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ANALYSIS Europe - battleground for next-generation formats

The war of words between Blu-ray and HD DVD is intensifying and Europe has become a key battleground. Sony's Blu-ray-enabled PS3 games console finally launched here in late March and immediately dwarfed all previous sales of hi-def video hardware. Meanwhile, HD DVD is building relationships with Europe’s independent publishers, authoring houses and replicators as it waits for the price of its hardware to fall. HELEN DAVIS JAYALATH, Senior Analyst at Screen Digest, tells why peace is not yet in sight.

PS3 shifts the hardware balance overnight

By delaying the European launch of the PS3 by four months to 23 March, Sony was able to ensure it had adequate stock of the machine to meet initial demand – a far from usual occurrence in the games sector in recent years. Although this strategy caused some observers to suggest that the continuing availability of the console must reflect slower than anticipated demand, first weekend sales of around 500,000 units across Europe were in line with expectations, and actually broke records in some markets.

As in the US, Sony leveraged its combined hardware and software strength to run a 'soft' bundling deal designed to raise awareness of the link between the PS3 and Blu-ray Disc (BD). The first 500,000 European PS3 owners to register on the PlayStation Network received a free copy of Casino Royale on BD. This no doubt served to remind the first wave of owners - a majority of whom will arguably have bought the machine for gaming rather movie playback - that their new console is also a BD player, and a very good one at that. A similar launch promotion in the US resulted in the distribution of several hundred thousand ‘free’ copies of Talladega Nights: The Ballad of Ricky Bobby, along with a substantial number of money off vouchers towards the cost of buying a further BD movie.

The real importance of the PS3 launch is that it marks the first time that the video business has managed to harness the huge volume sales that often characterise games console launches. Although Sony's PS2, Microsoft's Xbox and Panasonic's GameCube all play DVDs, the launch of all these consoles post-dated that of DVD by two or three years so had no impact on early format adoption. This time round, however, Sony is taking every opportunity to reinforce the PS3/Blu-ray link. And with Microsoft's hardware support for HD DVD limited to an optional add-on drive for the Xbox 360, Blu-ray was always going to dominate the games sector.

So is it 'game over' for HD DVD? The fact that Blu-ray can also boast a stronger line-up of both consumer electronics brands and Hollywood support certainly seems to have convinced some observers. And the Blu-ray Disc Association (BDA) publicity machine is doing everything in its power to convince consumers and the industry alike that the 'war' is effectively over already. However, Screen Digest, which has been commenting on the video industry since before the launch of VHS and Betamax, believes that it is much to early to declare a winner just yet.

Reports of the death of HD DVD 'much exaggerated'

Although Blu-ray launched in Europe (albeit in a limited way) as early as October 2006, whilst Toshiba’s first HD DVD player only just arrived in time for Christmas (and didn't even manage that in some markets), the latter format actually accounted for the lion’s share of hi-def hardware sales in 2006, according to Screen Digest research. This situation continued throughout the first quarter of 2007; by the end of March HD DVD still accounted for around 80% of the installed base of standalone (ie, excluding games consoles) hi-def players. And this is not just a European phenomenon; HD DVD players are also outselling standalone BD models in the US, with Toshiba claiming to have celebrated the format's first anniversary in mid April by selling its 100,000th player.

This suggests that price does matter, at least for some early adopters. By March 2007 aggressive retailer discounting already meant that US consumers could buy an HD DVD player for $350 compared with $500 for a basic standalone BD player. Following the development of a ‘system on a chip’ solution for HD DVD production by Broadcom and Microsoft, several new manufacturers pledged support for the Toshiba-backed format, and Chinese companies LiteOn, JK, Alco and Shinco have all stated that they plan to launch 'affordable' HD DVD players this year.

Meanwhile, Toshiba reduced the price of its own HD DVD players from 1 April, with the SRP of the entry-level HD-A2 dropping from $499 to $399. Despite Sony’s recent announcement that it will launch a fully-spec’d BD player for a US list price of just $599 this summer, it seems inevitable that HD DVD will maintain its position as the cheapest way to buy into hi-def video. And although no announcements had been made by either side at the time of writing, Screen Digest expects similar price reductions in Europe in time for Christmas 2007.

The secret’s in the software

But hi-def hardware is no use without software. Here again, BD currently occupies a commanding position. With seven of the eight major studios already publishing on the format, it can rightly claim to offer the greatest number of major titles. The BDA has been quick to illustrate this with the now familiar table showing that 18 of 2006’s US Top 20 DVDs are distributed by BD supporters against just four that are supported by HD DVD backers (although it is worth noting that the same analysis carried out on the 2005 Top 20 shows a slightly more even balance, due to a stronger slate of titles that year from the HD DVD supporters).

Mini-major Lionsgate is also part of the BD camp whilst The Weinstein Company (TWC) has aligned itself alongside HD DVD; New Line has announced (but not yet released) titles on both formats. Of the half dozen smaller independents that have begun publishing on hi-def, three are releasing on both formats and three are currently exclusive to HD DVD. As a result, by late April US BD aficionados could choose from a total of 234 titles, according to Screen Digest analysis, compared with an HD DVD slate of 189. Adding titles with a confirmed release data into the analysis narrows the gap; 267 BD titles v. 237 HD DVD releases.

In Europe, the studios (including Lionsgate and TWC) had released 170 BD titles and 125 on HD DVD by the same date, and confirmed release dates for a further 42 BD and 48 HD DVD titles, bringing the total Hollywood slates to 212 and 173 titles respectively. On top of this, half a dozen independents had either begun releasing or confirmed release dates for titles on both formats, accounting for a further 18 titles on BD and 16 titles on HD DVD. Three were releasing exclusively on BD (four titles in total) while, as a result of the HD DVD camp’s proactive courting of European video publishers, 18 indies had either begun releasing (55 titles) or committed to firm release dates (27 titles) for HD DVDs alone. Half a dozen independents had begun releasing or confirmed release dates for both formats, but as a result of the HD DVD camp’s proactive courting of European video publishers, 18 indies had committed to HD DVD alone, accounting for 55 released and 27 confirmed titles, compared with just three BD supporters (four titles).

On the surface, therefore, our analysis indicates that both formats were offering the same number of titles in Europe: 203 BD and 203 HD DVD. Furthermore, if titles with confirmed release dates are included (88 on HD DVD and 47 on BD), the total HD DVD slate actually appears to outnumber that of its rival by over 20% (290 to 240 titles).

But the figures require closer examination. Independent video distributors, many of whom handle US independent product as well as domestic titles, play a significant role in the European DVD business. In some markets (notably France) they can account for as much as half of all DVD sales. However, few if any of these companies acquire pan-European rights to movies. As a result, the titles they release will usually be available in only one, or at most two or three, markets. Thus the actual number of HD DVD titles released in any given European territory will be significantly lower than the total numbers quoted above. In the UK, for example, Screen Digest research shows that whilst the number of BD titles available was indeed 203, only 180 had been released on HD DVD by 22 May.

Not all titles are equal…

For most consumers, however, it’s not how many titles are available that matters, but how many of them they would actually like to own. Inevitably, given the greater number of studios backing the format, the BD library boasts more new and recent releases - a fact that is as true in Europe as it is in the US. In fact, Screen Digest analysis of US data from Nielsen VideoScan shows that about two thirds of the Top 50 BD titles sold in the US in the first quarter of 2007 were ‘new’ or ‘recent’ (ie, their BD release came within three months of their DVD release). On HD DVD, by contrast, almost two-thirds (64%) of the Top 50 were more than three months old on release.

Further analysis shows that the new/recent titles in the BD Top 50 were ‘better’ than the equivalent HD DVD releases, based on average box office takings ($86m compared with $72m on HD DVD). Interestingly, however, similar methodology reveals that HD DVD’s slate of catalogue titles is significantly stronger than that of its rival (average BO of $94m compared with $72m on BD).

One explanation for this may be that HD DVD backers have opted to throw some of their strongest catalogue hits at the new format, to compensate for the less impressive line-up of new titles, whilst BD supporters are choosing to hold back their biggest catalogue titles, either until there is a larger installed base or until the format’s interactive capabilities, already a key part of the HD DVD offer, can be fully exploited. Although the studios’ European slates are slightly smaller than their US offerings so far, the situation is, inevitably, very similar as regards the relative age and quality (based on box office returns) of titles.

European focus a key strategy for HD DVD

In addition to courting Europe’s independent video publishers, Toshiba and Microsoft, who are leading the European HD DVD push, have also been focussing on other key parts of the video supply chain. Microsoft, keen to promote the use of its VC1 codec in hi-def disc authoring, has been offering free access to additional authoring tools, training and support to selected European authoring houses that have already invested in the HD DVD authoring tools available from Sonic Solutions or Memory-Tech.

And the final link in what HD DVD describes as its infrastructure ‘eco-system’ is the fact that there is also a noticeable groundswell of support for HD DVD among Europe’s independent replicators. This is primarily on economic grounds: not only are HD DVD production lines cheaper to install but, unlike BD lines, they can also produce DVDs, making it easier to amortise the cost of upgrading even if there is initially insufficient demand to run at full hi-def capacity.

Furthermore, with Sony’s own manufacturing arm, Sony DADC, currently accounting for the majority of BD production worldwide, some European independents fear they may be unable to realistically compete for BD business until the market for Blu-ray Discs is significantly larger. The net result of these various initiatives is that at the time of writing there was substantially more support among Europe’s independent sector for HD DVD than for BD.

So what happens now?

In a report published in late 2006, Screen Digest stated that the most likely outcome was that both formats would survive for the foreseeable future, eventually giving way to one or more dual format solutions (as we saw in the DVD recorder format skirmish). Nothing has happened since then to change our view that this remains the most likely outcome. Indeed recent developments - the incredibly rapid emergence of dual-format players from LG and now from Samsung, and Warner’s determination to launch its Total Hi-Def (THD) dual format disc – serve only to strengthen us in this view.

We expect the PS3 to continue to outsell standalone hi-def players (of both formats) for the next couple of years, as a result of which European hi-def enabled console households are likely to continue to outnumber homes with a standalone hi-def player until 2011. However, we expect the lower cost of HD DVDs to enable the latter format to keep the pressure on BD over the next few years. Whilst price may not be a key consideration for most early adopters, falling hardware prices have a demonstrable effect in stimulating mass market adoption.

According to Screen Digest analysis, when the average price of a DVD player in Europe fell from around €400 to less than €200 (2001-2003), the annual volume of DVD players sold increased almost five-fold, more than doubling the installed base.

If, as we think likely, the lower cost of HD DVD hardware succeeds in shifting a substantial numbers of low-cost players into US and European homes, we believe that more studios and independents will adopt a ‘format agnostic’ position on hi-def publishing. Warner and Paramount, initially HD DVD supporters, already back both formats. If companies such as Disney, Fox or Lionsgate feel that they are losing out on potential sales by not publishing on HD DVD there is nothing to stop them following suit (although Sony Pictures might be more difficult to persuade!). Indeed, back in 2006, Disney's Bob Iger told shareholders that the company (which was originally expected to back HD DVD) eventually 'will probably publish in both formats'. Although he recently reiterated the studio's existing support for BD.

Of course, this argument applies both ways, and it is equally possible that Universal, the only major studio currently publishing only on HD DVD, could opt to publish on BD as well.

But will any of it make any money?

Irrespective of the outcome of the fomat war, we do not expect hi-def to change consumer behaviour in the way that DVD did. Instead, consumers will ‘cherry pick’ key titles to buy on the new formats. Furthermore, we believe that relatively few of the millions of PS3 households will buy as many Blu-ray Discs as those that have invested in a standalone BD player. As a result, we do not expect total video volumes to rise substantially over the next few years.

The real opportunity for the industry, however, will be in reintroducing the concept of pre-recorded video as a premium product. In 2006 the average retail price of a DVD in Europe was just over €13, almost half the average when the format launched in 1998. The real challenge for the industry will be how to ensure that BDs and HD DVDs retain their perceived value for as long as possible.

With all this in mind, Screen Digest anticipates that by 2011 European consumer spending on physical video products will have risen above €9.3bn again, a compound annual growth rate of 1.5% over 2006. And detailed analysis of our latest UK market forecasts indicate that by 2011 DVD will account for around 70% of total video spending, with the remainder split 2:1 in favour of BD, reflecting BD’s greater installed base of games consoles, but a slight advantage to HD DVD in the standalone sector.

Story filed 04.06.07

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