Felix Torres
04-21-2006, 07:00 PM
Sometime during spring 2009, a station manager somewhere in the United States will give the order to shut down the last active NTSC TV transmitter, putting a belated end to the analog-broadcast era of TV in the United States. That is, assuming entrenched powers and special interests don’t get the US Congress to delay yet again the transition to an all-digital, High Definition broadcast TV regime. Given the fear within both the broadcast and entertainment industries that a transition to purely HDTV will completely and detrimentally change the rules of their business, it's quite likely that a delay will in fact occur. In my opinion, the rules will invariably change in these industries.<br /> <br />Platform transitions always leave wreckage in their wake as companies and products that thrived under the old regime fail to properly adapt to the new environment. Whether it be GUI-based apps replacing their light-bar and function key-driven precursors, or Smartphones displacing standalone connected-organizers, platform transitions always shake up the status quo. This, of course, opens the door for new players to squeeze in and force the old players to try to adapt to an environment they are unfamiliar with.<br /><!><br />Indeed, in the general media there has of been talk of an “HD revolution”, as a way to refer to the massive changes that are happening to the industry. Unfortunately, the term isn’t quite accurate. What we are seeing is not a true revolution (a big change over a short period or a single major change) but rather an evolution (a gradual transition as a result of a series of small discrete steps) as new products and services are rolled out. The success or failure of these products is dictated as the forces of technology development, economics, and changing consumer needs and tastes evolve.<br /><br />The next five years are not going to be kind to movie theater operators, local TV stations, Hollywood studios, DVD renters or established consumer electronics manufacturers. They will, however, be very kind and satisfying to consumers who have yet to buy their first HD displays. At the same time, early HD adopters with pre-2005 displays are in for a kind of aggravation well-known to early adopters and technology enthusiasts: the annoyance of seeing their very expensive first or second generation devices face early obsolescence and forced retirement upon the arrival of much cheaper and more capable replacement technology. Some will accept this as the unavoidable price of jumping headfirst into a new wave of technology. Others will find themselves fighting doomed rear guard actions against the more refined products that will eventually come to define the market as it matures into a new status quo. Either way, it is going to get very touchy out there.<br /><br />Having recently had the opportunity to research the current status of the HD display business, I was struck by the familiarity of the emerging scenario. Because in the past few decades, we've gone through technology evolutions, we have hopefully learned a basic lessons that can be recycled and applied to help us all survive the turmoil that lies ahead.<br /> <br />This article is meant to be the first in a series in which I hope to document and explore certain trends in the various HDTV-related markets—starting with displays—to spark discussion and see if the trends I see emerging stand up to detailed scrutiny.<br /><br />First, though, before we can look at the near future, we really need to look at the present—or more accurately, the recent past. Starting with the basics:<br /><br /><b>What is an HDTV?</b><br />For the purposes of this exercise, an HDTV is a television set designed to receive and fully display at least one of the two ATSC-standard broadcast formats (720p or 1080i), whether received over the air or from a set-top box. It does not require an ATSC tuner, but, it should have some kind of over-the-air tuner to qualify as a TV. HD-grade monitors are a new breed of display that can do everything an HDTV can do but lack tuners. They are new enough that they do not factor into the market statistics I have available.<br /><br /><b>How many HDTVs are there?</b><br />In the US, during the years 2000 through 2004, an estimated 16.4 million Digital TV sets were shipped to dealers, which is about 12% of the total installed base of TVs in use in the country. <br /><br />More precisely:<br />In 2004, a total of 31.5 million TV sets were sold in the US.<br />24 million were analog TVs: direct-view CRTs and CRT-based rear-projection units.<br />7.5 million were digital TVs, of which: <br />2.3 million were CRT-based rear-projection units,<br />1.8 million were direct-view LCD flat panels,<br />1.2 million were Microdisplay-based rear-projection units,<br />1 million were direct view CRTs,<br />900,000 were Plasma Display Panels,<br />300,000 were digital combo TVs.<br /><PAGEBREAK><br />Estimated digital TV shipments for calendar year 2005 would nearly double the installed base. Of those, a large portion (around 50%) are not HD sets, properly speaking, because they do not fully and natively display either of the standard High Definition resolutions. Although some of them are billed as such because they can receive ATSC signals and/or meet the minimum official spec of displaying 720 progressive lines or 1080i interlaced lines, albeit at a reduced horizontal resolution. The number of actual HDTVs in use is thus masked, but a reasonable estimate is that about 10-15% of all TVs in use by the end of 2005 were actual native-HD sets.<br /><br />Now, here’s where things start to get interesting. If only 15% of all TVs in use are HD-capable, and analog broadcasts go away in three years, that would imply that 85% of all TVs need to be replaced over the next three years, right? Fortunately, no. Because, as pointed out above, it is possible to receive HD content and display it on non-HD TVs and monitors. Thus, all the fuss over the end of analog broadcasts something of a red herring, especially when one factors in that somewhere between 80-90% of all US households get their TV via cable and/or satellite set-top boxes. Now we have our first rule for the HDTV era:<br /><br /><b>Rule one: The ability to receive an HD signal is totally independent of the ability to properly display it. You can have either one without the other. Assume nothing.</b><br /><br />Nonetheless, while HD sets are not necessary to view HD content, expectations are that by 2009, 75% of all TVs still in use will be HD displays of one kind or another.<br /><br />Which brings up the question of how such a transition is to happen.<br />Until very recently (the last two-three months), HDTVs have uniformly sold for prices well above the $1000 mark. Often many multiples of $1000 in fact. Add in that the average TV selling price in 2004 was $628 and the paradox grows.<br /><br />Consider: <br />- The most popular TV sold in the US in 2004 was a 27” CRT at an average price of $266 (22.6% unit share, 7.11 million units) of which 95% sold for prices under $399.<br />- The second most popular configuration was for 20” CRTs at an average price of $186 (17.6%, 5.54 million units).<br />- The third most popular configuration was for 32” CRTs at an average price of $513 (12.6%, 3.97 million units), of which 53% sold for under $399.<br /><br />We’re talking serious sticker shock, no? The cheapest HD equivalent to that basic $399 27” CRT would be a 32” LCD display at prices starting around $1000 for second-tier products and easily going to $2000 for name-brand products.<br /><br />It’s rather hard to envision the market changing so much in three years that consumers would be willing to go that high or technology changing so quickly that existing price points can be met. Hard, but not impossible.<br /><br />In the HDTV retail business, there was a lot of talk late last year of “the great price war of 2005”. Mostly in tones suggesting it was an anomaly, and that 2006 would see a return to the market dynamics of 2004 and earlier. Retailers and manufacturers can only hope so because over the last five years they have grown accustomed to HDTV stacked profit margins of 46% of retail (not MSRP!) prices. 2005 saw prices drop, on average, well over 25% year-over-year and those nice juicy profit margins won’t last much longer if the price-dropping continues.<br /><br />So, what we have today is a market that has grown fat and lazy off the profits of early adopters and home theater enthusiasts, running head-on into a horde of mainstream consumers accustomed to end-of-life-cycle CRT pricing on their mainstream TVs. Given the clear superiority of the HD display quality, (surveys have shown) consumers are in fact willing to pay a premium for their first mainstream HDTVs. However, they are not willing to go much above $600, yet for that money they want a flat panel display at least as tall as their current TV, not a bulky CRT.<br /><br />Something is going to have to give. And it will. The result will be a bloodbath favoring consumers.<br /><br /><b>NEXT: </b>In part two, I will focus on how this is likely to come to pass and on the technology and economic trends that are pushing manufacturers and retailers towards giving consumers what they want, whether they like it or not.<br /><br />But in the meantime, <a href="http://www.digitalmediathoughts.com/index.php?topic_id=10266">Chime in on our quick survey</a>.<br /><br /><i>Felix Torres is a dabbler in home entertainment electronics and a survivor of both the home computing wars of the '80s and the multimedia wars of the '90s who is currently most interested in home media networks and the North American transition away from broadcast media. </i>