He blamed the low figure on the delayed player launches by most CE manufacturers.

DAZED AND CONFUSED

Widespread consumer confusion about the two conflicting technical formats certainly didn't help matters any. In a fall study conducted jointly by CEA and CNET, 85 percent of early technology adopters, the prime audience for any new electronics product, indicated some awareness of the next-gen DVD players. But only 43 percent expressed real familiarity with the details. And a mere nine percent said they were very familiar with the particulars.

Furthermore, 24 percent of the participants said they didn't know whether either HD disc format was compatible with today's DVD technical standard. In addition, 81 percent expressed concerns about the price of the HD equipment and the cost of updating their extensive DVD libraries with new high-def discs.

"There's still a lot of confusion about the merits of both formats," Koenig notes. Not surprisingly, then, only 32 percent of the "tech enthusiasts" in the survey indicated interest in purchasing a high-definition DVD player.

CE retailers and market analysts say consumer confusion about the different high-definition DVD systems may well continue to dampen sales. Indeed, in a recent issue the magazine, Consumer Reports urged consumers against buying the next-gen players right now, partly because of the on-going format tug-of-war between the Blu-ray and HD-DVD camps.

"Home entertainment history suggests that only one format will be left standing," Consumer Reports advised its readers. "That's what happened in the VHS vs. Betamax battle, the 1970s videotape-format fight in which consumers who invested in the latter format were left with obsolete tapes and players."

CE makers generally downplay such concerns. But even some of the strongest proponents of the new DVD players concede that a prolonged duel between the Blu-ray and HD-DVD camps could stall the market for high-def DVD players.

"The longer we have a format war, the more I worry about consumers staying away," says Parsons, whose company is a strong Blu-ray supporter. "We need to get that behind us."

ONE PLAYER FITS ALL

Some industry officials are hopeful that dual-format players could prove to be the industry's salvation. Both Pioneer and LG initially announced plans to produce combination players but then backed away because of the high costs. Hitachi also has expressed interest in the idea.

Fueling such hope, both Broadcom and NEC have developed audio/video decoder chips that support both high-def formats. In the fall, each company announced new chips that could work in both kinds of next-gen DVD players.

Analysts applaud such moves. Reluctant to predict a format winner at this early stage, analysts warn that consumers could end up shunning both types of players in favor of such potentially competitive technologies as cable-delivered HD video-on-demand (VOD) or Internet-delivered HD video download services.

"It could hamper consumer adoption because people are wary," Koenig says. "The consumers are the ones who are going to cast ballots with their money." 

UNVEILING THE TRI-LAYER PLAYER

The same folks who brought us hybrid HD-DVD and DVD discs now are taking disc technology to a whole new level.

In September, Memory-Tech and Toshiba announced the joint development of a single-sided, three-layer disc to allow users to play standard DVD titles and/or HD-DVD format titles on their current digital video players. Consumers could watch either regular DVD videos on their standard DVD players or an advanced HD-DVD version of the same content on their newer HD-DVD players.     

The creation of this proposed tri-layer optical disc means that Hollywood movie studios and other content providers could stock a single disc with video programming that could be viewed on both standard and HD-DVD players. Thus, consumers wouldn't have to worry about tossing out their old DVDs to upgrade to the new high-definition format, assuming, of course, that they chose to upgrade HD-DVD players rather than the competing Blu-ray Disc players.

This technological breakthrough also means that content providers could possibly put a standard DVD movie, the HD-DVD version of the film and even a related video game on the very same disc. Such a three-in-one disc would enable movie studios and game developers to collaborate on films and games more closely than ever before.

Memory-Tech and Toshiba said the proposed three-layer disc would have room for either two HD-DVD layers and one DVD layer or two DVD layers and one HD-DVD layer. Under a standard DVD scenario, for example, the new disc would provide 8.5 GB of DVD space on the first two layers and then 15 GB of HD-DVD space on the third layer.

That would represent an improvement over the "DVD Twin" format disc that Memory-Tech and Toshiba came up with in 2004. This single-sided, two-layer disc, which was adopted as part of the HD-DVD technical standard and has been used for a number of hybrid software releases since last spring, provides 30 GB of HD-DVD space but only 4.7 GB of standard DVD space.          

The two companies said the tri-layer disc should ease the capacity concerns of movie studios and software providers by supplying "double the maximum capacity for each format". They aim to bring the three-layer disc to the HD-DVD Forum standards body for approval soon and then start shipping the new disc sometime in the coming year.

DVD MARKET AGES WELL

As consumer electronics manufacturers introduce their new high-definition DVD players in the stores, standard DVD players are showing definite signs of aging. But they're still selling surprisingly well, even after nearly ten years on the market.

 In a telling indication of the standard red-laser player's growing maturity, DVD hardware shipments fell in the U.S. for the first time in 2005 after racking up hefty annual increases over the product's first seven years. The Digital Entertainment Group (DEG) reckons that American retailers sold slightly less than 34.4 million DVD players, recorders, set-tops, portable players and other digital video equipment in 2005, down markedly from a record-high 37.1 million like-minded devices in 2004.

Indeed, DVD hardware sales lagged behind the previous year's sales totals in each of the last three quarters of 2005. Fourth-quarter sales particularly slumped, sliding from 17.6 million units in fall 2004 to 14.3 million the following year.  

Yet, even with DVD players now ensconced in nearly 85 million U.S. households, player sales appear to be holding steady at a stratospheric level. Although DVD hardware sales dipped again in the first quarter of 2006 on a year-over-year basis, they rebounded smartly in the second quarter, according to the latest data from DEG. As a result, retailers sold a record-high 14.2 million devices in the first half of last year, up from 13.7 million in the first six months of 2005.

With almost 176 million DVD products now in consumers' hands, DEG credits the DVD player's continued market strength to the spread of the device to rooms throughout the home, as well as to cars, planes, trains and other means of transport. In fact, the industry group reckons that 52 percent of all DVD owners now have more than one digital video player at their disposal.

Not surprisingly, then, CEA projects that sales of non-HD-DVD players will remain strong during the next few years even as high-definition player sales start to take off. In its latest forecast last July, CEA predicted that U.S. electronics manufacturers will ship nearly 22.2 million DVD players and recorders in 2007, up from an estimated 19.3 million units in 2006, as recorder sales continue to surge amid falling prices. 

It's a somewhat different story for DVD video sales, which may have topped out in 2005 after eight straight big annual increases. North American DVD video software shipments to retailers slipped to about 742 million units in the first half of 2006, down four percent from 772 million units in the first six months of 2005, according to DEG's latest figures.

BETTING ON PLAYSTATION 3

Like other CE industry officials and experts, Andy Parsons is counting heavily on new video-game consoles to boost sales of next-gen DVD systems over the next year or two.

As the senior vice president of advanced product development for Pioneer USA and chair of the U.S. promotion committee for the Blu-ray Disc Association (BDA), Parsons is particularly counting on Sony's new PlayStation 3 to generate more consumer interest in Blu-ray Disc players and programming. Despite various equipment component shortages and two unexpected shipment delays for the PS3 in 2006, he believes that the latest PlayStation model will spur interest with its embedded Blu-ray player.

"Next year (2007) is the year when we're expecting to see the numbers really pick up, a lot due to the PlayStation 3," he says. "In the first half of the year, we should really start to see a big acceleration."

Parsons notes that Sony, which began stocking the PlayStation 3 in U.S. and Japanese stores in mid-

November, intends to accelerate console shipments by the spring. Plans call for Sony to ship a total of six million PlayStation 3 devices worldwide by the end of March, after shipping 500,000 units at launch and about two million units by the close of 2006.

"So we'll have an awful lot of consumers out there," says Parsons. "That will create enormous demand for content. That's going to really snap into focus for people."

In its latest forecast, CEA projects that videogame console sales from manufacturers to dealers will climb to nearly $4.6 billion in 2007, up a neat $1 billion from an estimated $3.6 billion in 2006. CEA credits the projected gain at least partly to Sony's introduction of the PS3.

Industry experts believe the PlayStation 3 also will entice consumers to try out the new Blu-ray DVD format because of its appealing price. While the console's $499 price tag in the U.S. is considered pretty high for a videogame console, it's relatively low for a high-definition DVD player, particularly a Blu-ray model.

As a result, the experts see the PlayStation 3 as the wildcard in the great high-def DVD market duel between the Blu-ray camp, headed by Sony, and the HD-DVD camp, led by Toshiba. Although the HD-DVD side does have the new Microsoft Xbox 360 console on its side, the Xbox 360 offers only an external HD video drive that can be attached separately, not one that comes embedded in the game machine itself.

"The PlayStation 3 really gives Blu-ray an advantage," says Michelle Abraham, a principal analyst at In-Stat. "The Xbox 360 will help HD-DVD but it's not as automatic as if it were integrated."

The jury, though, is still out on the PS3 factor. Experts say the console's impact on the high-def DVD market probably won't become clear until at least next fall.

"We continue to wait for the (high-def DVD) market to mature a little more," says Ross Rubin, director of industry analysis for the NPD Group. "There are a lot of cards left to play in this game."

By Alan Breznick
January/February 2007