Definition of Confusion

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By Kim Hart
Washington Post Staff Writer
Friday, November 24, 2006

Standing before two giant television screens and clutching a remote control in each hand, Tony Sardo grappled with a question that will confront millions of Americans this holiday shopping season.

For nearly an hour, he toggled between two new types of video-disc players offering brilliant image quality. He questioned a sales associate and weighed the none-too-low prices of the players, known as Blu-ray Disc and HD-DVD. Finally, he did what many electronics customers are doing: He walked away without buying either.

"It's too early to know which one to go with," said Sardo, 28, after browsing Micro Center, a Fairfax electronics store, for a next-generation DVD player to go with his new 42-inch high-definition television. "It's like betting on which team will win the Super Bowl before pre-season games start."

The fight between Blu-ray and HD-DVD, reminiscent of the 1980s battle between Betamax and VHS tape formats, isn't just vexing consumers like Sardo. It's shaping up as a business disaster for movie studios, electronics companies and retailers that had counted on a robust holiday selling season for the fancy new players -- which cost $500 to $1,000 -- and movies to play in them.

Technology companies have divided into two warring camps, each backing one of the formats. Attempts to come up with a single format collapsed last year, so the two sides decided to duke it out in the marketplace. As they do, consumers are mostly staying on the sidelines, causing sales to fall far short of initial projections.

A winner could still emerge, but some experts say it's just as likely that consumers, fearful of buying an expensive player that will turn out to be worthless, will just say no to high-definition discs altogether. In the best case, analysts predict, the format war will go on for another year or so before a clear winner emerges, delaying an industry switchover to the improved discs.

"By and large, it's going to result in the season where no one buys anything," said Gartner research director Van Baker. "Manufacturers have put an awful lot of investment into these players, and they're not going to see a return on that anytime soon."

In January, the Consumer Electronics Association predicted that more than 600,000 high-definition DVD players, worth $484 million, would be sold this year. Shipment delays and production problems have twice caused the organization to lower its forecast, and it now expects U.S. sales to reach only 200,000 players, worth $181 million, by the end of the year.

Those numbers don't include sales of video game consoles, which manufacturers hope will give the new formats a boost. Sony's PlayStation 3, released last week, doubles as a Blu-ray player, and Microsoft's Xbox 360, released last year, can play HD-DVDs with an accessory component. Sony expects to have shipped 2 million PS3s by the end of the year, trailing Microsoft's total shipments of 10 million Xbox 360s.

Movie studios Disney, Fox, Miramax and MGM have sided with Sony's Blu-ray technology, while Universal and Warner Bros. have chosen to produce movies in Toshiba's HD-DVD format. Paramount and Warner Home Video are releasing movie titles in both formats, an expensive undertaking when consumers are reluctant to buy either. New Line Cinema has put off releasing titles on the new DVDs until next year.

Last month, Warner said consumers spent $30 million on high-definition TV equipment and movies through September, only half what the studio had forecast. Hardware sales will total $750 million in the fourth quarter, the studio said, compared with an initial projection of $1.5 billion to $1.9 billion. About $150 million will be spent on movies and other such material, compared with Warner's forecast of $225 million to $500 million.

"There's no guarantee that every top movie that's going to come out is going to be available on the format you want," said Ben Bajarin, a consumer technology analyst with Creative Strategies. "Retail is one of the biggest challenges. How do you promote the technology without confusing the customer and losing the sale on both?"

At a Best Buy store in Manassas, some customers favor a stopgap solution: a type of DVD player that uses standard discs and "up-converts" the digital information to create an improved picture. Such players sell for $150 or so, and the result is better than standard DVDs when seen on high-definition TV sets, though not as good as pictures from Blu-ray or HD-DVD players.

Michael Sardone, the store's home theater supervisor, explains the differences in the three technologies to customers at least 15 times a day. "They just throw up their hands in confusion, and then they walk away because they just don't want to deal with it," he said. "A lot of them are content to stick with the regular DVDs they already have."

At Micro Center in Fairfax, customers are not willing to spend the money to upgrade their entire home entertainment systems, said sales associate Abbey Giwa. He's only sold one Blu-ray player and a few HD-DVD players.

If there were a standard format, it's clear that more consumers could put it to good use: People are buying high-definition TV sets at record rates. About 15 percent of U.S. households already have one. As prices drop and broadcasting and cable networks show more high-definition programs, penetration is expected to increase to nearly 25 percent by early next year, according to the Yankee Group.

"This is the first time HD-TVs will be competitive with regular sets," said Ross Rubin, director of consumer technology analysis at NPD Group, a market research firm. "Once more households have high-definition televisions -- a prerequisite for watching high-definition DVDs -- the real battle will begin."

By August, HD-DVD had outsold Blu-ray by 33 percent, largely because of its earlier introduction and because more vendors sell the hardware, according to NPD. The popularity of Sony's PlayStation 3, with a Blu-ray player built in, may boost the visibility of that format, but production delays have stalled sales of stand-alone players.

Consumers have been burned by competing media formats before. A few years ago, two battling formats of improved audio compact discs entered the market, but both failed as consumers refused to take a risk on players that could become obsolete. Retailers, well aware of the history, have been among the loudest voices urging the Blu-ray and HD-DVD camps to bury the hatchet.

"We've always said that it would have been better for everyone if manufacturers had agreed on a single format," Circuit City spokeswoman Jackie Foreman said.

In spring 2005, the presidents of Sony and Toshiba, the companies leading the respective camps, met in an effort to agree on one format, but the talks broke down over disagreements on which was better. By July, each side had released its own study concluding that its format would win. Since then, each side has amassed many backers, splitting the industry.

One possibility is that both formats will survive. Another is that a single system will win out in the marketplace, as in the VHS-Betamax war. Early adopters who pick the wrong technology can get stuck with thousands of dollars' worth of useless equipment, but if history is a guide, most consumers won't switch until a winner has emerged.

Experts say the disc technologies have a finite window of opportunity to earn the loyalty of consumers. As they see it, movies on disc is a technology with a limited life span anyway, as people will eventually be able to retrieve high-definition movies from the Internet or call them up from a cable or satellite company -- as many consumers can already do with a limited movie selection.

"They don't have 20 years to fight this one out," said Adi Kishore, the Yankee Group's director of global media and entertainment. "The horizon isn't far away."


© 2006 The Washington Post Company

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