Blu-ray boom not enough to rescue DVD sales

Since Blu-ray Disc's victory in the hi-definition DVD format war, data have trickled in suggesting a sales boost for Sony's fledgling technology. But if the pace doesn't quicken, home video might not return to sustained growth mode for several years. In December, when Sony's duel with rival Toshiba was raging and next-generation DVD players and movies were a popular Christmas gift, 63% of next-generation DVDs sold in the U.S. were Blu-ray.

In March, however, the first full month after the format war ended with Toshiba's surrender, Blu-ray's advantage swelled to 81%, according to Redhill Group. In the first quarter this year, 4.9 million next-gen movies were sold, 3.8 million of which were Blu-ray. That's half of the 9.8 million copies of 536 different titles that have been sold in the U.S. since the inception of Blu-ray and HD DVD.

However, the numbers -- while impressive since mid-February, when HD DVD threw in the towel -- don't make up for sagging traditional DVDs, sales of which might have peaked two years ago in terms of revenue. Citigroup analyst Jason Bazinet figures that wholesale DVD revenue worldwide, for theatrical releases only, came in at $25 billion in 2006, dropped to $23.1 billion last year and will further decline to $21.4 billion this year.

"The industry appears to be lowering pricing to keep demand aloft," he said in his recent 2008 studio forecast. Library titles have seen the biggest decline in DVD sales. While Disney makes an exceptional $2.3 million per year on each of its 990 library titles, most other studios generate only $300,000 per title. Time Warner, with 6,600 library titles, makes the least per title because a large number of them are in black and white.

Bernstein Research analyst Michael Nathanson also crunched the numbers and concluded that, even since the end of the format war, folks are only mildly interested in Blu-ray discs. At the end of 2007, there were at least 3.5 million Blu-ray players in U.S. homes. At most, each of those households had purchased an average of three Blu-ray titles. Nathanson said that the same point in the adoption curve of standard DVD players, each household had purchased as many as 30 DVDs.

The disparity isn't surprising, though, considering most Americans are so happy with their switch from VHS to DVD that they just don't see the value proposition of making another switch to Blu-ray any time soon. Plus, since the vast majority of Blu-ray players are in homes because Sony has embedded them into the PlayStation 3 video game consoles, many consumers don't seem to care that they even have a Blu-ray player.

Until stand-alone Blu-ray players -- the cheapest is about $370 -- fall to below $200, Americans en masse won't adopt the new technology, experts predict. Nathanson predicts in a recent 27-page report that that won't happen until the end of 2009. In addition, he says, many Blu-ray households will upgrade only small portions of their libraries, particularly their favorite action and sci-fi films. "We have a hard time understanding why consumers will rush out to Best Buy to pick up the Blu-ray version of 'Caddyshack' or 'Sleepless in Seattle,"' he said.

The analyst figures that early Blu-ray adopters eventually will average about six to 10 titles apiece. But, with the extra $10-$15 per unit Blu-ray commands, it might be enough to put home video back into growth mode. Taking into account that Blu-ray sales will cannibalize a large portion of standard DVD sales, Nathanson says that during the 2007-2011 period, home video could boast a 2.4% compounded annual growth rate in revenue. Without Blu-ray, he estimates home video would have lost 2.2% each year during that same time frame.

His forecast assumes that stand-alone Blu-ray players, in about 1% of U.S. households by the end of this year, will expand their reach to 25% by the end of 2011. He also assumes that the average price of a Blu-ray disc will drop from $28.50 this year to $24.43 in 2011 and that overall revenue from Blu-ray movies sold in the U.S. will rise from $260 million this year to $4.24 billion in 2011.

Blockbuster to Promote Blu-ray Disc With In-Store Kiosks

While standard DVDs are still the overwhelming format of choice for the mass market, corporations are looking to high-definition as the next growth frontier. Blockbuster announced last week that it will begin ramping up even further promotional efforts to present the virtues of Blu-ray Disc to their customers.

Blockbuster will install in select locations special Blu-ray Disc kiosks equipped with a 42-inch HDTV and PlayStation 3 console. Movies will run on the kiosk, enabling customers to view high-definition picture quality. Blockbuster also pointed out that its kiosks will also drive home the point that PS3 consoles double as Blu-ray players, though it’s unclear if Sony had any part in planning the kiosks initiative.

For its rental-by-mail service, Blockbuster will now offer subscribers a Blu-ray preference setting so they can automatically indicate that they want to receive all available movies in the high-definition format. Blockbuster’s online service will also continue to serve all available HD DVDs for customers who demand that particular format.

Last summer, Blockbuster was one of the first corporate giants to dump HD DVD in favor of Blu-ray Disc. The rental firm said in June 2007 that it would rent only Blu-ray Disc movies in 1,450 stores that offer high-definition options, while only 250 of its pilot stores would also stock HD DVD.

"Blockbuster was the first national retailer to accurately recognize and react to consumers' preference for this format when we added Blu-ray discs to a large percentage of our stores last summer," said David Podeschi, a Blockbuster SVP. "Now, with this national rollout, we believe Blockbuster is perfectly positioned to drive consumer adoption of this next generation DVD format and to become the customer's headquarters when it comes to renting or buying Blu-ray movies, whether in-store or online."

Podeschi continued, "Our mission at Blockbuster is to provide consumers with convenient access to media entertainment -- whether that's with Blu-ray or standard DVDs, retail or rental, through our stores, by mail and through new technologies."

Besides DVD and Blu-ray Disc, Blockbuster is also exploring the realm of digital delivery. The company revealed last week that it plans to offer rentals as part of a streaming online service, likely through its Movielink property.
 

Blu-ray Disc drive prices may not fall as quickly as expected, say Taiwan makers

Although international vendors of desktop and notebook PCs, in their road maps of product development to promote Blu-ray Disc (BD), expect ODM/OEM makers to gradually reduce their quotes for BD drives, sources in Taiwan's optical disc drive industry indicated that increased costs for pick-up heads (PUHs) and other components may render the expectations practically impossible.

PC vendors are forecasting a price drop of 7-10% a quarter, with the price level for the fourth quarter of 2008 expected to be 30% lower than current prices, the sources noted. For example, international vendors expect ODM/OEM quotes for half-height BD-ROM drives to drop from US$95-100 currently to US$70 in the fourth quarter of 2008, the sources pointed out.

However, the cost of PUHs and other components of BD drives have risen a few times since the second half of 2007 and price hikes of another 5-10% are possible in the near-term, mainly due to price increases for materials, the sources explained

In addition, global supply of BD PUHs has appeared to be tight due to increased orders for BD drives, the sources noted. Thus, it is very difficult for ODM/OEM pricing of BD drives to drop by as large a margin as international vendors hope for, the sources explained.