Global Trend

The Outlook for HDTV Comes into Sharp Focus

In the late 1990s, when the first television channels began offering high-definition television, few U.S. households had HDTV sets to receive the signals, and it’s no wonder: Shows in high-def were scarce, and the average price of an HDTV set was $3,147.

Now, as prices have plunged to as low as $500, and as most prime-time shows are now beamed in this format, the penetration of HDTV into America’s living rooms is approaching the tipping point.

In 2004, U.S. sales of HDTV sets grew by 78 percent, reaching $10.7 billion in revenues, according to the Consumer Electronics Association. For the first time, they accounted for half of the sales of all television sets in the United States. In all, more than 7 million HDTV sets were sold in the U.S., an increase of 63 percent over the previous year.

Combined with earlier sales, the recent surge in purchases by American consumers brings the total installed base of HDTV sets to 18 million, and 12 million American homes now have at least one.

HDTV provides a much sharper picture because the pictures are encoded digitally as a series of 1s and 0s. Each image carries six times the digital information of an analog picture.

This phenomenon was entirely predictable, and in fact, the Trends editors foresaw its impact more than a decade ago. In 1996, the Federal Communications Commission established a standard for digital broadcasts. Each picture can contain up to 2.1 million pixels of information, at a height of 720 ? or 1,080 lines.

The FCC ordered all broadcast stations to start sending at least some of their signals in digital format by 2002, and to beam all of their programming in both analog and digital formats by April 2005. By the end of 2006, stations must phase out analog broadcasts, except in markets where at least 15 percent of viewers do not have HDTV sets.

Meanwhile, the FCC required manufacturers to become HDTV-compatible within the same rough timeframe. This applied to television sets with screens of at least 36 inches as of July 2004, and it applies to smaller sets by July 2006.

Now, with the programming widely available, and the hardware in place, HDTV is reaching critical mass. Every week, viewers can choose among 5,000 hours of high-definition programming.

Looking ahead, we offer three forecasts for the general direction of the industry, followed by more specific industry forecasts:

First, sales of HDTV sets will experience rapid growth in the near term, as more viewers come to appreciate the upgrade in quality they offer compared to standard-definition sets. According to the Consumer Electronics Association, or CEA , by the end of 2005, there will be 50 million HDTV sets in American households. By 2007, the CEA predicts that the installed base will reach 80 million.

Second, news programs, which until now would have been too costly to film in high-def, will soon make the conversion due to new, affordable cameras just coming on the market. In the first month of marketing a new high-def camera that costs just $5,000 instead of the $50,000 that previous models commanded, Sony sold 35,000 units. Panasonic will offer its own low-priced high-def camera in the fall, according to Barron’s.

Third, as prices of commercial-grade high-def video cameras plummet, it is only a matter of time until they become affordable to consumers. With digital screens on their TVs and PCs, consumers will not be satisfied with the relatively poor quality of today’s camcorders. Prices should fall into the price range of most consumers well before the end of this decade.

What will be the impact on content producers, on satellite companies, on broadcast networks, on video game companies, and on hardware manufacturers? Let’s explore the answers, starting with eight industries or companies that are well-positioned to win:

First, PCs, laptops, and video game systems will require much larger hard drives in order to deliver the crystal clarity that is HDTV’s greatest benefit. The downside of high-def is that it takes 500 gigabytes to hold 60 minutes of uncompressed programming. According to a recent cover story in Barron’s, this will create more demand for hard drive companies like Seagate and Western Digital.

Second, manufacturers of TV sets will also benefit. The new format is exactly what the mature industry needed to reverse the slow sales of recent years. For companies like Sony, Panasonic, Samsung, and Sharp, HDTV represents a dazzling opportunity to revitalize the industry’s profits by enticing a billion television viewers to replace their existing sets with new ones.

Third, TV sets will also face intense competition from other devices that can broadcast HDTV programs ? and these devices may steal some of their market share. For example, computer hardware companies like Dell Computer and Hewlett-Packard are jumping into the battle for the market with their own HDTV screens.

Fourth, creators of video game consoles and games will see a boost in sales when they release their new HDTV-compatible products. Microsoft’s next-generation Xbox 360 will allow users to play games in a high-def wide-screen format when they connect the 360 to a high-def television, according to an article in The New York Times. Sony’s PlayStation 3 will offer HDTV compatibility when it is unveiled in the Spring of 2006. The sharp graphics and wide-screen picture will give the millions of players of video games on the Xbox and PlayStation platforms another reason to upgrade to the next generation of the technology.

Fifth, for film studios like Walt Disney, DreamWorks, and LucasFilms, the shift to HDTV means another chance to sell the same content to consumers in a new format. Favorite movies like Finding Nemo, Shrek, and Star Wars will shine in HDTV, and consumers will be forced to replace their old DVDs with high-def disks, just as they tossed out their videotapes when the original DVDs were released. High-definition DVD players and recorders from Hewlett-Packard and Panasonic are expected to hit store shelves in 2006.

Sixth, firms that help producers convert old content that was shot on analog video or film, into high-def images will also win. For example, in the most recent quarter, Autodesk earned about 12 percent of its sales, or $41 million, from special-effects video software that movie studios rely on to scan their old movies into high-def format.

Seventh, video-editing systems in high-definition also have a high upside because of the shift in technologies. Avid Technology is well-positioned as the industry leader in the traditional format and is one company that is working to avoid being buried by a disruptive technology. It has launched a high-def version of its most popular product, the Media Composer, which is already generating strong sales.

Eighth, DirecTV is building a powerful position as a leader in HDTV among satellite companies. By 2007, the four satellites the company just launched will provide 150 national channels and 1,500 local stations in high-def to most of the country.

Finally, who stands to lose the most? Anyone who has heavy sunk costs in the old format is in jeopardy. According to Barron’s and several other sources we monitor, four of the industries or companies that will suffer the greatest damage from the rise of HDTV include:

First, producers of network television content that was filmed on standard video just a few years ago must convert from the old format to the new. Their images will look weak and murky on high-def screens.

Second, movie-rental chains, like Blockbuster and Netflix, may see an increase in revenues ? but a drop in profits. Due to increased demand, they will have to replace their older titles with fresh copies in the new format, at a cost they may not recoup in increased rentals.

Third, satellite companies like Echostar are likely to lose market share to competitors like DirecTV and other firms that invested heavily in HDTV programming. Experts believe that Echostar hasn’t made a big enough commitment to high-def to satisfy viewers who will have a choice of providers.

Fourth, Nintendo is in serious peril of falling behind Sony and Microsoft in the competition for the video game market. Its next-generation console, code-named Revolution, won’t be released until 2006, several months after the Xbox and around the same time as the PlayStation 3. The crucial difference is that Nintendo’s entry will not be HDTV-compatible. By next year, this will be equivalent to selling a car without windshield wipers. Unless the company abruptly changes its strategy before the launch of the Revolution console, it could be making a mistake that costs the company hundreds of millions of dollars in sales.

References List:
1. Barrons, May 23, 2005, “HDTV: Who Wins, Who Loses,” by Bill Alpert. ⓒ Copyright 2005 by Dow Jones & Company, Inc. All rights reserved.2. ibid3. Barrons, May 23, 2005, “HDTV: Who Wins, Who Loses ? Part II,” by Bill Alpert. ⓒ Copyright 2005 by Dow Jones & Company, Inc. All rights reserved.4. The New York Times, May 16, 2005, “HDTV Is a New Reality for Game Developers,” by Eric A. Taub. ⓒ Copyright 2005 by The New York Times Company. All rights reserved.5. Barrons, May 23, 2005, “HDTV: Who Wins, Who Loses,” by Bill Alpert. ⓒ Copyright 2005 by Dow Jones & Company, Inc. All rights reserved.