HD DVD price cut shakes up format wars

Mere days after a group of Blu-ray-supporting studios orchestrated an event to show off the Blu-ray Disc format in Los Angeles, the HD DVD format achieved a dramatic resurgence with Toshiba's move to a US$100 player. Never let it be said that consumers don't love a bargain--but will price alone decide this format war?

That's a tough question to answer. Clearly, price plays a role. According to a report from market research firm The NPD Group, 62 percent of HDTV owners are waiting for player prices to fall before they buy. There's a historical precedent, too: Conventional DVD players and upscaling DVD players--which convert a standard DVD's 480i-resolution image up to high-definition 1080p for improved playback on an HDTV--both exhibited rapid sales growth as their prices fell below US$200.

Toshiba's flashy, visibility-raising strategy was a success. When the price drop hit, Best Buy and Wal-Mart stores (plus a few other retailers that matched their prices) burned through unsold stock of Toshiba's second-generation HD DVD player, the HD-A2--and in so doing, put HD DVD players into the hands of reportedly 90,000 new users.

The aggressive pricing was somewhat stunning considering that the purchase of an HD DVD player also gets you at least five free movies by mail. The US$100 price point was also right in line with the price of an upconverting DVD player, which made this deal a doubly good bargain. No matter how the format war turns out, having such a cheap HD DVD player at the very least improves your DVD playback, regardless of whether you end up using it to play HD DVDs. At US$100, the buying paradigm changes: Now you're not so much choosing a new format as you are getting support for the new format as a no-risk bonus on top of the purchase of an upscaling DVD player.

"The low price point was, if anything, a test and a precursor," states Paul Erickson, director of DVD and HD market research at DisplaySearch. "The question was: How price-elastic are consumers for next-generation DVD below US$200? Below US$100?

"With this sale, Toshiba found out. Curiously, even Blu-ray owners said they took the plunge into going dual-format because the price was simply so close to that of upscaling DVD players; HD DVD was seen as practically no-risk--especially with five to ten free movies."

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That no-risk assessment raises questions, however. Does a person's purchase of an HD DVD player mean that they intend to begin investing heavily in a new library of movies? The question is not unlike the one that hangs over the PlayStation 3's inclusion of a Blu-ray Disc player (and a very capable one, at that): Just because it can play Blu-ray Discs doesn't mean people will buy the discs.

Ultimately, the movie "software" is a key component of this story. The truth will be seen in the coming months, when we'll learn whether Blu-ray can maintain its healthy 2:1 disc sales ratio.

As of the beginning of August, The NPD Group estimates, cumulative units shipped to retailers totaled about 200,000 for Blu-ray and 256,000 for HD DVD. Of the stand-alone high-def players sold, NPD says, more than 70 percent sell for less than US$500.

"You'll see a short-term rise in HD DVD software sales," theorizes Erickson, "rooted in the fact that a big burst of players have sold through [recently]. The first step to sustaining long-term large increases in software sales is getting the hardware in-house, which Toshiba has done. The HD-A2 is a Trojan horse, just like the PlayStation 3 is for Blu-ray."

The second step to boosting software sales, adds Erickson, is having a large library of content. In this respect, HD DVD still falters: Of the major studios, only DreamWorks, Paramount, and Universal are exclusively in its camp. Warner Brothers continues to straddle the line ably, although Dan Silverberg of Warner has said that the company is continually reevaluating its dual-format stance, based on where the market currently stands. Silverberg has indicated that such analysis could mean that nothing will change--or that everything might change by the start of next year.

Meanwhile, if you want to watch The Simpsons Movie, Close Encounters of the Third Kind, Cars, or Ratatouille, you'll need a Blu-ray Disc player, since those titles are exclusive to Blu-ray Disc.

Well, at least the HD DVD player you just scored for a song will upconvert your DVDs for your bedroom HD set. Or maybe it will come in handy when you want to buy the classic Star Trek series for the umpteenth time, on HD DVD.

Long term, is the price sustainable?

Now that consumers have had a taste of high-definition DVD at the just-barely-under-$100 price, will they happily buy players at US$300 and US$400--let alone over-US$500 models? I'm not so sure. Given these recent shenanigans, if I were a high-def-TV-owning consumer contemplating a high-def player, I'd hold off on both formats for now and wait until sales or price cuts bring the costs down even further. (I'd use the money to vacation in Hawaii instead.)

That would be my protest against the format war, as well as against Toshiba's gimmicky pricing intended to move older players. A consumer backlash is bound to come: After all, how would you feel if you'd bought Toshiba's newer model, the HD-A3, for US$300, and then saw the virtually identical (albeit six months older) HD-A2 going for one-third the price? It's not quite the same as Apple's infamous iPhone price cuts, but close enough to strike a nerve with consumers.

Consumers are smarter than they used to be, notes Richard Doherty, an analyst with the Envisioneering Group; as it is, they felt taken for a ride once they heard about the payoff Paramount received to go HD DVD exclusive this summer.

A digression: It's plausible that to maintain sales momentum, Toshiba may be equally as aggressive in lowering the price of its HD-A3 players, either through a direct price cut or rebates. You'd think the company would be taking a huge hit on the cost--some reports I saw pegged Toshiba's losses at US$500 per player. Other reports, however, note that the HD-A3 has an identical twin in a line of Chinese-manufactured players, models intended for the CH DVD (a China-only HD DVD variant) market; if that's the case, perhaps Toshiba is managing greater economies of scale in manufacturing its low-end players than anyone previously surmised.

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All of this business intrigue keeps things interesting, but none of it will be at the forefront of your mind when you're standing in the aisle at Best Buy trying to decide what to purchase this holiday season.

Regrettably, the format war isn't ending yet. If you can score a deal on either a Blu-ray Disc player or an HD DVD player this holiday season, it might be worth snapping up: At the least, you'll have a fancy upconverting DVD player. Both formats are running free-movie incentives, too, so you can get a taste of the high-def life.

Blu-ray Disc players will drop in price heading into the holiday season, says Doherty, but not by nearly as much as HD DVD units have. "Our research shows that Blu-ray players will be at US$348 for Black Friday," he says. "And we think you'll have no trouble finding a Blu-ray player for under US$400." That's a far cry from the "casual" US$100 buy-in to HD DVD, but it may make sense if you're a Disney film fan, for example (Disney movies are available only on Blu-ray Disc).

Clearly, by being willing to experiment with prices, Toshiba has given the HD DVD format new life. "I think this gives HD DVD wings," says DisplaySearch's Erickson. "The enthusiastic response to the sub-$100 pricing clarifies HD DVD's path to victory. Still, I think consumers are in for another year of battling between the two formats. By Black Friday 2008, Blu-ray will be in a better position to push into these psychological price barriers. By the end of 2009, I think we're in for some clarification."

Humph. Pass me the popcorn, please. I'm going to kick back and watch the drama unfold before jumping in with both feet.