Analysts react to HD DVD demise

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Analysts aren't surprised that Toshiba abandoned HD DVD just one month after vowing to fight on and cut player prices in the wake of Warner Bros.' surprising early January defection to the Blu-ray camp.

Michael Pachter, media analyst with Wedbush Morgan Securities in Los Angeles, said HD DVD's demise was inevitable from the beginning, since Toshiba couldn't compete with Sony on sales volume. Sony included Blu-ray playback on the PlayStation 3 game console, which has sold more than 3 million units in the United States alone, according to research firm The NPD Group. Toshiba revealed during its Feb. 19 announcement that only 1.03 million HD DVD players, including the Xbox 360 HD DVD add-on, had been sold worldwide.

Ross Rubin, director of industry analysis for The NPD Group, said a combination of factors killed the HD DVD format. "I think there were a number of suspects, but you can't quite pin down one murderer," he said.

First came the Warner announcement, which left HD DVD with just two major studios supporting it, Paramount Home Entertainment and Universal Studios Home Entertainment. Hardware sales data the week after Warner's announcement showed 93% of high-def players sold were Blu-ray, according to The NPD Group.

Toshiba responded by drastically lowering its player prices by as much as half. Microsoft dropped the price of its Xbox 360 HD DVD add-on by $50 as well. Toshiba also bought a 30-second Super Bowl ad for a reported $2.7 million.

But apparently the moves were ineffective in boosting sales or digging into Blu-ray's lead. Nielsen VideoScan data has consistently shown Blu-ray software outselling HD DVD software by a 3-to-1 margin or better. Then came the final blow -- or, rather, three blows, all in the last week. First, Netflix announced it would carry only Blu-ray product. Then Best Buy said it would give preference to Blu-ray Disc software in its stores. Finally, Wal-Mart announced it would no longer carry HD DVD software -- an interesting twist, given that the discount chain had been one of the primary sellers of low-priced HD DVD players during the 2007 holiday season.

"Wal-Mart's decision certainly was impossible to bounce back from," Rubin said.



On Feb. 14, industry sources told Home Media Magazine that Toshiba was about to call it quits, due to the rapid loss of support for the format and the piling financial losses the company was incurring on its standalone players. Various Japanese news outlets carried the same news over the weekend, again quoting unnamed sources, and then on Tuesday, after an initial denial that a decision had been reached, Toshiba made the exit official.

Analysts expect an uptick in consumer adoption of high-def now, but warned that just because Blu-ray has won the battle, it hasn't won over everyone's living room.

"This certainly clears an obstacle for Blu-ray," Rubin said. "The format will become more appealing to consumers, and the economies of scale kicks in and player prices should go down. But the technology is still sandwiched between consumer satisfaction with DVD on one side, and the growing number of digital distribution options on the other."

Rob Enderle, media analyst with The Enderle Group in San Jose, Calif., said players are too expensive and need to drop below $200 for wider consumer adoption. In addition, current standalone Blu-ray players will soon be obsolete and can't be updated to play all the features on some Blu-ray Discs. HD DVD had fewer compatibility obstacles, as all players required the same specifications from day one.

"The current technology was rushed to market incomplete and is different than the typical technology update cycle," Enderle said. "It seems like most of the Blu-ray and HD DVD supporters on the content and technology sides have moved to downloads as the next big thing, suggesting that this fight took too long and may have missed a market which is in the process of moving on."

Wedbush's Pachter said to expect Blu-ray player sales from 20,000 to 30,000 units over the next several months. He also predicts retailers such as Best Buy will aggressively cross sell the PS3 in order to up-sell consumers video games in addition to movies.

"They will not focus on entry-level $200 Blu-ray players," Pachter said.

Erik Gruenwedel contributed to this report.
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