Good DVD article:
Priced to Sell: Could the Gift Under Tree Be a New DVD?
By EVAN RAMSTAD
Staff Reporter of THE WALL STREET JOURNAL
In what is shaping up as the best holiday for consumer-electronics sales since 1994, the digital videodisk player sparkles as the brightest star in a galaxy of newly affordable gadgets.
Retailing most places for just $299, DVD players are flying off the shelves. Two years ago, most DVDs sold for a prohibitive $600.
And as consumers experience the better video and sound quality of DVDs, they also are buying bigger TVs and better sound systems. Big-screen TV sales are up 12% this year, and audio sales are up 11%, according to the Consumer Electronics Association, a trade group. Holiday sales of personal computers, meanwhile, have been crimped by rising prices and lower rebates, but still are expected to be strong.
"The biggest market driver is DVD," says Terry Shimek, owner of Shimeks Audio Video in Anchorage, Alaska.
Initially caught flat-footed, Hollywood studio executives are now making more titles available on DVD. The number jumped to 5,000 this year from around 1,800 a year ago. By comparison, about 18,000 movies are available on VHS tape, and 12,000 on laserdisk.
Even Walt Disney Co., a holdout among the major studios in DVD production, is releasing nine of its animated classics in the format for holiday shopping. And Blockbuster Entertainment Corp. this fall said it would offer DVDs in 3,800 of its 4,000 U.S. stores.
But the explosive growth in DVD sales may have taken much longer had it not been for two rival retailers. Impatient with even the normally rapid progression of consumer electronics, Best Buy Co. and Circuit City Stores Inc. jump-started the DVD by taking an active role in its development.
Before the DVD, manufacturers had tried for years to lure movie-watchers away from the tried-and-mostly-true video cassette tape. First came laser disks, which proved unwieldy and too expensive. Then came compact disks, which were smaller but didn't have the data capacity needed for movies.
Introduced in 1997, DVDs combined the smaller size of CDs with higher data capacity. They also were more durable than videotapes, and required no rewinding.
But like all new technology, the early DVD was pricey. When it hit the market in 1997, the cheapest DVD player was three times more expensive than a typical VCR.
Sensing a hit but searching for a way to make it more affordable, Circuit City bankrolled a variation of the standard DVD called Divx. That system allowed consumers to purchase movie disks but charged them a small fee each time they replayed the video. At $3 a viewing, Divx made DVD comparable to renting a movie cassette.
That's when archrival Best Buy got involved. The two chains dominate consumer electronics sales and compete head-to-head in more than 100 cities.
Unwilling to sell a product that would benefit its rival, Best Buy bypassed Divx and last year offered five free Warner Home Video movies and 13 free DVD rentals at Hollywood Video, a rental chain, with every DVD player it sold. It also searched for a company to produce a $299 DVD
player by Christmas 1998 -- about $100 less than the average price at the time, and well below what a Divx player cost.
Several manufacturers gasped at the request, saying that $299 was the low-end price target for Christmas 1999, not 1998. But Japan's Toshiba Corp. accepted the challenge, sensing a chance to build market share and foster goodwill with a major customer.
Best Buy says it studied the state of DVD manufacturing closely before making its move. "We knew the cost of manufacturing a DVD player is not that much more than manufacturing a CD player once the research and development was amortized," says Wade Fenn, Best Buy's top marketer.
Toshiba didn't see it that way. When Best Buy first mentioned the idea of a $299 DVD player in April 1998, "there were way more nays than yeas"" inside Toshiba, says Steve Nickerson, vice president of marketing for Toshiba's U.S. unit.
Toshiba and Best Buy began serious discussions in late summer of that year and had a final agreement by mid-October.
One month later, just in time for Thanksgiving, Toshiba agreed to cut the price of some of its lowest-end units to the price Best Buy wanted.
'Short-Term Pain'
"There was some short-term pain. But the decision was made with the realization there would be long-term benefits. When you see the industry is going to exceed 3.5 million units this year, the long-term benefits outweigh the short term," Mr. Nickerson says.
With DVD players selling for half as much as they did a year earlier, warehouses emptied rapidly last December, with many retailers left in short supply into February.
Indeed, with some of the less expensive units now selling for as little as $149, the Consumer Electronics Association recently raised its 1999 forecast for U.S. sales of DVD players to 3.5 million from 2 million. Last year, about 1 million were sold.
VCR sales, by comparison, are expected to fall about 3% to 17.5 million units this year.
As DVD sales surge, Thomson Multimedia SA, maker of RCA and GE brands, has moved TV production out of a plant in Juarez, Mexico, to make room for production of more DVD players and digital satellite receivers. Matsushita Electric Industrial Co., maker of Panasonic products, in July doubled its production of DVD players, and Pioneer recently leased a warehouse in Ohio and filled it with DVD players to ease pressure on its main distribution center in California.
DVD sales would not be where they are without the "intensity of the marketing initiatives associated with the alternative formats," says Warren Lieberfarb, president of Warner Home Video, who became an outspoken opponent of Divx after working for years to win acceptance for DVD in Hollywood.
Last summer, Circuit City decided to abandon Divx, acknowledging that the influx of cheap DVD players had rendered its idea obsolete and created a much bigger opportunity to sell machines.
"Only 3% of American homes have a DVD player, so if you're out looking for presents, it's a wonderful opportunity to get something that most people don't have," says Alan McCullough, who is president of Circuit City.
DVD technology has had its glitches, however. After Warner Home Video shipped 1.5 million copies of "The Matrix" on DVD in September, some consumers complained that the disks wouldn't play. The problem was solved when manufacturers agreed to install new software in players that had the difficulty.
And while DVD picture quality is generally better than videotape, it is sometimes compromised by technical shortcuts taken by the studios. High-action films, such as "Titanic" and "The Matrix," generally require that more data be squeezed onto a 9-gigabyte disk space, leading studios to cut corners. The result is that subjects may briefly appear blurred when a movie suddenly shifts from slower action to a faster pace.
But will consumers be willing to replace their VCRs with a DVD if they can't record their favorite episode of "The X-Files?"
Someday soon, they'll be able to, manufacturers say. The first recording DVDs are already being tested in laboratories and demonstrated at trade shows. Samsung Corp. recently announced its intention to sell a $2,000 DVD recorder by the end of summer. Others are expected to quickly follow.
But, says Toshiba's Mr. Nickerson, a practical, affordable DVD recorder is still two years away.
Write to Evan Ramstad at evan.ramstad@wsj.com |
