Home > Views > Industry Views > Just How Fragile Is HD DVD?

Just How Fragile Is HD DVD?

Jan 14th, 2008
Indicators and predictions


Loyalties and Payoffs

Rumors continue to circulate that Warner received a huge incentive to go Blu-ray Disc exclusive. But when Warner Home Video’s Ron Sanders was asked if there had been a Warner payoff, he answered, “I wish.” During a Blu-ray Disc Association presentation last Monday, Sanders said his studio’s decision was in response to consumer demand. He denied that the studio had received a cash incentive from the Blu-ray camp. “We have a $42 billion worldwide home entertainment business; any payments would be a drop in the ocean compared to getting it wrong in terms of what the consumer wanted. It didn’t have anything to do with any incentives.”

Rumors also continue to circulate concerning Paramount Pictures Home Entertainment and Universal Studios Home Entertainment. In an article that originally appeared in The Financial Times, it was claimed that Paramount had an escape clause built into its contract. Allegedly, if Warner Home Video bails and goes BD-exclusive, Paramount had the right to back out of its eighteen month obligation to HD DVD. An unnamed (and therefore suspect) industry insider was quoted as saying that there was a significant possibility that Paramount would exercise that clause and will make a decision within a month. The escape clause was confirmed by Variety.

Variety also reported that Universal’s legal obligation to support HD DVD is over and that the studio is weighing its options. Last Thursday, the studio announced its continued support of HD DVD. Universal Studios Home Entertainment executive vice president of HD strategic marketing Ken Graffeo said, “Contrary to unsubstantiated rumors from unnamed sources, Universal’s current plan is to continue to support the HD DVD format.” Paramount made a similar statement earlier in the week.

The operative word is “current,” a word also used by Warner until it made its BD-exclusive announcement. Neither Universal nor Paramount denied that they were considering a format switch to either format agnosticism or BD-exclusivity. And that careful wording is exactly what we should expect from any business that does not want to telegraph its plans.

The Players

Toshiba is reaching out to retailers to be assured of their continued support. It’s not quite clear just how loyal retailers are going to be. We’re beginning to see fire sale pricing. Amazon is now offering a Toshiba HD-A3 player for $133.99. TigerDirect is offering the same player for $129.99. Each comes with two movies in the box and a coupon for five more. Either Toshiba has initiated price cuts in an attempt to grow the installed base or the market for HD DVD players may be collapsing.

A quick check of eBay this morning revealed that 662 HD DVD players and only 104 Blu-ray Disc Players were for sale. Now there’s a sales ratio win for HD DVD: 6.4 to 1. And depending on which city you examine, you’ll find similar disproportionate ratios on CraigsList. Secondhand HD DVD players far outnumber secondhand BD players. On Saturday, I found ratios that ranged from 14:1 in New York City to 8.8:1 in Los Angeles to 6.6:1 in San Francisco.

Considering that the BD player installed base is far, far greater than the HD DVD player installed base, these numbers are even more significant. This does not bode well for Toshiba or the HD DVD format.

Addendum: Toshiba announced in a press release dated January14th (after this column was written) that as of January 13th, the MSRP of the entry-model HD-A3 will be $149.99, the HD-A30 with 1080p output will be $199.99, and the high-end HD-A35 will be $299.99.

The Stock Market

Wall Street may be another indicator of the expected resolution of the format war. The perceptions of institutional investors, individual investors, brokers, pundits, and analysts all affect a company’s market performance. A quick check of the Yahoo financial pages reveals that for the last three months Toshiba is in decline. Its value dropped 34%.


On the other hand, for the same period Sony’s stock value grew by 15%.


These numbers were likely buoyed by months of strong Blu-ray Disc retail performance and by optimistic predictions about the format’s future. The Blu-ray Disc Association reported that 85% of all high definition disc players purchased since the formats were introduction 2006 are Blu-ray Disc players. And the Association pointed out that 66% of all films purchased in 2007 on high definition disc was on Blu-ray Disc.

20th Century Fox Home Entertainment's executive vice president of technology strategy Danny Kaye predicted that 2008 would be “a year of very strong, explosive growth.” He expects Blu-ray Disc players will grow from the 3.5 million sold by the end of 2007 to 10 million by the end of 2008. He also suggested that 2008’s HD movie sales would explode from 2007’s $170 million to $1 billion. Those gains are expected to trigger steep growth in Blu-ray Disc sales in 2009 and 2010 that will rival the growth of DVD in the third and fourth years following its 1997 launch. “We’re going to see an inflection point where consumers embrace and buy [Blu-ray Disc] more strongly,” he said.

Lionsgate president Steve Beeks agrees, “We believe 2008 will be a watershed year for Blu-ray's ascent in the marketplace. Hopefully, we can start focusing our energy away from fighting about which format is the better format and now start focusing on consumer education. The choice is clear; consumers need to upgrade from standard def to high def, and perhaps we can start to see packaged media sales start to grow again.” But Beeks is realistic, replacing DVD sales with Blu-ray Disc sales will “take a long time, maybe an eight- to 10-year timeframe.”

Research firm Understanding & Solutions was also optimistic, predicting that by 2011, there will be a Blu-ray Disc adoption rate countrywide of 45%. Of those, 32% are expected to be Blu-ray Disc players and 15% are expected to be PS3s. As for HD DVD, the firm projects less than a 5% penetration by 2011, assuming the format is still being marketed.

Market research organization, NPD Group also pointed out that worldwide, Blu-ray Disc represents 85% of high definition disc player hardware sold since launch, but the group was a little more conservative. NPD Group VP and senior entertainment analyst Russ Crupnick observed that the Blu-ray camp will have to educate consumers and eliminate confusion about high definition before widespread adoption can be expected. For example, many consumers mistakenly believe that they already have an HD disc player because it scales 480 to 1080.

Of course, education is exactly what the Disney/Panasonic mall tour is helping to do. Only 26% of consumers were aware of Blu-ray Disc a year ago; that number presently stands at 86%. And Disney issued a booklet of fundamental HD concepts that is gaining wide distribution. During a recent visit to BJ’s (a BD-exclusive vendor), I found that the Blu-ray Disc display had stacks of free booklets, “A Simple Guide To The World Of High Definition Home Theater, And Blu-ray Disc.” Simplified but basically accurate, these, too, should help with the education process. What is missing at BJ’s is a Blu-ray Disc playing on all the widescreen displays on the floor.

The Microsoft Connection … Again

Bill Gates made his last appearance at CES this year, explaining that he was retiring to dedicate more time to his foundation. But he made clear where he believes consumers should be investing their technology dollars. “[Microsoft is] not about physical media. Even movies are moving away from physical media.”

When asked about the Warner decision, he said, “The last announcement was Paramount opting for HD DVD and now this one is going the other way. I still think a format battle is going on there. Our contribution is the HDi Interactive format piece [; it] has been really well received. We hope to see that used broadly. I think the real competitor in the long run is digital [video] download. Just like in music, it is going to be the biggest of the three.” He continued in answer to another question, “In the long run, people don’t want physical media.”

I’ve written before and I’ll write it again. I think Microsoft has a vested interest in prolonging the format war until the infrastructure is in place to support its download service. And, alas, there is a significant proportion of the population that simply doesn’t care about quality. But, Wal-Mart and Google recently shut down their video download services, and Movie Gallery went bankrupt trying to make a go of its MovieBeam service. Sterne Agee analyst Arvind Bhatis observed that movie downloads do not yet make economic sense. “The comfort level and technology are not there yet.”

I don’t think most Americans trust the reliability of hard disks to store their movie collections. And I don’t know about you, but I’m not comfortable with the stability and reliability of any Microsoft operating system. I’ve moved up to Windows Business Vista and I’m still experiencing resource leakage. So even if I had a 50 Gbit/sec fiber optic pipe to my door, I still wouldn’t opt for HD downloads.

Long live physical media.

Parting Thoughts

As Universal and Paramount consider their bottom lines and examine trends both in the marketplace and on Wall Street, we must wait patiently. It may take a few weeks, or a few months, or perhaps the rest of the year. But short of any grand surprise, it’s very likely that we will see the end to this destructive format war before the next president of the United States finally is sworn in.

Comments (0)

Write comment

smaller | bigger