The optical disc market in China. Down to 16M to 18M units in 1999, from 20-22M in 1998......................
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The Optical Disc Market in China
By Howard Woo
With a population of 1.2 billion people, China is potentially the largest single market for optical disc media in the world. Demand for CD in China has in fact exploded since 1995, thanks to the incredible growth of the Video CD (VCD) format. Several VCD offshoots have since come into the picture, including China Video Disc (CVD), Super-Video CD...(S-VCD) and Chao Ji Video CD, as well as DVD-Video. This article explores the emergence of these formats - addressing issues ranging from politics to piracy - as well as an update on their current status.
In The Beginning...
The VCD revolution was started by C-Cube Microsystems with the introduction of its MPEG-1 video compression chip set, headed by Dr. Alex Balkanski, then C-Cube vice president of marketing. The first implementation of the VCD format was a joint venture company headed by Dr. Edmund Sun of Digital Video Systems [DVS], which created the first reference design.
The VCD business in China represented less than 1 million hardware units in 1995. The market has since ballooned in size, to an estimated 6.5 million players in 1996, and 18-to-20 million pieces in 1997, opening the door for new VCD formats.
New Video Disc Formats Emerge
With VCD beginning to take hold of the market, work began on offshoot formats. C-Cube and its leading Chinese customers began in 1997 to improve and enhance the VCD standard in China. They wanted to create a better picture quality and develop additional features. The specification for a proposed format named China Video Disc (CVD) included a picture quality increase to 352 horizontal resolution [1/2 D-1] and overlay graphics. There was a provision for four-channel mono sound or two stereo channels.
Better picture quality and additional features drove the June 1998 launch of CVD. At the same time, the Chinese Ministry of Information Industry [MII] instructed the China Recording Standards Committee to create an improved version of the existing standard of VCD, to be called Video CD 2.0. Their proposed standard included features such as better picture quality of 480 horizontal line resolution [2/3 D-1], a new video management protocol system [VMP], overlay graphics, and interactive features for educational purpose using a subset of Java programming language. This proposal also included an option for double density discs, called Super VCD (S-VCD). The purpose of this format was two-fold: the creation of an improved format fueled by market demand, and the creation of China's "own" intellectual property.
At the same time, JVC, Panasonic, Philips and Sony (collectively known as the 4Cs) and the owners of the patents and intellectual property of the VCD systems, worked with the China Recording Standards Committee to develop an improved version of VCD. The main feature of this format, called HQ-VCD, was 352 horizontal line resolution [1/2 D-1]. Its primary purpose was the intention of the 4Cs to work with the Chinese to improve the picture quality and at the same time protect their patents and intellectual property.
Because of the market launch of CVD in June 1998, MII was presented with a launch of a de-facto standard. The format was initially very successful in the major urban areas. The major Chinese OEM manufacturers, such as Idall, Malata, BBK, Nintaus, SAST and Xiamen Solid, supported CVD. S-VCD was supported by Shinko [the largest VCD manufacturer]. The major point of contention was the identification header - specifically, they were incompatible. In November 1998, the Department of Science and Technology of Ministry of Information Industry forced a compromise in incorporating the two standards into a single format called Chao Ji Video CD. This became the "proposed" industry standard in China. This standard stated that Chao Ji VCD has to read the identification header for both CVD and S-VCD. This standard was no longer a disc-based standard, but a player-based standard. In reality, Chao Ji VCD is a multi-standard player that plays CVD, S-VCD, VCD 2.0, VCD 1.1 and CD-Audio. This compromise was made because an estimated 300,000 to 600,000 CVD players were already in the distribution channels.
S-VCD, CVD Launched
S-VCD and CVD players were launched in mid-1998 at a 1800 RMB price point, which has subsequently dropped to an average price of 1200 RMB (approximately U.S.$145), and sometimes as low as 1000 RMB (U.S.$120).
Chinese-produced DVD players were selling in China in early 1999 for less than 2000 RMB (approximately U.S.$240).
The estimates of VCD and Chao Ji VCD players vary greatly. I believe that the figures used by the Chinese government are underestimated by as much as 25 percent because of under-reporting and "smuggling" of major components into China. The figures I have used are based on information from major component manufacturers.
Current State Of Video CD
In 1998, the VCD market size in China was estimated to be 20-to-22 million players. The breakdown of players included 15 million VCD and 5-to-6 million S-VCD and CVD.
Currently, there is a VCD manufacturing over-capacity. Over the last two years, there has been a consolidation of manufacturers of VCD players. In 1996, there were over 600 manufacturers of the product. In 1998, seven manufacturers - Shinco, Idall, Nintaus, BBK, Malata, SAST and Ambsonic [Xiamen Solid] - represented over 70 percent of the market.
VCD players have become a commodity faster than component manufacturers expected. Certain markets in China are saturated with VCD. Places like Guangzhou have 79 percent of households. Beijing has 64 percent of households and Shanghai has 61 percent of households. Also in the same study, places such as Shanghai and Guangzhou showed that the average time the customers had their VCD players was 21 and 18 months, respectively.
The local manufacturers are divided into two camps - the Sony and ESS solution, and the Philips and C-Cube solution. The big growth opportunity for VCD is in the non-major urban cities. However, price is the critical factor for success. This is commonly referred to the sub-500 RMB market (U.S.$60). New solutions have to be found, such as a VCD boom box that plugs into a TV, and new channels of distributions.
It is doubtful that these manufacturers will be the same ones that are currently manufacturing VCD hardware. This is because the current Chinese manufacturers are too expensive for the "rural" customers.
The typical Chinese VCD customer earns about 800 RMB per month (U.S.$96). This is the middle class in China; it is considered a good wage. A farmer's average earnings is about 25 percent of this figure.
Lack Of Royalties Kept Prices Low
VCD player prices were kept low because the patent royalties issue has never been resolved - the 4Cs [JVC, Sony, Panasonic and Philips] did not have a licensing program until mid-1997. A $2.50 figure per player has been rumored but not finalized or confirmed. CD-Audio players and discs have no royalties in China, because it was not until 1985 that foreign companies could register patents in China.
DVD-Video In China
DVD-Video made its foray into China in 1997, with approximately 10,000 DVD-Video players "imported" into China.
Player sell-through in 1998 was disappointing, mainly due to the lack of "authorized" software titles, and their price - "authorized" titles sell for 100 to 125 RMB (U.S.$10-$15). Another factor was the cost of DVD players, ranging from 3000 to 4000 RMB (U.S.$360-$480), compared to a single-disc VCD player price range of 500 RMB to 800 RMB (U.S.$60-$96).
The projected 1999 market for DVD players in China is estimated to be 1 million units. This is about five percent of the optical player market in China in 1999, with the S-VCD market estimated at 8-to-10 million pieces, and the VCD player business estimated at about 7 million pieces.
It is anticipated that by the end of 4Q 2000, the price of locally produced DVD players will be around 1400 to 1500 RMB (U.S.$169-$180).
I have two views on DVD in China. One is if the current DVD standard becomes the standard used in China, players will start at 2000 RMB (U.S.$240) and have steep price erosion to 1400 to 1500 RMB (U.S.$169-$180) by the end of 2000, and further price erosion to about 1200 RMB (U.S.$145) by the end of 2001. It is my understanding that this scenario is favored by the DVD Forum.
DVD Forum members are just beginning to pursue patent and intellectual property royalties for the production of DVD players in China. Unlike CD licensing, which is one stop shopping with Philips administering the program, at least four to five different groups are licensing DVD patents, with the possibility of more coming out of the woodwork. The Chinese realize that this will add up to more than $20/player and are seriously considering an alternative.
It is my opinion that it is politically unacceptable for the Chinese government, especially the MII, to agree to pay these royalties to foreign companies. This would put Chinese industry at a disadvantage. A quick calculation shows that if the Chinese produced 50 million players for domestic consumers, they would have to pay $1 billion in royalties to foreign companies. For this amount, they can and will develop their own format or variation of DVD.
Piracy
In China, there are two channels for software creation - the official channel and the piracy channel. The former is complex and time consuming. The latter is haphazard and typically of low quality - the source of content can be from a hand-held 8-mm camera to laserdiscs, and every combination in between.
Pirated software sells for 10 to 12 RMB (U.S.$1.21-$1.45) per film, and is openly available in most Chinese cities. The profits from piracy are huge. It is estimated that a two disc set can be manufactured for as low as 3 RMB (U.S.$0.36). The CD replicator sells to the pirate at 3 RMB per film [two discs] and the pirate distributor sells to the retailer at 6 RMB (U.S.$0.72) per film and the retailer sells for 12 RMB (U.S.$1.45). At each level of distribution, there is a 100 percent gross margin to be made! Chinese consumers have little understanding or concern about piracy.
Pirated DVD titles made from various sources - from hand-held 8mm cameras to laserdiscs - sell for 28 RMB in Beijing to 30 RMB in Shenzhen (about U.S.$3.50). The proliferation of "pirate" DVD titles is growing very rapidly, particularly as the installed base increases.
The production of authorized software titles is a complex and complicated procedure in China. To produce a legitimate title, one has to have a publisher. However, in China, all publishers are state owned. For foreign content owners, this means that they have to find a partner who is a state publisher - this can be a traditional book publisher or an audio-video company.
The next step is to get a certificate for cultural content from the Ministry of Culture. Then, an electronic publishing certificate is needed, which is issued by the Press Publication Administra-tion (PPA). A registration number, similar to a bar code, is also necessary.
Finally, to get discs made, one must find a replicator licensed by the PPA. Replicators need two types of licenses - one for mastering and one for replication.
In Summary
Doing business in China requires a good understanding of the cultural environment and the structure of Chinese governmental organization. China is indeed potentially the largest market for optical discs, but is also one of the most complicated markets to understand.
Howard Woo is an industry consultant specializing in the Chinese market for optical disc (Tel: 44-181-292-1137; Email: aida@ibm.net ) |
