DisplaySearch’s 4th annual HDTV Conference took place at the Beverly Hilton in Los Angeles on August 15-16 and brought together representatives from across the HDTV supply chain including:

Content developers such as movie studios, TV networks and game developers

* Retailers
* DVD player/recorder manufacturers
* TV brands
* Audio manufacturers
* Alternative content
* TV electronics suppliers
* Panel and imager suppliers

Lutron Electronics

The conference generated a tremendous amount of press in the United States for a number of reasons as described below:

* It provided the latest figures for HDTV penetration, clearly a rapidly growing market which has a lot of consumer appeal. Data was provided on a sell-in and a sell-through basis using figures from DisplaySearch and The NPD Group.
* It provided the first and only analysis to date of HD-DVD vs. Blu-ray DVD player sales. Our conference was the debut of this information from The NPD Group which has not yet made it available to its customers. One of the most popular DVD magazines, Video Business, actually put Ross’ HD-DVD/Blu-ray market share charts on their cover and three movie studios have since requested his presentation.
* It included a panel of retailer executives which rarely participate in industry events. The participating retailers gave very frank answers on a number of controversial topics, particularly the launch of next generation DVD players which PRO Group Executive Director Dave Workman called the worst launch in the history of consumer electronics.
* Attendees and the media had a chance to hear from top executives at 10 major TV brands. These executives provided a number of insightful comments on the future of the TV industry as they saw it.

It also helped that the event attracted well-known general interest publications such as the New York Times, the Los Angeles Times, Time Magazine as well as all the major TV and DVD industry press.

While the content listed above was valuable to the attendees, perhaps what was most satisfying was the HD content presented at the event by ESPN and Microsoft. ESPN SVP and conference keynote Bryan Burns debuted the Monday Night Football opening which the network won’t televise until September 11th. It was jaw dropping to say the least. Wait till you see it, you will be “ready for some football”. In addition, the HD video games that Microsoft Game Studio GM Dave Luehmann demonstrated during his talk were also extremely impressive. HD takes gaming to a whole new level and I am sure his demonstration inspired more than one attendee to buy a Microsoft XBOX 360.

The event is summarized by session below:
Day 1, Opening

The event started with ESPN Monday Night Football producer Jay Rothman discussing their new open or tease in HD. After playing the tease, he then introduced DisplaySearch President Ross Young. Ross then presented the latest HD results from the new NPD-DisplaySearch report This Month in TVs which covers point of sale (POS) data in the US for all retail channels except warehouse club. As shown in Figure 1, as HD prices have declined, the HD unit and revenue shares have continued to rise, reaching 41% and 81% in June of 2006 respectively, up from 25% and 59% in June of 2005 with HDTV sell-through growth up 88%. This data covers TVs and combination TVs. He also indicated that HDTV was the #2 feature desired after larger size by a recent NPD consumer survey of nearly 2000 people looking to buy a new TV. Of those not naming HD as an important feature in their next TV, 40% weren’t clear of its benefits. So, additional education on the benefits of HD is still needed. Of course, lower prices and increased content are driving the HDTV market. To support the pricing point, he showed monthly volume weighted average pricing data for 32″, 37″ and 40″ LCDs as well as 42″ and 50″ PDPs which are down between 32% and 50% Y/Y. In addition, he showed CRT pricing data which is increasing as a result of the digital tuner mandate. From February to June, CRT TV prices are up as much as 23% which is helping to support gains by LCD TVs. Year-to-date, TVs are up 1% in the USA on a sell-through basis according to NPD and 3% on a sell-in basis for North America according to DisplaySearch as shown in Figure 2. While total unit growth is modest, both research firms are showing triple digit growth in flat panel TVs. It is interesting to note the differences between the DisplaySearch and NPD data. The DisplaySearch growth is higher which accounts for the warehouse club channel gaining share. The DisplaySearch MD RPTV growth is quite a bit higher than the NPD data which is indicative of the warehouse club experiencing a lot of growth in this category. It is also interesting to note that DisplaySearch is showing slower growth in plasma TVs on a sell-in basis than NPD is showing on a sell-through basis due to plasma TV supply constraints. The higher sell-in than sell-through growth for LCD TVs is indicative of faster sell-through growth to come in Q3’06.

In terms of HD content, the number of hours of HD content per day more than doubled in 2005 and continues to rise. A growing number of networks now broadcast all of their prime time content in HD except for news and reality programming. At the same time, some networks are already broadcasting or intend to broadcast news programs in HD. Young also counted more than 140 high definition movies from nine different studios with 2006 release dates available on either HD-DVD or Blu-ray formats. In addition, HD gaming has already arrived with dozens of titles available for downloading from XBOX Live Marketplace and PlayStation 3 ready to launch in November with an integrated Blu-ray player.

As a result, DisplaySearch is expecting HD penetration on a sell-in basis to rise from 51% in North America in 2006 to 90% in 2010 with global penetration rising from 25% in 2006 to 60% in 2010.

Young also announced that DisplaySearch will be expanding its CE offerings through new hires and leveraging the NPD POS data and consumer panels. It intends to break out US data separately from North America, begin forecasting TV costs and prices on a monthly basis as well as start forecasting shipments in the US market on a monthly basis. In addition, DisplaySearch intends to add new regions to its TV coverage such as Brazil, Korea and India. Furthermore, DisplaySearch will expand its coverage to all products connected to the TV, such as next generation DVD players/recorders, traditional DVD players and recorders, set top boxes and PVRs, video game platforms and even home theater audio. DisplaySearch will also begin tracking HD content and household penetration for the US market and eventually worldwide.

DisplaySearch also continued its use of audience polling at the event. 54% of the HDTV owners at the event indicated they were HD enthusiasts with only 6% feeling unsatisfied, down dramatically from 43% last year likely due to more content.

Figure 1

Figure 2
YTD TV Unit Growth

Day 1, Session 1, HD Content Outlook – The View from Movie Stuidos, Networks and Game Developers

· Our first keynote speaker was Darcy Antontellis who is EVP of Distribution and Technology Operations at Warner Brothers. She discussed how Warner Brothers is mining their content library, which consists of over 65,000 episodes of television programming and 60,000 theatrical releases, to continue to create value from content created up to forty years ago. Warner Brothers monitors illegal peer to peer sites such as eMule and YouTube and sees that there is still demand for content such as Gilligan’s Island. She indicated that it proves that demand for popular programming will get satisfied in one way or another and that reformatting in HD is the rationale for giving consumers something better in legitimate distribution channels. She indicated it makes good business sense to reformat old content in HD such as Friends as well as old movie classics such as The Searchers soon to be released in HD-DVD and later in Blu-ray. She made the point that content owners must move assertively to HD, even though it leaves studios vulnerable to hacking. Content protection must be transparent, she said. Warner Brothers has not yet decided whether it will implement the Image Constraint Token which downgrades the resolution of content not protected. Nonetheless, the company is also planning in the near-term to distribute content over the internet through a pact it signed with BitTorrent six months ago. BitTorrent has 65 million users worldwide, but downloads will obly be available to US users. According to Antonellis, starting in late summer or early fall, Warner films will be available for downloading for a fee on the BitTorrent site. The films will be available initially in standard definition, but the service will support HD. BitTorrent is a place where people go for untraditional ways to get content, she said, and “we want to be there. In regards to HD-DVD and Blu-ray, she indicated that Warner Brothers is committed to actively mastering and releasing movies in both Blu-ray and HD-DVD as there are no quality differences. Warner Brothers will continue to release in both formats until the market decides there is a winner. She also showed data from Screen Digest indicating that in 2005 there were 21M HD households, but only 12M households were watching HDTV.

· The next keynote speaker was Bryan Burns, VP of Strategic Business Planning and Development from ESPN. He shared the remainder of the new Monday Night Football opening which left the audience in awe. He then went through his presentation which was entitled Meeting of the Stakeholders which summarized recent meetings with leading cable and satellite companies. He also went through some recent consumer survey data which covered the importance of sports to HD and vice versa. According to the consumer survey data he presented from various sources, 1 in 3 future HDTV buyers expect to watch more sports because of HD and over 70% of HDTV owners indicate that they watch more sports since getting HDTV. In addition, most of these sports fans are tuning into to ESPN HD and ESPN2HD to get their HD sports. ESPN HD is now available to 85M homes while ESPN2 HD is now available to 41M himes. Another interesting point was that HDTV service subscribers tend to watch 16-20 hours more per week than non-subscribers. He also discussed an interesting consumer result that only 52% of HDTV owners report that they have HDTV service. This means there is either a lot of low hanging fruit for HD service providers, or a lot of consumer confusion. In terms of comments from leading cable and satellite providers:

· The President of Cox Cable, Pat Esser, indicated that HDTV is expected to be a big driver for them with 65% of their customers expected to subscribe to an HD package by 2010 which would consist of at least 50 channels. 50 channels sounds great! (Ross’s comment).

· Brian Roberts, Chairman and CEO of Comcast, indicated that 28% of their subscribers are using DVRs and or HD STBs, up from 17% a year ago.

Burns indicated that ESPN grew its HD telecasts by 61% in 2006 to an amazing 762 events, including all 62 games of the World Cup at 12 different venues which was their proudest moment. After constructing a $200M facility with five HD production control rooms in Bristol in 2004, 90% of its studio programming is now filmed in HD. Now that all their major events and programming are in HD, the same growth in 2007 and beyond is not likely, but they will never go backwards. They are not looking to film lower tiered events in HD just for the sake of doing them, as there is still additional cost associated with filming in HD. He also indicated that as of April 1st, all advertisements are now in HD.

When asked what was the future for ESPNHD and ESPN2HD, where will its growth come from, he indicated that ESPN will concentrate in the short-term on internal infrastructure growth. ESPN is building a 2nd HD production facility in Los Angeles next to the Staples Center. It will be used as a base for some late-night episodes of SportsCenter. In addition, it will be a response to critics who complain the show has an East Coast bias as many of those in Bristol are Red Sox or Yankees fans Burns said jokingly. The LA facility may also serve as a disaster recovery center. ESPN will also look to do more newsgathering in HD.

He also indicated that although many cameras used on the road are now 1080p, they have no near term plans to try and broadcast in 1080p due to the limited bandwidth of the cable and satellite providers resulting from MPEG-2 codecs as well as the high cost and time associated with upgrading their routers, switchers, control centers, editing equipment, etc. Cable and satellite companies remain less concerned about quality than squeezing in more channels.

· The next keynote speaker was CBS VP of Engineering and Advanced Technology Robert Seidel. He indicated that as of August 1, 99.995% of US TV households were served by 1,566 digital broadcast stations in 211 markets. CBS has 220 digital stations than can reach 99.9% of US households while UPN has 168 digital stations that can reach 97% of US households. However, only 14% of Americans look to broadcast stations for their TV signals with 86% looking to cable and satellite. While CBS and other networks are widely available in HD on cable, satellite providers are in the process of launching more local channels in HD through new satellites. DirecTV has launched 2 satellites, Spaceway 1 and 2, with 3 and 4 expected to launch in early 2007. As a result, more local channels are now being rolled out in Tampa, Dallas, Houston, Boston, Washington DC, LA and NY. Seidel also indicated that too much attention has been paid to 1080p without regard to the importance of the 1920 horizontal resolution which is very sensitive to the eye. He claimed that DLP’s wobulation approach to 1920 x 1080p will produce an inferior image to true 1920 x 1080p solutions as in addition to 960 x 1080 pixels, shifting by half a pixel will further reduce the resolution of the image. While he indicated it falls short of reproducing 1280 x 720, it certainly looks better than 720p to me. He believes the CE Industry should specify TVs in terms of television lines per picture height (TVL/PH) and went on to describe a wedge approach for visual interpretation of horizontal and vertical resolution. Until true 1080p content is delivered to sets fully capable of reproducing that resolution, consumers are viewing DTV “through a screen door or a haze”, he indicated.

Moving on to HD content, he put together a list of all the TV networks now available in HD via cable, satellite or OTA as shown in Figure 3. As shown, there are now 42 different HD channels. In regards to movies, he indicated that a growing number of movies are being captured at 1920 x 1080p/24 and he listed 18 of them including the first 3 episodes of Star Wars where no film was used. In fact, 38% of the TV series now in production are being produced in HD, a significant number of 1080p/24. Why? This is because the additional cost of capturing in HD is negligible as the camera costs are similar. Dual mode cameras that record in both standard and HD are replacing older SD cameras whenever studios undergo scheduled upgrades. Editing in HD isn’t an issue either, he said. “People are editing electronically, and in that case, it doesn’t matter if it is in SD or HD. The goal is to preserve the future asset value, so you don’t have to go back into the vault and take out the film which is very expensive.” He estimated the cost to convert film negatives into 1080p was as much as $100,000 per hour.

Figure 3
HD Channels

Seidel also revealed that CBS’s entire fall prime time line-up will be in HD excluding two reality shows and two news programs. In addition, 11 of the 14 prime time programs on the CW (the CBS-Warner Brothers channel which was UPN) will also be in HD. In addition, all of the US Tennis Open, every NCAA football game, the NCAA basketball final four and numerous other programs will also be in HD. Also in HD are the soap opera The Young and the Restless, the Late Show with David Letterman and two of its affiliates are producing all of their local news in HD. From September, all its owned stations will convert to HD news as Sony’s XDCAM-HD cameras are installed. At that point, CBS will be providing 40 hours per week of original HD programming. In addition, CBS affiliate King World will begin distributing Wheel of Fortune and Jeopardy to other networks in HD. There will be no premium for these game shows.

Speaking of quality, he mentioned that unlike competing networks, CBS requires all of its MSOs to broadcast its content at 19Mbits.

Regarding advertisements, last year, there were around 8-10 ads per week in HD. Now they have 8-10 HD ads per day.

Regarding IPTV, he indicated CBS was very aggressive in getting content to the internet, but would rely on revenue sharing with its local affiliates. CBS is also exploring digital story lines to CBS.com starting with the Jericho series which could be extended to other shows targeting younger viewers. Studios and networks are negotiating an agreement for placing programs on digital distribution platforms according to other sources. At issue, is the split between the studios which own the content and the networks which spend millions to license, schedule, promote and market it.

Regarding which next generation HD format CBS will release its TV shows on in, he indicated that from a technical standpoint he liked Blu-ray as it relies on MPEG-2 which is compatible with their existing content and has higher capacity.

* The next speaker was Karl Meisenbach, Director of Advertising for HDNet. He revealed the advertisers currently running HD spots as well as the 19 networks broadcasting them. He also demonstrated how poor the quality of SD ads look on an HD set. He also showed some examples of HD content on TV shows and sports programming that SD viewers were unable to see, easter eggs he called them. He also indicated that HDNet is experimenting with running no more than two commercials in a row to prevent channel changing. When asked what metrics the advertising agencies needed to recommend more ads be broadcasted in HD, he indicated frequent updates to # of HD households. He also indicated he expected the number of HD ads to really surge between now and the Super Bowl as HD penetration exceeds 50% and executives at advertisers wonder why their ads look so much worse than the HD content on their televisions.

* The final speaker in this session was Dave Luehmann, General Manager of Microsoft Game Studio. Microsoft’s vision according to Luehmann is to deliver HD entertainment experiences on every screen in the house, whether they are on the PC, TV, game console or portable device. Windows Media Center today delivers HD support for recording free over the air HDTV programming and gives consumers the ability to enjoy it from any room in the house. Xbox 360 customers have a mechanism to download HD games called Xbox Live Marketplace. The HD-DVD drive that will soon be available with Xbox 360 will not be capable of playing games, only watching movies. Microsoft had to make this decision nearly 12 months ago, but this doesn’t preclude them from coming out with another drive that could be used for games in the future. Loading speed and transfer speeds were also reportedly a concern. This external drive is rumored to have an introductory price as low as $199, which is pretty compelling given current HD-DVD and Blu-ray player prices. Microsoft executives have promised to have the lowest priced HD-DVD drive on the market. There are already dozens of HD titles on Xbox Live Marketplace. He demonstrated some games that are on the site now or will soon be available and they were extremely impressive. They expect to have 160 HD games for downloading by the end of the year. There are already 3M members of Xbox Live with 60% of Xbox 360 gamers connected to Xbox Live. Xbox live is also being used to download HD music videos, movie trailers and TV content.

Microsoft will also be introducing Microsoft TV IPTV Edition software to provide consumers with new ways of bringing content, even HD content, into the home. He also presented some interesting data showing that 90% of Xbox 360 owners either own or intend to purchase an HDTV in the next 6 months with 47% of TV households planning to buy an HDTV in the next 12 months.

Interestingly, he also indicated that it typically costs $20M to develop a new game.
Day 1, Session 2, Lessons from Retail – Are Consumers Still Confused?

The retailer session consisted largely of regional and local retailers with the exception of Amazon. This was fitting given NPD’s roll-out of its market level data which tracks sell-through by region.

On the panel were:

· Casey Crane, CEO of Ken Crane’s, which has nine stores in Southern California and has been open for business for nearly 60 years.

· Bjorn Dybdahl, who presides over Bjorns in San Antonio.

· Noah Herschman, Director of Home Electronics for Amazon.com.

· Jim Pearse, SVP of Merchandising at Ultimate Electronics which has 23 stores in 9 states.

· David Workman, Executive Director of the PRO buying group which coordinates merchandising, marketing and other business services for 16 mostly regional retailers representing $2B in CE sales.

To quantify the position of regional retailers in the TV market, Ross estimated their share by subtracting the NPD weekly POS data, which consists of 11 national retailers and one regional retailer, from the NPD monthly POS data which is nearly all regional retailers except for Radio Shack. The results are shown in Figure 4. As indicated, regional retailers have the strongest presence relative to national retailers in RPTVs and a weaker position in flat panel TVs. Regional retailers account for 25% – 33% of the market depending on the month. He also looked at the mix of technology within each channel. LCDs accounted for the highest share of national retailer revenues, while MD RPTVs accounted for the highest share of regional and local retailer revenues.

Figure 4
National vs. Regional Retailer Share

This brought up the first question to the panel. Why are regional players strongest in RPTVs and what are the strengths of regional retailers?

Ultimate’s Pearse explained that while Ultimate tends to more closely match national chains RPTV shares, their salespeople were trained toward selling the larger sized screens which points them to more MD RPTV models but with no bias in that direction. “We stress screen size over technology.”

Workman indicated that “The forte of the specialist is responding to the customers needs. Consumers are typically undersold at national retailers.” Workman said PRO retailers have a qualifying process in terms of screen size that helps determine whether the customer is looking at MD for his price point or has the option of flat panel within budget.

Bjorn Dybdahl stressed that at his store the emphasis is in taking the time with the customer, asking the right questions, and the importance of listening. “It takes more time to get them into the larger screen sizes. Our specialty is taking the time and establishing strong relationships.”

Crane suggested that flat panels tend to get added sales just because they are so prominently front and forward. “Customers see them. If there is not as much interaction, that would tend to benefit flat panel sales.”

Herschman offered that three of the top four selling SKUs for the e-tailer were flat panels with the #1 seller a 32″ Samsung flat panel but #2 was a 42″ Samsung DLP RPTV. He said third party opinions of customers posted to the websites is a valuable tool of communicating unbiased opinions and a direct source of in-home experience with a product. Beyond that Herschman said, their “click to call” feature for products $1000 or greater, allows customers to talk to Amazon staff trained in the product, prepared to talk about a particular model prior to the call as per the request. But at the core, it begins with the customer on the internet.

“People like to do their own research.”

So, clearly the regional retailers aren’t threatened by the potential loss of share of MD RPTV to flat panel as they believe their position is more about screen size and price point than about technology.

I thought it would also be interesting to compare HD share at regionals vs. nationals which you can see on Figure 5 for HD and Figure 6 for 1080p. As shown, the HD share has been higher at regionals, but over the past few months, it has become negligible. This is due to the PDP HD and CRT HD share at nationals quickly approaching regionals. At 1080p MD, regional retailers held a wide advantage through February but that advantage has since narrowed as 1080p becomes mainstream. Perhaps once the regionals develop the market, the national retailers quickly move to these segments and cause regional retailers to have supply constraints. Ross then asked the panel what was their outlook for 1080p TVs? How do they educate your customers on the benefits of 1080p vs. 720p? Do they get it? What about 1080p LCD TVs? Will they catch on as quickly as 1080p MD RPTVs?

At Ultimate Electronics, Pearse says seminars are regularly conducted, creating buzz and offering a non-selling sell-in with the ability to spend some concentrated time to make HD concepts clearer. “We take educating the customer very seriously. 1080p is a simple proposition. It is just a question of an education process and getting them comfortable.”

As Bjorn demonstrated at last years conference, the store produces and runs TV spots that are specifically aimed at simply explaining a single topic, building image for Bjorn’s as a place to go to get unconfused. He said has a partnership with cable operator Time Warner in San Antonio, one of the nations larger HD markets, that helps bridge the added confusion gap at installation. He cites the fact the TV industry seems to love to confuse people and his aim is to do all he can to eliminate confusion at all points in the selling and set up process.

“People buy picture, not the technology”, says Workman. It’s all in the demo. He says taking the time to answer questions is important but not just a barrage of details. In the end they are buying the technology to get to the content.

Added Crane, “Regionals and independents tend to originate all of the educating. These efforts become mainstream and the nationals run with it.”

Young also showed comparisons of brand share at national and regional retailers which revealed stark differences in Sony and Samsung’s positions depending on the channel. Retailers were relatively stoic regarding this data, that it just represented action and reaction in fairly quick time frame. While Samsung has expressed intentions to make inroads at regional dealers with more concentrated support, Bjorn said he has seen that already in action. “Sony has supported us for a long time but early this year Samsung stepped up and finally did a Super Bowl ad with us.” Panelists cited other keys to differentiating and prospering as a regional or independent such as versatility, being careful to not become too comfortable with a particular technology, format or brand. All agreed the accessories and service are the best way to restore lost margins on competitive pricing.

Figure 5
HD Revenue Share by Channel

Figure 6
1080p Revenue Share by Channel

A major topic of discussion that rendered some of the strongest comments from retailers was the launch of HD-DVD and Blu-ray players.

Casey Crane and Bjorn said their employees were embarrassed giving demonstrations of the first batch of Blu-ray films, seeing very little improved performance over their standard definition versions. Samsung, which brought out the first, and is still the only available Blu-ray player in the market, has admitted to chip problems in earlier units, the Genesis Microchip MPEG noise reduction was turned all the way up producing a cloudy image. The manufacturer has since said that this issue has been resolved. Crane said that a Samsung-provided demo disc showcased Blu-ray beautifully on an early Samsung player, suggesting possible mastering issues with certain film titles.

“I took [the Samsung disc] and what we got from the software companies, and it was two different worlds,” Crane said. “Sales are lighter than we anticipated.” Crane says the picture quality has improved since a software glitch was fixed. Still, he said, “sales are lighter than we anticipated” as most of the panel agreed. “The source material is not what it could be,” Crane offered. “The future will be strong for 1080p DVD. The consumer does want it, but their expectations are higher than what we are delivering.”

Workman of PRO Group voiced frustrations with the format war in general, with software glitches, future compatibility issues and the rush to get players on the market with the imminent HDMI 1.3 spec.

“The HD-DVD/Blu-ray DVD launch is probably the worst execution of a new technology release this industry has done. We’ve stacked this thing up as far as you can to try and create a failure for what should have been the best new technology introduction,” he continued. “As an industry there are so many competing technologies out there for consumers’ share of wallet and discretionary income, we have to do a better job on this one. It’s been a race to see who can string the tightest noose.”

Jim Pearse shared other panelist’s disappointment with the initial product but doesn’t really subscribe to the idea that the players and software is really going to be a Q4’06 product. “it will be a 2007 product as more manufacturers bring it to market. “[Studios] were pushing too hard to get the product out, so you’re going to get execution that is sub-par.”

Bjorn said he was “somewhat disappointed” in the launch of both formats thus far, and agreed that “below par” encoding of software in early Blu-ray releases for dampening enthusiasm and this has contributed to salespeople “becoming lazy and are not demonstrating the material over and over and over again. Bjorn also said that the 1080i output from the Toshiba player looked better than the 1080p output from the 1080p output Blu-ray player, but agreed that the Samsung demo disc, with material encoded in high quality, showed the true potential of the format and the player, and the imperfections of the early movie discs.

With having no demo concept to deal with and offering a more positive view than the specialty dealers, Amazon’s Noah Herschman said the e-commerce retailer has “done very well with sales of both blue-laser format players and software.”

Retailers agreed that the problems were due to both sides trying to get a leg up in the format war, with studios and manufacturers rushing products to market before the kinks are worked out.

Crane, as a leading retailer of software going back to the heyday of laser discs, said he welcomes the day premiere DVD maker Criterion rolls out product in Blu-ray or HD DVD.

Other retailers at the event later confessed that multiple formats are problematic for them, requiring them to stock 5 different versions of the same movie – standard, widescreen, special edition, Blu-ray and HD-DVD. This is going to limit how many titles and options they can stock.

Young also introduced NPD’s regional POS data which will soon be available to manufacturers and retailers. It will initially provide regional POS data for 30 different markets representing 55% of the population. An example is shown in Figure 7 which shows the ratio of PDPs to RPTVs in major locations across the United States. As shown, there is quite a gap in favor of PDPs in the largest metropolitan areas which face higher real estate costs and have greater space sensitivity. RPTVs do better in the Midwest and South which are less space sensitive as well as at higher altitudes due to PDPs buzzing challenges. He also showed how brand share differed for PDPs and RPTVs by region for Sony, Samsung and Panasonic.

Figure 7
PDP – RPTV Sell-through Ratio by Region

Day 1, Session 3, Outlook for High Definition DVD Players – What Does the Adoption Curve Look Like?

This session consisted of the following speakers:

* Ross Young, President, DisplaySearch
* Jim Taylor, Senior Vice President & General Manager of the Advanced Technology Group, Sonic Solutions
* Mark Knox, Advisor to the Toshiba HD DVD Promotion Division, Toshiba America
* Jeff Goldstein, VP of Marketing, Sony
* Eisuke Tsuyuzaki, Managing Director, Panasonic Hollywood Lab

· Ross’s speech gave an overview of the current DVD player market, the opportunity for next generation DVD players, an approach to forecasting this segment, attempted to handicap the different formats and provided the sell-through results to date for the US market. Based on NPD US sell-through data, the DVD market was 16.4M units in 2005, down 15%. Accounting for the warehouse club channel, it is likely around 20M units in the US. Revenues have declined for the past three year with ASPs declining at 12% – 25% per year from 2000 – 2004 before stabilizing in 2005 at $89. Young segmented the DVD player market into six distinct segments:

o Standard players

o Progressive scan players

o Progressive scan players with upconversion

o Standard recorders

o Progressive scan recorders

o Progressive scan recorders with upconversion

Progressive scan players now dominate the market with a 79% share in 2005 as the premium for progressive scan declined to $0. In 2005, the average progressive scan DVD player price fell to $67, below the price of standard players without progressive scan. It should be noted that DVD recorder prices were $700 when they began selling in early 2003. He also showed that prices continue to fall rapidly at the high end with upconversion units falling 37% to $105, nearly the same price as the HDMI cable. As a result, upconversion units are beginning to accelerate as the price ratio with progressive scan units has fallen to well below 2.0 causing the share to surge to 15%. He also showed that the attach ratio between HDTV and upconversion DVD sell-through which has recently jumped to 35%. This type of analysis provides a basis for forecasting the next generation DVD market substituting 1080p TVs for HDTVs. Young figures the attach ratio between 1080p TVs and next generation players will eventually reach high levels as consumers look to take advantage of the additional resolution on their premium-priced 1080p TVs. First, prices must fall for the players as 90% of DVD sell-through is below $150 with >$300 systems just 2% of the market. Certainly, low-cost dual format (HD-DVD and Blu-ray) players would be idea. In terms of brand share, Sony dominates the current DVD market on a revenue basis with more than a 25% share. Four of the top five and nine of the top 18 brands support Blu-ray, accounting for a 61% share of the market. HD-DVD’s 2 brands account for 13% of the market.

Why next generation DVD players? Standard definition DVDs played on larger and larger TVs begins to result in quality concerns. HDTV owners want to enjoy HD quality DVDs on their TVs, upconverted SD is not sufficient for 1080p TV owners. In fact, DVDs have fallen behind broadcasted HD in quality. In addition, today’s DVDs cannot support three hours of HD content. Movie studios, video games, etc. want to add capacity, boost interactivity, storyboard access, synchronized graphical, text and audio commentary, random access, search, etc. Even the DVD market has rapidly migrated to higher capacity DVDs with over 90% of output at DVD-9 compared to 70% in 2000. The DVD player and DVD rental/purchase market has slowed or declined, and the DVD hardware industry is looking to enjoy the same revenue growth opportunity from HD as the TV industry.

DisplaySearch believes the total available market consists of 1080p TVs, which will have a very high attach rate, and 26″+ 720p/1080i TVs which will have a lower attach rate and be more price sensitive. Based on these two segments, the total available market in 2010 is nearly 30M units.

He went through the technical parameters with Blu-ray offering a higher data transfer and video bit rate which should generate a quality advantage for Blu-ray, but that has not been observed.

In terms of studio backing, there are more studios behind Blu-ray although HD-DVD studios have more titles available. In addition, three of the studios backing HD-DVD are also supporting Blu-ray. Young identified 85 HD-DVD titles with 2006 release dates compared with 50 Blu-ray titles.

In terms of hardware, three different HD-DVD players have been introduced compared with one Blu-ray player on the market from Samsung. However, Pioneer, Panasonic, Philips, Sony, Sharp and LGE are all expected to introduce Blu-ray players in the next few months. There is also hope for a dual format player as both Samsung and Epson have reportedly developed optical pick-ups that can play both formats.

In terms of HD-DVD and Blu-ray sell-through covering NPD’s 12 weekly contributors for the six week period 6/18 – 7/29 when both formats were available, Blu-ray led with a 54% to 46% advantage as shown in Figure 8. On a revenue basis, Blu-ray led with a 69% share. Of course, this period covers the Blu-ray launch and there was likely some pent up demand. In fact, Blu-ray players led for the first three weeks of this six-week period while HD-DVD led for the latest three weeks. If we compare the first six weeks for each technology, HD-DVD led on a unit basis, selling 33% more than Blu-ray, while Blu-ray led on a revenue basis selling 42% more due to its higher ASPs as shown in Figure 9. In terms of the next generation DVD share of the total DVD market, as shown in Figure 10, over the past six weeks it amounts to just 0.4% on a unit basis and 3.6% on a revenue basis. The revenue share is already bigger than either the standard player or standard recorder markets.

Figure 8
6/18 – 7/29 HD-DVD vs. Blu-ray Results

Figure 9
HD-DVD vs. Blu-ray Launch Comparisons

Figure 10
Next Generation DVD Player/Recorder Share

Young summarized his presentation by comparing HD-DVD and Blu-ray across a number of ley parameters as shown in Figure 11. As indicated, they both have their strengths and weaknesses and it may be quite a while before a winner is determined.

Figure 11
HD-DVD vs. Blu-ray Comparisons

* Next up was Jim Taylor from Sonic, which is a leading provider of DVD authoring software. Taylor is a leading authority on conventional DVDs. He explained why standard DVDs were a success, and questioned if next generation DVDs would be a success as the improvement over standard DVDs is much less than the improvement from VHS to standard DVD. Perhaps the biggest improvement will be in the area of interactivity according to Taylor. Has anything changed, he asked? Of course, the HD transition is underway, consumers are more familiar with DVD, entertainment devices and consumers are more sophisticated and consumption behavior has changed in the areas of more purchasing, expectations of more and better stuff on DVD and a significant uptake in music DVDs and TV shows on DVD. He showed an interesting chart on number of years to 50% household penetration as shown in Figure 12. DVD players took the least amount of time to 50% penetration at just 6 years. To determine how quickly next generation formats will succeed will depend on the content, according to Taylor as content is king. Another interesting point was that according to In-Stat, 2/3 of US HDTV households don’t have HDTV service. What are they watching? DVDs! Another important point as mentioned earlier is shelf space for the new DVD formats. There are approximately 60,000 DVD SKUs with retail space for just 21K or so. Alternative distribution must flourish for the new formats to become successful. Managed recording or legal burning which has gained acceptance will also help, although it may lead to HD content on red laser discs. In summary, adoption rates are unclear due to multiple formats, content will determine success supported by distribution enhancements.

Figure 12
Time to 50% Household Penetration

* Next was Mark Knox, representing Toshiba and HD-DVD. Know supported Young’s earlier comments that larger screen sizes need HD. SDTV picture quality peaks at around 30″ according to Toshiba. He then explained the DVD approach to HD. With MPEG2, it would require 5-6X the capacity vs. standard DVD. Capacity could be increased by 2.6X by switching from a red laser to a blue laser. The Blu-ray approach, according to Knox, is to dramatically increase the numerical aperture from 0.6 to 0.85, significantly reducing the spot size and increasing capacity by 5X. However, this requires a different structure, rather than 0.6mm thickness, 0.1mm is required which is more delicate and easily damaged as shown in Figure 13 . This means new manufacturing equipment must be installed. In addition, a more costly objective lens is required. Furthermore, the narrower working distance (WD) and smaller spot size means yields are a bigger concern. Toshiba’s solution was to move to the blue laser, increase the numerical aperture slightly from 0.6 to 0.65 to achieve 3X the capacity and then move to MPEG4 or VC1 to double capacity to 6X. Knox showed that MPEG-4 is 40% – 50% more efficient than MPEG-2 and MPEG-4 and VC1 have equivalent bit rate efficiency. This approach maintains the same 0.6mm structure, uses a simple and cost effective objective lens, has a larger working distance, can use the same manufacturing equipment and the larger spot size doesn’t impact yields. So a major difference is that HD-DVD will rely on newer codecs while Blu-ray can continue to use MPEG-2, but will require a more costly manufacturing process although capacity will be 10GBs higher per layer. Because the HD-DVD manufacturing process is compatible with standard DVDs, studios have the option of putting a film in standard DVD on one side and in HD-DVD on the other, making it a future proof purchase. This is more appealing to studios than selling two separate DVDs in the same package which can result in the loss of a sale if someone gives one version to a friend, etc.

Figure 13
Different DVD Structures

Source: Toshiba

* The next speaker was Jeff Goldstein from Sony. He stressed Sony’s abilities to take advantage of this format throughout the company covering:
o Movies through Sony Pictures and music through Sony BMG Music.
o Replication and mastering through Sony DADC
o Recorders and players through Sony Electronics
o Recording media through Sony Electronics
o Gaming via PS3 through Sony Computer Entertainment
o PC storage and entertainment
o Authoring and compression

Blu-ray disc IT products include the Sony AR190G notebook, the RC300 desktop PC, the BWU-100A BD drive and 25GB and 50GB recording media. Sony’s first home Blu-ray player, the BDP-S1, will feature 1080p output, DVD upscaling to 1080p, Sony Cinema tuned HD quality, uncompressed multi-channel PCM output and Java interactive capability. He also indicated that Sony was looking at 100GB media.

* The last speaker was Eisuke Tsuyuzaki from Panasonic. He made a point to let the audience know that HD-DVD vs. Blu-ray is not like VHS vs. Betamax which took place over 30 years ago. Today, formats are launched much quicker, and this format launch should happen quickly due to format attributes such as extendibility and support where we have ROM and RE on multiple devices, complimentary products such as HDTVs which need more HD content and world of mouth through a network of videophiles, retailers and analysts. In terms of speed to market, he indicated that Blu-ray actually came to market first in the form of RE devices in April 2003 in Japan in order to minimize the different recordable formats unlike what happened in DVD. He also showed that Blu-ray has overwhelming studio support with studios representing more than 50% of DVD sales providing exclusive Blu-ray support (Walt Disney, 20th Century Fox, MGM, Sony and Lionsgate) and studios representing 81% of DVD sales supporting Blu-ray in total. Only 12% of studios are exclusively supporting HD-DVD – Universal, with Warner Brothers, Paramount and DreamWorks supporting both formats. While today the outcome isn’t clear, he believes the strong flat panel TV, DVD player and studio support will ensure that Blu-ray comes out on top. Panasonic will focus on premium quality, high-end products in this space. It also has replication capability and will sell BLu-ray media, doesn’t believe the disc costs will be much more than HD-DVD. They will also offer a slim drive for PCs, home theater players and recorders, video cameras, mobile navigation products, professional products and related ICs.

Panel Session and Audience Q&A

We then had a short, but interesting panel session which also covered audience polling. The first question was what kind of price reduction can be expected over the next 2-4 years. Goldstein indicated that it will follow a similar path as traditional DVD with significant price reductions likely. Mark Knox indicated that the next generation players have a lot more sophisticated electronics which should result in slower price reductions. Taylor indicated that next generation players are more powerful than traditional players but are starting at a lower price point than first generation VHS and DVD. The audience polling question revealed that 54% of respondents would be willing to pay $200 – $400 for a next generation DVD player vs. an upconverting DVD player.

In terms of how fast next generation players can gain share, Tsuyuzaki thought it would follow the DVD adoption rate. Know said that consumers hate SD after purchasing an HDTV. As people experience next generation content, consumers will drive demand faster than expected. The majority of the audience thought that next generation players would only earn a 5% share in 2007 and were evenly divided between <10% and 10% - 20% in 2008. Will consumers wait for a winning format? Taylor thought the winner might end up being a dual format player with Samsung and Epson developing multiple heads. The market would rectify any inequities with multi-format players. Knox indicated that even if consumers have to buy something later to adjust to a winning format, they will still buy now. Goldstein indicated that content will drive the outcome of the battle. We then asked the audience that given that multiple movie studios are supporting both formats, are you comfortable selecting one format or will you wait for a winner. 69% said they preferred to wait for a standards war winner. When asked if there would be a next generation DVD form at winner (>70% share) in the next two years, 68% said they believed there would not be a clear winner through 2008.

When asked if there was any consumer preference research available? Know indicated that Warner Brothers found that consumers preferred the SD/HD combination discs available through HD-DVD.

In terms of output formats, Knox indicated that HDMI is preferred, otherwise the image constraint token could be enacted to down rez the resolution, although no studio has agreed to do it yet but the entry level PS3 unit may tempt the studios. Taylor indicated that nay consumer can connect to any device, though it may not be the most elegant solution.

The last question was whether the packaged media distribution model was threatened. Know indicated that the studios realize that the window is relatively short for packaged media before bandiwidth improves and the internet takes over.
Day 1, Session 4, Display Electronics – Maximizing Performance While Cutting Costs

Philips and Genesis presented the issue of cost, integration and video performance in the electronics that drives the displays. Both companies are trying to answer the same question. Will all video processing chips going to be integrated into a single piece of silicon? They both conclude that a single silicon design to address the worldwide market is not probable in the next few years.

Public relations generated at the marketing departments at the video processing semiconductor companies tell the world that their next generation video processing chip is a “highly integrated single chip solution.” The truth is not as clear. The TV system is complex and no one truly has a “single chip.” The real answer is how the companies are partitioning the system. There is no one right answer to how the system is partitioned with many factors determining the partitioning. Some of factors that prevent a single chip to address the whole TV market:

o New improvements in video functions like motion judder removal, better contrast and wider color gamut

o Support for higher resolutions and refresh rates

o ATSC, DVB-T, and other geographical standard differences

o Networking of TV’s

o Different segments in the TV market (see figure below)

Figure 14
Different TV segmentation

Source: Philips

The segments where integration wins is in the low to middle end TV. The standards and video features are well accepted in these segments will get integrated. The mid-high end of the segment will use multiple chips to support better video, audio, and increasing number of inputs. Who will win the chip wars? The current leaders are clear with Trident and Genesis but the long term winner is not. Only time will tell who will truly win.

Software for TV’s

The software code base is rapidly increasing to the size of the code has increase 16x over the last five years (see figure 2). It’s one reason why video processing companies with new ATSC solutions have hard time gaining traction at tier one TV companies with new MPEG 2 front end solutions.

Figure 15
TV Software Increasing in Complexity

Source: Bitrouter

Gopal Miglani, President of Bitrouter, talked about the role of software and it’s increasing complexity in TV’s. Future support for Bi-directional Cable, DVR, conditional access, IPTV, home network and high definition DVD’s will all contribute to the growing role of software. Software at hardware companies in the past was almost an afterthought but that’s certainly changing now. Many of the newer MPEG video processing chips were delayed due to the complexity of the software stack. Chip companies must now spend at least as much time in software as hardware. Stability and compatibility will be key.