CES 2009: Blu-ray's continued struggles and the ramping ascendancy of online
By Brian Dipert, Senior Technical Editor -- 1/9/2009
Last year's most popular Electronic News newsletter-referenced writeup, so I've heard, was my CES 2008 piece that came hot on the heels of Warner's decision to go Blu-ray-exclusive (and predicted a month-later inevitable conclusion that was also popular with online readers). The following prophetic paragraphs sum up my mildly ;-) controversial analysis:
I'm still betting that Blu-ray's seeming eventual victory will end up being a hollow one. Both camps have splurged a tremendous amount of money to date: in technology development and manufacturing ramp, in player hardware and software development, in player production ramp, in movie-studio "financial accommodations," and in retailer and end-user promotional campaigns. How long, and at what equipment and media-run-rate assumption, will it take for Sony and its partners to recoup this substantial upfront loss? Will they ever?
To that point, remember that format uncertainty is only one reason that consumers haven't migrated to HD optical discs. As I've (seemingly) pointed out innumerable times, a high-quality, upscaling, red-laser DVD player can output a picture virtually indistinguishable from its "true" high-def Blu-ray or HD DVD counterpart. How low will Blu-ray player and media prices need to go in order to force the DVD-to-HD transition? How much incremental financial impact will that additional price pressure incur?
And remember, red-laser DVDs aren't the only standard-def video content that's capable of being upscaled. With Apple (likely) poised to add rental capability to its online movie distribution service, are the studios' attempts to shore up their optical disc business a case of too little, too late?
- The PlayStation 3 has long been the Blu-ray poster child, by virtue of its subsidized (by hopeful subsequent content sales) hardware price tag. However, after decent PS3 adoption growth in the first half of the year, Microsoft's Xbox 360 price cuts (now below $200 for the entry-level model), coupled with Sony's refusal to respond in kind (for perhaps understandable reasons) and the enduring popularity of another competitor (Nintendo's Wii) have driven PS3 sales off the side of a cliff.
- Standalone Blu-ray player prices are now undercutting the PS3, with CES 2009 announcements regularly coming in at $200 or less (though buyer beware...many of these bargain basement models don't support the v2 profile and therefore won't deliver a complete user experience with appropriately coded titles). Though this is mildly good news from a revenue standpoint, the innumerable companies involved in the Blu-ray ecosystem are not nonprofit entities, and as such the inevitable unprofitability of such price pressure cannot be ignored. And particularly in these tough economic times, I doubt many consumers will still be willing to replace a failed DVD player with a Blu-ray-supportive successor, in the face of $50-or-less upscaling DVD-only alternatives. Far fewer will be willing to go Blu-ray as an incremental buy to existing gear, even if folks are cocooning at home nowadays more than they usually do.
- Part of the reason for the above pessimism has to do with media prices. Single-disc Blu-ray content is $10 more expensive on average than the DVD alternative, with multidisc sets proportionally even more pricey. If I were a Blu-ray hardware manufacturer facing pressure to slash prices in order to move inventory, but with no post-sale means of recovering profit margin, I daresay I'd be a bit pissed at Blu-ray prophet Sony, which in contrast "conveniently" also owns several movie studios.
- A dependable marketing rule of thumb is that when you don't have good absolute sales numbers to share, focus instead on percentage-growth metrics. After all, if two years ago you sold one unit and last year you sold three, you can still claim a 300% year-to-year sales increase, right? Blu-ray content sales aren't that miniscule, but they aren't impressive. DVD content sales in the US were down 15% in 2008 from the year before, attributable both to overall economic malaise and to cannibalization by online rentals and purchases. Conversely, Blu-ray content sales grew to the tune of 250%, which I largely chalk up to an initial purchase push (that'll inevitably tail off over time) by early adopters rationalizing their hardware acquisition. But the absolute sales data gives a more somber story: DVD content shipments were 1.4 billion units, with Blu-ray content only chalking up a 63.2 million shipment metric. That translates to only a 4.5% market share.
- Blu-ray backers will invariably point to more robust hardware and content sales growth in Europe. I'll respond by suggesting that this discrepancy is likely largely do to decreased broadband Internet adoption in that geography versus in North America and Asia, therefore to decreased competition from the online-content-distribution alternative. Translation; just as has occurred elsewhere, when broadband penetration inevitably blossoms across the Pond, so too will online content adoption, to the detriment of legacy physical media.
- Returning the focus to the US, Blu-ray backers will also invariably point to the seemingly optimistic data provided at yesterday afternoon's press conference: 10.7 million Blu-ray capable players (including the PS3) shipped in the US since launch, as compared with 5.4 million DVD players shipped through three years into that format's launch. However, as the saying goes, the devil's in the details. When did DVD's clock start? Nobody said. As Wikipedia points out, DVD-Video test marketing in the United States began in March of 1997; the first serious sales didn't happen until that winter's holiday shopping season. Sony's PlayStation 2, which, courtesy of its subsidized cost, ignited the DVD player market, wasn't launched in the US until October of 2000 (beyond the probable three-year window that the Blu-ray Disc Association used in coming up with its comparative statistics yesterday). In contrast, the equally subsidized PlayStation 3 has been around for more than two years' worth of Blu-ray's life-to-date. And anyway, given that the US population is higher than it was a decade ago, you'd expect format sales to be higher due to that metric alone.
Speaking of online content, who are the high-roller online winners in Las Vegas this year?
- Yahoo! (believe it or not). After many months' worth of repeated, vigorous kicks by press, analysts, and shareholders alike, the success of Widgets is sweeping and must be affirming to the company. Many TV manufacturers (notably including pretty much every tier 1 supplier) are embedding Ethernet ports and/or Wi-Fi transceivers into their displays, along with Widget-processing circuitry. Back when Yahoo bought Pixoria's Konfabulator technology in mid-2005, I scratched my head. Over the past few years, as I've attended a number of presentations given by Yahoo! vice president Patrick Barry and other executives, the picture started to become less dim. And now it's crystal clear.
- Netflix. Watch Instantly (aka Watch Now) is one of the many services delivered by the Yahoo! Widget Channel; some companies are also building direct Netflix support into their displays, and others are following LG and Samsung's lead in augmenting their Blu-ray players with Netflix capability. But will Watch Instantly ever be profitable?
- Amazon (and by association, Roku). As an increasing flood of competitors became Netflix-cognizant (see above), I wondered what card Roku had up its sleeve to keep its Netflix Player relevant, believing that adding high-definition support alone wasn't sufficient to keep product sales healthy. Amazon Video On Demand rental and purchase support neatly augments the existing Netflix capabilities of Roku's box; Amazon gives Roku access to current Hollywood blockbusters that Netflix Watch Instantly largely lacks. Other CE suppliers have also announced Amazon support at the show, in TVs, optical disc players, and other devices. I'm curious to hear the "purchase" details, since few of these widgets contain sufficient mass storage to house an actual movie file. Does "purchase" simply give you permission to stream the flick from Amazon's servers on an unlimited-time basis, or are you also allowed to pull down a copy of the movie to your Mac, PC or HDD-inclusive TiVo?
- Blockbuster. The company is woefully late in embracing the online distribution trend; presumably, an internal tug-of-war with the folks responsible for all those bricks-and-mortar stores was at least partly to blame. However, what's finally resulted from the mid-2007 purchase of Movielink (and a Widgets partnership with Amazon) differs from Netflix's offering in several key respects (indicative of the heritage business discrepancy between the two companies). Blockbuster's program encompasses the latest Hollywood hits, it doesn't require a monthly subscription fee, and it dispenses with the need to deal with any physical media rentals. Ironically, to the latter point, one could argue that Blockbuster's now the digital trendsetter, with Netflix following in its footsteps...though Netflix seems to have partnered with a better hardware implementer...
In other online content news, and speaking of repeated (and, I'd argue, justified) kicks from press, VUDU continues to slash hardware prices in search of a sustainable customer base. Just before Christmas, the box price dropped from $299 to $99, as long as you also bought $50 in movie credits. Now, the company has even discarded the credit-purchase requirement.
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