Posted on 06/15/2006 8:01:01 PM PDT by Lunatic Fringe
CHOICE IS A BEAUTIFUL thing, whether it's picking stocks, voting for a politician or ordering pizza toppings. However, when it comes to the ongoing battle of the high-definition DVD formats — Blu-ray Disc vs. HD DVD — choice is a burden consumers will have to bear. That is, if they opt to choose at all.
The first Blu-ray player in the U.S. is coming from Samsung next week — HD DVD players hit store shelves in the U.S. in mid-April — and I can't help but think that those early adopters who choose wrong will get burned. Recall how Sony (SNE: 42.30, +1.15, +2.8%) took it on the chin in the mid-'80s as Betamax was supplanted by VHS as the VCR format of choice. Those who are old enough to remember spending hundreds of dollars on Beta players and tapes only to watch the technology turn obsolete cringe at the choice that they made, not because VHS was necessarily a better technology but because they were asked to gamble, and they placed their bet on the wrong horse.
The new souped-up DVD formats, which allow for crisper images, mind-numbing audio and added room for bonus features like extra movie scenes or director commentary, have brought that scenario to an even grander level that has created a schism among Hollywood's studios and the electronics, PC and gaming communities. Blu-ray, a format championed by Sony, has a litany of backers including PC giants Apple Computer (AAPL: 59.38, +1.77, +3.1%) and Dell (DELL: 24.91, -0.16, -0.6%), movie studios like Walt Disney's (DIS: 29.19, +0.50, +1.7%) Buena Vista Home Entertainment and MGM, and electronics makers Panasonic and Pioneer. Among those in Toshiba's HD DVD court are Microsoft (MSFT: 22.07, +0.19, +0.9%), Intel (INTC: 18.12, +0.39, +2.2%), Universal Pictures and NEC (NIPNY: 5.16, +0.09, +1.8%). For the consumer, this means that the format they choose to buy into will determine which movies and other content will be available to them. For example, Blu-ray has "The Terminator" and "Crash" while HD DVD has "Goodfellas" and "Million Dollar Baby."
Last summer, the two camps tried to figure out a way to unite their technologies into one format and make things easier for shoppers, but the talks failed. And here we are today with the antithesis of that King Solomon parable playing out before our eyes. Instead of ensuring the welfare of the baby, the baby has been split in two.
It's no wonder then that many anxious customers are sitting on the sidelines as they watch this battle play out. HD DVD has been out for a couple of months now and sales have been sluggish at best. Michelle Abraham, an analyst at independent research outfit In-Stat, expects sales of high-definition DVD players in North America to be under 100,000 units this year and grow to three million annually by 2010. DVD players, on the other hand, were introduced in 1997, and by 1999 unit sales grew to more than four million annually, says Abraham. Not only will the market likely be limited to those with the cash to buy high-def television sets, but the costs of the players themselves will also bog down demand. Toshiba currently offers two HD DVD players at $499 and $799. Samsung's upcoming Blu-ray player is a much heftier $999.
Once customers peruse the limited selection of movies available to them — Best Buy's (BBY: 51.50, +0.10, +0.2%) web site yielded close to two dozen titles each for HD DVD and Blu-ray — they may feel less compelled to buy the players. (The first Blu-ray titles will be made available on June 20). Sales of DVDs, which in recent years were a cash cow for movie studios, are starting to slow. The new formats could help pick up some of that slack by allowing studios to offer fans more in-depth features about the making of a film or different movie endings. But Hollywood seems to be waiting for customers to start buying the players before they spend money adding these extras or putting entire movie libraries into the high-def format. "It's a chicken and egg scenario," says In-Stat's Abraham.
Unlike the state of the market when DVDs debuted in 1997, there are many different formats that high-definition DVD will have to contend with that could keep it from reaching the same commoditized level as its first generation brethren. Viewers can now order a movie via cable or satellite using video on demand, they can tape shows using digital video recorders like TiVo's (TIVO: 6.62, +0.38, +6.1%), and they are increasingly capable of downloading films off of the Internet. This could leave the high-definition DVD market in the lurch, at least for the near term, appealing primarily to videophiles with deep pockets and the yen to build an impressive home theater.
From an investment standpoint, betting on Blu-ray over HD DVD (or vice versa) is like trying to predict whether Tom Cruise and Katie Holmes are going to make it. It's just too early in the game and there are a lot of variables yet to play out. Significant delays in the release of these players do not bode well for investor confidence. Both Sony and Pioneer recently delayed the release of their Blu-ray players until August and September, respectively. The sale of Sony's much-anticipated PlayStation 3, which will be sold with Blu-ray capabilities, has been pushed to November — the brink of the crucial holiday selling period. Toshiba's HD DVD player was originally anticipated to come out late last year and didn't arrive until this spring. The results have been lackluster.
The best way to play this new field without getting burned Betamax-style would be to invest in a company that's positioned to win no matter what. Sonic Solutions (SNIC: 14.82, +0.33, +2.3%) sells its DVD-authoring software to both consumers who fancy themselves homegrown directors, and professionals, including Hollywood studios that use its technology to create DVDs and prepare them for mass replication. The Novato, Calif.-based company, with $148.7 million in sales and diluted earnings of 70 cents a share for the year ended March 31, has been selling software for both Blu-ray and HD DVD authoring since April 24 (they diplomatically released the two products on the same day). Studios have already been lining up to use Sonic's high-end Blu-ray and HD wares to create some of the first titles in the market.
Another good reason to bet on Sonic is its stock price. In a research report published Monday, Roth Capital Partners analyst Richard Ingrassia noted that Sonic's valuation "is low on almost every metric." Trading at 13 times estimated 2007 earnings, Sonic's stock is well below the 18 to 20 times forward P/E ratio of its peers, says Ingrassia, whose firm makes a market in Sonic's shares. His price target: $21.50. (For more analysis of Sonic's valuation see our June 7 Stock Screen, "A Super Small Cap?.")
A lot of power and money is being thrown behind Blu-ray and HD DVD, and the technologies themselves are impressive. But I think it's the customers and their choices that have to be watched closely, and I don't think they are ready to make those big decisions quite yet.
I've still got my Sony Beta. It's the best format, you know.
Folks who don't get burned by choosing wrong will be burned when they find their High Definition display doesn't have the necessary decryption software to display true high definition. The image will be downgraded to prevent piracy.
How the mass market will vote:
[_] HD-DVD
[_] BR
[*] None of the above
Early adopters, lacking up-to-date HDMI inputs on their
displays, are apt to get screwed, as the analog YPbPr
"HD" output from these "HD" players is reportedly degraded
from full HD.
> The results have been lackluster.
And Sony, being late and continuing to slip, may well
decide to cancel the intro. If Wal-Mart, seeing dour
results so far on HD-DVD, elects to not stock BR,
Sony may have to cancel.
The present offerings are expensive videophile products
that disrespect the videophile. And videophile was never
more than a niche market anyway.
Blu-ray is a much cooler name than HD-DVD. It's like 'Viper' versus 'Elantra'. If you asked people who knew nothing about the technology which they would prefer, they would all want Blu-ray because it sounds better.
I am just giddy with the money I save by not buying anything.
Part of me is even glad to see both formats fail, given the cultural degeneracy in which these companies are involved.
Seems to me that if they chased down where the REAL pirating is happening (China, Russia come to mid) they'd expend less effort crippling the technology they purport to advance.
The Toshiba decks are displaying full resolution from the composite outputs.
There has reportedly been an agreement among the HD-DVD camp to allow full resolution out of component connections until at least 2010.
HD-DVD has one big advantage -- with some modification, the disks can be produced on current DVD manufacturing equipment.
Cool. The next format is more brand new movies from the video rental store that skip right out of the package. Even VHS tapes could be rented a couple of times before they were poor quality. I hope the next format is digital files shared on the internerd.
My parents bought a betamax right off the bat when I was a kid. I liked that thing. Of course, I like records better than cds. I like 8 tracks, too. I have a thing for abandonware formats.
Just wait a couple months until the "I got mine first" crew buys theirs and they'll be $99 at your local drugstore.
Maybe not. I've heard that the PS3's are so delicate that just bumping it will cause it to need repairs. If that is the case, it won't bode well for it's future.
They both suck and both have crazy DRM stuff.
I think I'll just stick with regular DVDs for the time being...
Someone needs to market an HDMI to Composite adaptor.
Between the coming demise of analogue broadcasting (making most US tv receivers obsolete for plain vanilla over the air reception), the DVD format wars, high-definition tv...I would not be surprised to see all but a handful of deep-pocketed consumers...buy nothing at all.
Americans have become used to cheap, good, color tvs. You can still buy one--new analogue sets STILL have no warnings on them about their coming obsolescense.
When the reality sinks in of the death of analogue and the rest, I expect consumers to be angry. Very angry.
Samsung is making one unit that will play both Blu-Ray and HD-DVD. I saw Underworld Evolution on Blu-ray. Looks great except the thing costs $40...
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