Fourth quarter crucial to format's future

When Toshiba finally gave up on the HD DVD format earlier this year, many in Hollywood breathed a sigh of relief. With a distracting format war out of the way, they figured, there would be nothing to stop consumers from making the switch to high definition DVDs.

But while Blu-ray won its battle with HD DVD, it’s still unclear whether it will win the war for consumers’ hearts. Sales are up substantially, particularly for male-oriented f/x heavy titles like “Iron Man,” but from a very small base. Prices for players are falling rapidly, below $250 at many retailers currently and on their way to under $200 by Thanksgiving weekend. But in the face of a slumping economy, are consumers ready to spend even a couple of hundred dollars for an upgraded viewing experience, not to mention $10 more per disc?

“I am cautiously optimistic,” says Universal home entertainment topper and Blu-ray booster Craig Kornblau. “But I would be wildly optimistic if the environment was what it was six months ago.”

At the Consumer Electronic Show in January, soon after Warner Bros. essentially killed HD DVD by committing to Blu-ray, format backers predicted $1 billion in software sales for 2008. As of the end of September, however, sales had reached around $300 million, according to Variety sister pub Video Business. Q4 is expected to be huge, but even if the 200%-plus growth Blu-ray has seen so far this year grows, $1 billion is almost certainly out of reach. (Overseas, Blu-ray perf is about even with the U.S. in Japan, while the European market is about one year behind.)

Beyond the economy, there are several potential factors noted by insiders:

n Following the end of the hi-def format war, it took several months for manufacturers to start expanding player production to match the new HD DVD-free environment.

n While many retailers discount DVDs as much as $5 off of the wholesale price to drive customer traffic, they’re not yet doing the same for Blu-ray. Result is that standard DVDs are often as cheap as $13 their first week, but Blu-ray discs never drop less than $25 and are often $30 or higher, resulting in a huge price differential that consumers have a hard time justifying. “It’s a bigger gap than it should be given the wholesale price,” notes one homevid exec.

n Sony’s PlayStation 3 remains mired in third place behind the Nintendo Wii and Microsoft’s Xbox 360 and hasn’t proven to be as big a booster of Blu-ray movie sales as some had predicted. Hopes that the videogame console, which costs $100 to $200 more than its competitors, would get a price cut for the holidays were recently dashed.

n Hype around digital distribution may be putting off some consumers from making the switch to Blu-ray. Even though revenue from Internet downloads remains miniscule, it has gotten a disproportionate amount of attention in the media and may be convincing some consumers that disc-based movies won’t be around wrong, making Blu-ray a bad investment.

The implications for not hitting $1 billion in sales this year are more than bad PR. Industry sell-through spending is down 3.5% as of September, and the biz hopes to avoid a second consecutive year of declining homevid spending. Studios are counting on Blu-ray growth to offset declines in standard-def DVDs. But, just as with the $1 billion goal, many insiders say flat revenue is the best-case scenario and another year of single digit declines is more likely.

“At the end of the day, people will profess to be pleased given the state of the economy even though we didn’t get to the billion-dollar goal,” says one experienced homevideo exec. “Where exactly we end up is going to depend a lot on ‘The Dark Knight,’ quite honestly.”

Warner Bros.’ superhero sequel, the year’s top grossing film with nearly $1 billion worldwide, is seen by many as the bellwether for Blu-ray. Already, superhero pics are proving to be a favorite for format consumers. “Iron Man” broke records in its opening week by selling over 500,000 Blu-ray copies, about 7% of its total. Blu-ray has repped more than 10% of disc sales for “Speed Racer” and “Journey to the Center of the Earth” and more than 14% for “The Incredible Hulk.”

Execs at several studios agree that “Dark Knight” is sure to dominate the Blu-ray charts for at least a month after its Dec. 9 release and break sales records.

The question is not only “By how much?,” but whether it will be a major driver for consumers to buy hardware as well. If so, the effects will be felt throughout the biz as new Blu-ray households buy other movies.

“The retail response has been extremely positive and we feel that given its street date in conjunction with what we expect to be aggressive hardware promotions and marketing, if there’s a consumer on the fence about whether to buy Blu-ray, ‘Dark Knight’ could be a title that tips the scales,” says Dorinda Marticorena, senior veep of worldwide marketing and hi-def for Warner Home Entertainment.

Thus far, Blu-ray hasn’t had nearly as much success beyond the type of movies that appeal to men and feature digital effects that really pop in hi-def.

Comedies and family pics typically sell 5% to 7% of their discs in the format. Disney’s re-release of “Sleeping Beauty,” which was specifically done to boost Blu-ray, is believed to be selling only modestly so far.

Even CGI-animated pics, which benefit the most from high definition, aren’t yet exploding. In a recent interview, DreamWorks Animation CEO Jeffrey Katzenberg said Blu-ray sales “will likely be small” for upcoming release “Kung Fu Panda,” though he added that his company will still give it significant support.

Other homevideo execs say that Disney’s “Wall-E,” which appealed more to non-family auds, could perform better. But overall, the consensus is that affluent families are the next market Blu-ray has to capture now that it is largely done with techies and cinephiles.

Studios are hoping to expand to that and other market segments with a marketing campaign being spearheaded by the “True Blu” group, which is part of the DVD-supporting Digital Entertainment Group. It will soon be launching its multimillion-dollar campaign with the support of most studios pushing the idea that Blu-ray’s time has arrived.

Just how wide an audience does that campaign have to reach to be a success? Not as many as Blu-ray critics might claim. Homevideo execs say that for the foreseeable future, especially in the face of an economic slump, they don’t need to convince the entire country to go Blu. Just the heavy DVD-consuming demographics, like young males, movie fans and families.

“If you look at the way our business works, 10% of the consumers represent over half the buys,” notes Kornblau. “If we get just 5% or 6% penetration and they’re all heavy buyers, that could mean 20%-25% of our business become Blu-ray.”

Diane Garrett contributed to this report.

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