Rapid Price Erosion Needed to Ensure Blu-ray's Viability

Rapid Price Erosion Needed to Ensure Blu-ray's Viability

Michael Greeson
Founding Partner and Principal Analyst

May 16, 2008

You've likely seen the flood of articles reporting that widespread adoption of Blu-ray players will be "delayed" due to higher-than-acceptable retail pricing. You may also recall that TDG advanced this argument in November 2007, some six months ago. At that time, TDG's consumer research indicated that $200 was indeed the "magic price point" for adoption of high-def DVD players. Unless Blu-ray prices dropped below that level, consumers will continue to stay on the sideline.

The Loss of a Scapegoat

Not so long ago it was widely believed that the last barrier to immediate and widespread consumer adoption of Blu-ray was HD-DVD. As many are now learning (to their own chagrin), it was never about HD-DVD; it was (and is) about DVD. As long as DVD delivers a quality experience at a lower price point, Blu-ray will remain the choice of gamers or high-end A/V buyers. Today, you can buy a DVD player capable of up-rezzing regular DVD to near-HD quality for less than $100, versus laying out $700 for Pioneer's latest Blu-ray player plus $25-$35 for a newly-released Blu-ray disc. You do the math - it just doesn't add up.

Chinese Vendors On Call

According to recent rumors (worth what they are), Chinese DVD manufacturers are poised to enter the global Blu-ray market as early as July or September of this year¹. Electronics Australian managing director, Tony Pack, told Current.com in April 2008 that he spoke with a couple non-brand factories with sample Blu-ray players on show in Hong Kong, a sign he believes tells of the "beginning of non-branded players entering the market."

Then again, in a March 2008 interview with The New York Times,² Sony Electronics' President Stan Glasgow said that the Blu-ray Association had no intention of allowing prices for their platforms to collapse as did DVD players, a trend he said was driven largely by the introduction of inexpensive non-branded players from (you guessed it) China. "Will there be Chinese (Blu-ray) players? Yes," he said. However, noted Glasgow, "we don't need to drive that and hand the technology over" any time soon.

Regardless of which version rings true, Glasgow makes an (ironically) valid point: allowing Chinese manufacturers into the game would cause rapid price erosion of platforms and (by consequence) video content. Yes, profit margins will be thinned. Yes, such a move would for certain upset every hardware vendor with which Blu-ray has partnered. Then again, player sales would accelerate and (by consequence) video content sales. As Glasgow himself admits, it was precisely this type of price erosion that made DVD the fastest diffusing CE platform in history.

A Conflict of Interests

Contrary to public positioning, the Blu-ray Association is not interested in immediate, widespread diffusion of Blu-ray-enabled solutions. If it were, it would allow Chinese vendors into the market as soon as possible. The short-term imperative is to maximize partner profits, meaning retail prices need to stay as high as possible for as long as possible, even if it means incremental penetration (no blame here - it's their modus operandi). We shouldn't think poorly of Blu-ray for following such a strategy - to the victor go the spoils, so it is Blu-ray's "right" as the winner of the format war to dictate market terms and make sure Blu-ray vendors enjoy as much profit as possible.

Winning the Battle While Ignoring the War

Blu-ray's short-term pricing strategies will have severe long-term consequences for Blu-ray. As TDG warned long ago, the "format war" with HD-DVD was but a distraction when compared with the much larger three-front battle Blu-ray now faces:

• Front #1: standard-definition DVD (don't dare count it out yet): it is significantly less expensive, pervasive, easy to use, and delivers a high-quality experience worth several times its cost;

• Front #2: video-on-demand services now being rolled out by PayTV operators: they are extremely convenient, will offer both standard and high-definition streams and downloads, and eventually include comprehensive day-and-date offerings at competitive prices; and

• Front #3: web-based streams and downloads directly to the TV: a notion still foreign to most consumers and five years away from establishing a mainstream presence, but no doubt on the rise (as evidenced by services such as AppleTV and VUDU).

And what is Blu-ray doing to fend off these emerging competitors? Many brand-named vendors are actually increasing their prices. Yes, the Blu-ray Association predicts prices will drop to $299 by Christmas 2008 and $199 by Christmas 2009, but even at $299, Blu-ray will find it hard to compete with DVD and emerging video alternatives.

Blu-ray must achieve widespread diffusion before mainstream consumers transition to on-demand and digital download services. High prices delay adoption, thereby making regular DVD look even more attractive in the short-term and reducing the chance that Blu-ray will make a dent in the market before competing services take hold.

Simply stated, $200 players must happen by Christmas 2008 or Blu-ray risks being relegated to a footnote in the history of video innovation technologies.

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Rapid Price Erosion Needed to Ensure Blu-ray's Viability