Blu-ray Disc: Stormy Waters Ahead

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blu-ray-logo-0510Today I’m revisiting one of my favorite topics: The Blu-ray optical disc format, and its continuing struggle to supplant red laser DVDs while fending off challenges from broadband-delivered video; in particular, Netflix streaming and direct digital downloads of movies in the 1080p HD format to DVRs.

My file of BD-related stories has grown enormous over the past year. For every ‘pro’ BD news release from the Digital Entertainment Group or a Blu-ray-focused conference, there’s a ‘con’ news story from an analyst firm, or a less-than-enthusiastic speech from some big entertainment name at a different digital media conference.

Item: On May 20, the Diffusion Group issued a report stating that Web-based video viewing will eclipse broadcast TV viewing by 2019. That is an aggressive prediction, but they’re sticking by it! That means trouble for traditional cable TV channel tiers, as viewers move more towards ‘on demand’ media consumption. And by extension, it means trouble for packaged media sales and rentals, too.

Item: Netflix executives recently predicted in late May that their DVD-by-mail rental service will peak in 2013, and then commence a slow but steady decline as more home viewers switch to streaming. They expect to be completely out of the physical media rental and distribution business by the end of this decade.

Item: Last Thursday at ESCA Edge, Redbox CEO Mitch Lowe announced that his company would soon begin offering $1.50 per night Blu-ray rentals at its checkout kiosks. (The company currently charges $1 per night for red laser DVDs.) According to the Home Media Web site , Lowe said that 17 percent of his customers own Blu-ray players and 20 percent would not rent a given title if Redbox didn’t stock it. Lowe expects that Redbox customers will play a significant part in driving the adoption of Blu-ray.

At the same conference, Bill Law of The Nielsen Company reported that in 2009, consumer spending on DVD was down 9 percent, and more than 70 percent of DVD households cut their home entertainment spending, with a similar percentage of Blu-ray households doing the same. In the Nielsen survey, 43 percent said that they were watching cable instead of optical discs, and 19 percent said they use a DVD subscription service like Netflix instead of buying DVDs. 17 percent said they were using low-cost rental kiosks like Redbox.

Home Media went on to report that “…Compared with DVD, Blu-ray adoption is slower than DVD was by its fourth year, with 7.8 percent of American households currently reporting Blu-ray purchases…That figure was 9.1 percent for DVD when it hit its fourth year. Year over year, new release DVD sales were down 20 percent in 2009.”

Item: Screen Digest, a market analyst firm based in the United Kingdom, just released a new report on packaged media sales forecasts . In its summary, the company says, “…Following disappointing hardware and software sales in key international (outside North America) territories in 2009, Screen Digest believes that Blu-ray Disc (BD) will not now compensate for declining DVD spending on buying home entertainment in even the short term. Instead we expect International consumer spending on buying packaged media to fall from $17.1bn in 2009 to $14.5bn by 2014 – a CAGR of -3.3 percent.”

Hmmm. None of that is particularly rosy news. Even Redbox’ BD rental announcement has a downside: If consumers know they’ll be able to rent BD movies for about the cost of a large cup of coffee at Duncan Donuts, there won’t be any big rush to buy these titles when they hit retail…even with the 28-day exclusivity windows that Redbox is negotiating with all the major studios. What’s a month’s wait if you can save twenty bucks?

Lastly, in two possibly related stories, Cinram announced a 155-person layoff at its Olyphant, PA DVD replication plant after losing a significant contract with Warner Home Media (who used to operate that facility). The Olyphant DVD plant is down to 50 percent of its payroll (about 1,000 employees) from the ‘boom’ DVD days of 2003, and also replicated CDs.

Across the ocean in Hungary, Sony is shutting down a facility that was used to manufacture Blu-ray players and DVD recorders in December of this year, moving all production to Kuala Lumpur, Malaysia going forward. In a classic example of corporate double-speak, the company issued a statement that said, “The worldwide demand for Blu-ray Disc players is expected to expand. By consolidating global production to achieve efficiency and offering customers higher value-added products such as Blu-ray 3D compatible Blu-ray Disc players, Sony aims to increase the competitiveness and profitability of its home video business.”

Let me get this straight: If demand for BD players is expected to increase, why shut down a relatively new BD factory in Hungary, which is a low labor-cost facility located smack in the middle of the European market, close to Germany, France, and other desirable markets? It somehow makes more sense instead to build players in Malaysia, and ship them halfway around the world instead?

So what does the future look like for Blu-ray? Obviously, 3D will play a big part in the equation, as there is no practical alternative for distribution of high-quality 1080p 3D movies and other programming. Streaming is too slow for HD 3D, and digital downloading hasn’t achieved enough market penetration. That’s a plus for the format.

putmanheadshot_titleBut the number of households who are ditching optical media completely and switching to streaming continues to grow by leaps and bounds. Netflix expects to have 17 million customers by the end of 2010 for its ‘Watch Now’ streaming service (compare that to DirecTV’s 18 million subscribers as of 2009) and is bordering on the verge of becoming its own program service provider.

Over-the-top, streaming, digital downloads, time-shifting…all of these trends will shape the future of television and media consumption. And none of these trends rely on optical media. That will make for some very stormy waters indeed, as the SS Blu-ray sails into an uncertain future…

Pete Putnam is an analyst for Insight Media. Reach him at pete@hdtvexpert.com