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The Format Wars are Over... Well, Maybe Not

TDG Opinions

The Format Wars are Over... Well, Maybe Not
Michael Greeson
President and Principal Analyst

Download this TDG Opinion as a PDF

August 2, 2007

During the recent Electronics Merchants Association Home Media Expo 2007 in Las Vegas, I participated in a panel hosted by the HD DVD Promotional Group. Sure, the panel was assembled to tout the virtues and benefits of HD DVD over its format competitor, Blu-ray, just as other panels were built to give the Blu-ray camp a chance to pat itself on the back.

What made this panel a bit different, however, was that HD DVD group asked an impartial industry observer (me) to contribute. In most cases trade groups tend to stack the deck, selecting an "independent analyst" who they know supports their cause. As was immediately evident to both the panelists and the audience, I wasn't that guy: as I told the audience, I don't give a hoot which format wins, as long as in the end the consumer gets the best experience that modern technology has to offer.

A Different Perspective on the Format War

If we are to believe the most vocal industry observers, the format war officially ended the moment Blockbuster sided with Blu-ray; this despite the fact that Blockbuster is but a blip on the DVD sales radar and will likely have little impact on how the format battle is decided. (For a more extensive discussion of Blockbuster's recent move see this prior TDG Opinion).

Not surprisingly, industry pundits quickly lined up to predict that it was just a matter of weeks (if not days) before HD DVD caved and Blu-ray emerged as champion. I've been observing the consumer video industry for more than a while, yet I still get a kick out of how quickly the bandwagon fills with wannabe prophets spewing "gut reactions" as to how such things will play out). I'm not saying I disagree with the conclusions of these zealots, but I am saying that what is lacking from this discussion is well-reasoned, dispassionate reflection - the zealots, prophets, and evangelists have dominated the conversation, which is too bad for all concerned. We could benefit from a detached consideration of the facts.

Just the Facts, Dude

Fact #1: The penetration of standard DVD players in US households is between 85% and 90%, with more than 50% of these homes owning two or more DVD players. In June 2007, there were only 1.8 million high-def DVD players of any kind in use in the US. In other words, despite the fact that less than 1.3% of the 140 million stand-alone DVD players in US households have a high-def component, many have already declared a winner.

Fact #2: Blu-ray has a 5-to-1 advantage over HD DVD in terms of the number of units in use. However, of the 1.5 million Blu-ray players in use today, 1.4 million are PS3s; only 100,000 are true stand-alone non-gaming DVD players. In other words, those arguing that the format war is over are basing their opinion on the early pull of a handful of extreme hard-core gamers that were willing to lay down $500-$700 on a new game console. The landscape will look very different when $200-$300 stand-alone high-def DVD players become the norm.

Fact #3: Recent TDG research found that among those that own a game console that supports DVD playback, less than 40% are actually using the consoles for viewing DVD movies (and in most cases infrequently). Then what are they using these next-gen consoles for? Take a breath, for you won't believe the answer: PLAYING GAMES! I know, stop the BS, Michael, this is too much. Really, they are actually playing games on their game consoles. Who'da thunk it?

Fact #4: This same research found that within homes that own a game console, there is a 70% chance that sitting right next to the game console is a stand-alone DVD player. Why would that be? Because consumers use one device for playing games and the other to watch DVDs (wow, pretty deep, huh?). While a small segment of outspoken PS3 owners may occasionally use the platform to watch a Blu-ray DVD, the vast majority of game console owners use these devices to play games.

Fact #5: To date, US consumers have purchased less than 3.5 million high-def discs: 1.4 million HD DVDs and 2.0 million Blu-ray discs, implying that the 1.5 million Blu-ray owners have purchased on average 1.3 Blu-ray discs. Among the 300,000 HD DVD owners, the attach rate is much higher - 4.7 to be exact. Again, Blu-ray users (most of which are PS3 owners) are more interested in using the platform for gaming, though on occasion they use their game console to view high-def DVDs. This may explain why many studios continue to support both formats.

Fact #6: Forces which could easily shift the battle lines have yet to weigh in - specifically, PC OEMs. HP, Gateway, Acer and Toshiba will be pushing out PCs featuring HD DVD drives, while Dell, Sony, and Apple will include Blu-ray drives. We're not talking about two million units here, folks - we're talking about tens of millions of units, volumes which could definitely shake up the market and create efficiencies that will push prices down dramatically and thus accelerate adoption and further complicate the high-def DVD market.

Fact #7: As discussed in a previous TDG Opinion, Blockbuster's decision to support Blu-ray in their brick-and-mortar stores was premature. Blockbuster simply doesn't have the firepower to define next-gen formats (remember that Wal-Mart owns 45% of the DVD sell-thru market, followed by Best Buy and Target - Blockbuster is but a blip on the radar). If Wal-Mart and Target made a similar move, matters might be different. But wait....

Fact #8: Just last week, Target and Wal-Mart announced that they would sell only Blu-ray players in their brick-and-mortar stores. Their online stores will still feature both player formats, as will the disc selection they furnish to shoppers in their physical retail stores. However, given the combined clout of Target and Wal-Mart, this move will likely result in a major uptake of Blu-ray players during the holiday season (Q4 2007), despite the fact that HD DVD players are still less expensive.

Fact #9: In the end, the format that is able to build a critical mass of stand-alone players will be capable of pushing the studios in their direction and thus create the momentum needed to end the debate altogether. When will this happen? Again, there is widespread consensus that the fourth quarter of 2007 will see the most intense competition and whichever of the competitors establishes a dominant market position during the holiday quarter, Q1 2008 will likely see the formal end of the format war. And Blu-ray has been able to establish undeniable public relations momentum which continues to translate into major retail wins.

Final Thoughts

At this stage, the Blu-ray versus HD DVD war is a public relations battle as opposed to a head-to-head competition about which offers a better consumer experience; efforts focused on which camp is winning the month-to-month battle for more available titles, greater DVD sales, or greater player sales (advice to both camps - get over the month-to-month shipment stats and focus on consumer benefits). Recent rumblings suggest that Blu-ray is outspending HD DVD 10-to-1 in terms of public relations and marketing, so it is not at all surprising to see that Blu-ray has achieved an early advantage while HD DVD is relying on guerilla tactics and face-to-face meetings to stake its claim. Given the recent Target and Wal-Mart wins, however, few are denying that Blu-ray has established undeniable public-relations momentum that will be hard for HD DVD to counter.

Can HD DVD pull off a miracle? Difficult but not impossible, though the window of opportunity closes a bit more with each exclusive retail and content partnership that Blu-ray announces. Radical moves will be required by the HD DVD camp, such as major equipment subsidies (slice the unit price to below $200 - soon) or significant marketing investment on the part of Microsoft, Toshiba, Universal, and the other HD DVD players (something which we have yet to see happen).

We'll keep our eyes open so stay tuned.

About The Diffusion Group (TDG):

TDG is an analytics and advisory firm helping companies in the connected home and broadband media markets. Using a unique think-tank approach that blends executive-level consultants and in-depth market research, TDG generates reasoned and pragmatic insights that help clients make intelligent market decisions. TDG produces more than just research - we create Intelligence in Action®.


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