Blu Ray: No White Knight

Thus far, most of the talk about high-def has related to the format war. It's well known that the studios are investing a lot of hope on the success of the Blu-Ray and/or HD-DVD market. Standard DVD sales are lagging badly, primarily because nearly all of the desirable movie catalog titles are available as are many of the high-profile TV series. As time passes, there's less product to be released, resulting in fewer units sold. In 2007, recent theatrical releases accounted for a higher percentage of DVD sales than ever before. So, with the DVD market contracting, new revenue sources are needed. We're not close enough yet for downloads to be a major player (most experts peg that date as being anywhere from 5-10 years away, depending on the aggressiveness of marketing and content availability). The hope has been that 2008 would be the year high-def would start ramping up and invading middle-class homes. However, while the format war could be less of an issue by year's end, there's a bigger factor that none of the studios counted on: a recession.

A shrinking economy is not good for discretionary (non-necessity) spending. The average middle-class family that might have considered buying a PS3 or HD-DVD player 12 months ago is now looking in other directions. Food, fuel, and other basic necessities come first. Then, rather than dumping a few hundred dollars on something they don't need, that money will go into a "rainy day" fund so that if someone gets laid off, they can afford to eat for another few weeks. People don't buy high-def DVD players when there's uncertainty about the job market or concerns that they may not get a raise or a bonus this year.

Not only will high-def DVD player sales take a hit, but so will disc sales. Those who already own a high-def player will be less likely to purchase and more likely to rent, especially considering how much more expensive high-def discs are than their standard counterparts. This is good news for NetFlix and Blockbuster but not so good for retailers that make their money from software sales. A lot of people enjoy watching high-def versions of new films but there aren't that many titles people want to own.

Of course, there is a segment of the population whose buying decisions are not impacted by a recession. Unfortunately, most of them already own at least one high-def player, if not more. The fat cats I know with annual incomes of more than $500K already possess really nice home theater set-ups complete with Blue Ray and HD-DVD players and a bunch of discs. They adopt early because they want the newest, coolest stuff and because they can afford to be wrong if they buy something that doesn't catch on.

The bottom line is that the people who really want high-def have already taken the plunge. The middle-class fringe, which was so important to Hollywood's plans of high-def expansion, won't be moving off the sidelines in large numbers until the economy improves. The weakness of the current high-def market is a direct result of the format war. Had the studios gotten together and agreed on a single format two years ago, that format would now be firmly entrenched and there would be a lot more households with high def players next to their TVs. Keep in mind that the holiday seasons of 2005 and 2006 provided high-water marks for HDTV purchases. Christmas 2006 in particular could have been a banner season for high-def DVD player purchases, but confusion kept many people from trying the waters. Others waited to see which format would emerge supreme.

Now, in early 2008, we know that Blu Ray will eventually take the crown. But it's starting to look more and more like a pyrrhic victory. Unless the recession is short and consumer confidence comes back in a storm, Blu Ray may never find the purchase it needs in the market to spread from home-to-home. It has long been rumored that Microsoft backed HD-DVD as a way to slow the progress of high-def DVDs. The reason: Microsoft wants to be on the cutting edge of downloadable movies; Blu Ray/HD-DVD was a direct competitor. What better way to promote their position than to undercut the competitor?

The crystal ball is too clouded now to see whether Blu Ray will have enough opportunity to catch on before the downloadable wave pulverizes it. It's all a matter of timing, technological advances, and pricing. After all, who can resist a cheap, high quality movie downloaded in 10 minutes for less than the price of a multiplex ticket? When we get to that point, Blu Ray will be in trouble. But is it two years away? 5 years? 10? In any case, the reality is that 2008 is not going to be a good year for the high-def DVD industry. Studios had better hope they have a record-breaking year at the box office because they're not going to be making as much money in the home video market as they have in years past, and the economy will ensure that, at least for now, Blu Ray won't be a White Knight.

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