Blu-ray Isn't Getting Much Traction

Sony won the battle to be the standard for HD-DVD. Can it persuade strapped consumers to buy in?
Stephen Kroninger

In January, Sony (SNE) and its allies won a big victory. Blu-ray, Sony's version of a new generation of high-definition DVD players and discs, signed up enough studios to knock out Toshiba's format after a six-year tussle. This was considered a big deal because sales of regular DVDs have been slowing of late. The studios and hardware makers needed something new to get consumers jazzed—in this case, technology that delivers crisper video and can hold many more bonus features. So all concerned (except Team Toshiba, of course) breathed a sigh of relief when a potentially ruinous format war came to a sudden halt.

Shame about the timing. New technologies often take a while to get established, and Blu-ray is fighting for acceptance at the very moment that cash-strapped consumers are pulling back. Meanwhile, Apple (AAPL), Netflix (NFLX), and (AMZN) are launching downloading and other services that could make Blu-ray obsolete before it has a chance to get traction. "We see Blu-ray's window of opportunity closing very quickly," says Jagdish Rebello, a director and principal analyst of iSuppli, a research firm. "The question is: Does Blu-ray really matter?"

It's too early to declare Blu-ray a flop. While research firm NPD Group reported a 40% sales drop in January, Sony, studios, and retailers suggest that a scarcity of players in stores is to blame. They say that hardware makers are still gearing up to produce Blu-ray machines in the wake of the format war and point to a 2% uptick in February as more players became available. Andrew J. House, Sony's chief marketing officer, says the company's $399 players are selling well. And Lions Gate Entertainment (LGF) CEO Jon Feltheimer says the new format already accounts for 7% of DVD sales for some of the studio's films, including 3:10 to Yuma and War. "This is just the tip of the iceberg," he says. "People want the better picture."

Still, an April report from Sanford C. Bernstein & Co. predicts that sales of Blu-ray discs will add just one percentage point of growth to the DVD market this year. One of the biggest hurdles is price. The discs cost on average $11 more than regular DVDs. And the players themselves run about $400 vs. $60 for a standard machine. That's a lot to ask consumers to pay when they are cutting back on discretionary spending. Plus, Sony executives have said that prices likely won't fall below $200 until the end of next year—at the earliest.

Another thing: Blu-ray is an iteration of an existing technology. It does not offer the kind of leap that DVDs represented over VHS tape. Even if Joe or Jane Consumer has an extra $400 to spend upgrading their home entertainment system, chances are they will junk the bedroom TV for a flat-panel one. Skeptics also say only certain movies look appreciably better on Blu-ray—mainly big action flicks.

One doubter is Michael Nathanson, who follows the entertainment industry at Bernstein. He says few people will bother to upgrade because the "higher video resolution does not materially improve the viewing experience for many comedies, dramas, or family titles." That may explain why Lions Gate is having luck with its action films.

Hollywood has good reason to push Blu-ray hard. The discs cost $4 to $5 to make and wholesale for about $17—nice margins. Movies delivered over cable or online are a lot less lucrative because generally they're rented; the studios typically get 60% of $4.99 or so.

The Blu-ray camp plans a mid-year marketing blitz. And the studios are pinning their hopes on a new version of the Blu-ray technology called Profile 2.0. It will allow consumers to use their players to connect to the Web and partake of movie-related bonus feartures. Fox (NWS) is preparing to deploy a video game that viewers can play along with its Alien vs. Predator flick. Industry insiders say Disney (DIS) plans a range of interactive bells and whistles tied to its animated films that may include games and social networking.

The studios also aim to target people who own Sony's PlayStation 3 game player, which can play Blu-ray discs. Thirteen million people own PS3s worldwide. But Nathanson says so far PS3 owners are buying one to three Blu-ray movies a year on average, compared to the eight titles bought by those with regular Blu-ray players.

Hollywood is clearly hedging its bets. Traditionally, the studios have forced cable companies to wait several months to show a movie after it's released on DVD. On May 1 they agreed to let Apple sell movies online the same day DVDs arrive in stores.

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