Anyone Going to Make Money on D-to-A Converter Boxes?

Tuesday May 27, 2008

DTC’s analysis of converter-box costs paints a pretty grim picture for manufacturers and retailers hoping to make money selling converter boxes for the U.S. analog TV shut-off next year. Those selling the boxes at or near the government-issued coupon value of $40 will realize miniscule profit.

So, coupon in hand, we went to a Best Buy store last week to see if we could walk out with a box without having to open a wallet. Our buyer walked out empty handed because she didn’t want to spend the $59.99 Best Buy required for its box.

After a little digging, she found places to buy a converter box for around $43 discovering that even this early in the transition, consumers can buy for just a few dollars over the coupon amount.

So how much did it cost to make those $43 converter boxes? DTC’s analysis of general component and royalty costs points to a total bill of materials and royalties of about $28-$32 per box. These are estimated costs for the boxes’ major components and don’t include assembly, shipping and tariff costs. It also doesn’t account for any markup by manufacturers or retailers. About $18 is attributed to component costs with about $12 attributed to licensing fees.

DTC does believe that some participants will realize benefit despite the dismal profit picture. TV suppliers and retailers who can convince D-to-A converter box shoppers to upgrade to a $40-discounted digital TV instead of buying the box will likely make better margins on the TV sale. And, assuming that all the converter box makers play by the rules, the owners of the technology intellectual property that goes into the boxes should enjoy a nice spike in licensing revenue in 2008 and 2009.

The Price of Inaction in the Digital World: A Cautionary Tale

Monday May 19, 2008 - Antonette Goroch

What can the video industry learn from its music-industry cousin about digital distribution of its products? That inaction can result in irreparable damage.

Attendance at the National Association of Recorded Music’s (NARM) annual convention held last week brought together music-business participants who are still stumbling through the transition from traditional to new distribution of their products. The event, held in San Francisco, where the giant downtown Apple Store cast a long shadow over the gathering was a fitting illustration as to why the packaged music media business is in such dire straits, and how continued inaction can only bring more turmoil to the business. Indeed, Apple’s iTunes, which just surpassed Wal-mart as the largest retailer of recorded music, provided a fitting backdrop for the event, which this year included “Digital NARM”, a subset of the conference focused exclusively on digital distribution issues with representatives from companies like Napster, MySpace, Sandisk and Motorola.

While the context for this discussion was music, the issues are the same in the video world—how to preserve the core businesses, while embracing new distribution models and strategies. There were familiar debates--- How DRM can decrease or eliminate piracy while facilitating a valuable customer product and experience…What business models and price points work for both the customer and distribution value chain…What are the new modes of delivery for content via mobile and Internet…What are the roles of social networks and Web communities in content sales…

But the music industry (like the video industry) still seems stuck in these debates, with very little resolve, as the large players focus on experimentation rather than full scale implementations of digital distribution strategies. The price of such inaction is clear, and serves as a cautionary tale for the video entertainment industry---continued declines in CD sales and billions of songs downloaded for free over peer-to-peer networks by a new generation of consumers, even as legal digital distribution sales reach record levels.

The chart illustrates how electronic distribution of video will be a significant part of the video-entertainment landscape. Although pre-recorded DVD discs will continue to ship in the billions of units annually, there will be little or no growth in the DVD business, while iTunes video sales will experience significant growth. And Apple is not the only supplier, although it is currently the largest one.

Will Blu-ray ever be the next DVD? Read on to find out…Read on to find out…

Monday, May 12, 1008 - Stewart Wolpin

Now that Blu-ray has won the high-definition DVD war, the expectation was that sales would explode and that in a few years, Blu-ray decks would outsell even standard definition DVD.

However, not only haven't sales of Blu-ray decks substantially increased, but DTC does not expect Blu-ray to represent any more than a third of all DVD devices sold five years hence.

DTC estimates that in 2008, global non-PC Blu-ray deck sales will represent only 3 percent of all DVD devices sold. DTC believes this percentage will increase to only 31 percent by 2013.

There are several market-specific reasons why Blu-ray will not replace DVD. But historically, no mainstream media format has ever been replaced by a slightly improved compatible product. For instance, digital audio tape could not displace the compact cassette, S-VHS did not supplant VHS, and neither SACD nor DVD-Audio replaced the CD. Blu-ray presents no practical advantage over standard DVD such as added convenience or longer play, as was the case when vinyl records replaced wax, CD replaced vinyl and DVD itself replaced VHS.

Blu-ray's success on any level is predicated on two primary factors: HDTV ownership and price. Only owners of HDTVs are likely to even consider a Blu-ray purchase. Only those owners who can afford 50-inch and larger HDTVs are likely to be able to afford a Blu-ray deck.

It also is unlikely companies that market lower-end or portable DVD players will enter the higher-priced Blu-ray device market for many years. Without the price competition the presence of these brands often incite, Blu-ray prices will remain two-to-three times higher than standard DVD product.