THE BACKGROUND
When DVD players arrived in the UK they appeared destined to remain boys' toys, the preserve of audiovisual anoraks and well-off film buffs. Seven years on, you can pick up a player for the children's room at the supermarket, and the format, with its recordable variant, has all but killed off the VCR. As more consumers trade up to widescreen TVs and embrace digital technology, the future for DVD brands may look rosy, but hardware price wars and the rise of new recording platforms are making it harder for them to differentiate their products as margins get ever tighter.
The days of viewers switching on their VCR to record a TV show will soon be over. DVD recorders are likely to become as much of a fixture as TV, yet only five years ago most UK homes did not have even a basic DVD player.
Home entertainment has undergone a revolution since the first consumer DVD player went on sale in the UK in 1998. At the beginning of the millennium, less than 3% of households owned a DVD player but by the end of 2004, it had rocketed to 57%, according to Mintel - almost a 20-fold increase.
'The spectacular growth has less to do with DVDs replacing VHS (tapes) than the fact that there has been a complete change in the way consumers buy entertainment,' says Ernesto Schmitt, chief executive of Silverscreen, the first dedicated retailer of DVDs in the UK. 'People like to collect DVDs because they are durable and look good on shelves. VCR owners would typically buy four (pre-recorded) tapes a year, but DVD owners buy about 14 (discs) a year.'
Mintel predicts the combined market for pre-recorded DVD and video sales and rentals will be worth £4.9bn at current prices by 2007, a robust growth of 61% on 2003 value sales. Reflecting this rise in demand, Silverscreen, which opened its first shop in August 2003, expects to increase its existing 50 stores to 80 across the UK by the end of this year.
While DVD rentals and sales are expected to grow by 223% and 162% respectively in the four years to 2007, video sales will suffer, growing a mere 4% in real terms to 2007, with rentals falling by 15%. Schmitt believes the format is doomed. 'Studios will soon abandon VHS altogether. It could be dead by the end of this year.'
The ranks of VCR diehards will consist of consumers with an extensive collection of tapes whose machine has broken down and needs replacing - but even they will eventually be tempted to buy a combination VCR/DVD player rather than a standalone VCR. Dixons said last November that it planned to stop selling VCRs due to lack of demand, while leading manufacturers such as Pioneer and Mitsubishi have recently dropped out of the VCR market.
Pricing pressures
The speed of DVD adoption and rocketing demand has not been mirrored by profit hikes for the major hardware companies, however. As Far East white-label manufacturers have made an aggressive entry into the market, DVD player prices have plummeted.
In volume terms, the combined DVD and VCR player market grew by 117% between 2000 and 2005 to an estimated 9m units, according to Mintel. Yet translated into value terms, this appears considerably less impressive, as the market value grew by just 6% to an estimated £816m, having peaked at £1.1bn in 2002. While the average price of a DVD player in 2000 was £311, by 2004 this had fallen by two-thirds to £92.
Last year, Alba was the biggest-selling brand in the UK, with 11% of the total DVD player market. Along with Philips and Sony, it accounted for nearly a fifth of all sales. Own-label players now account for half of all volume sales in the UK - a trend boosted by supermarkets selling players.
To offset these unprofitable developments at the entry level, established manufacturers have focused instead on the burgeoning DVD recorder sector, which represents a fifth of the total DVD market. Until recently, consumers held off from buying DVD recorders due to their expense. The first DVD recorders available in the UK cost up to £2000, and while prices have fallen over the past five years, the price of an average recorder is still about £130, almost five times more than the average player.
'This is changing fast,' says David Preece, category head of home audio-visual marketing at Panasonic UK. 'The DVD recorder market grew by 350% over the past year. Entry-level models are available at £99 and prices are eroding three times faster than in the DVD player market.'
Global brands such as Sony, Philips, Panasonic, Sharp and Pioneer will continue to focus on the profitable DVD/ HDD (hard disc drive) recorder sector, where prices remain more stable.
The rise of HDD recorders, or PVRs, such as Sky+, arguably poses a more immediate challenge to DVD hardware manufacturers than to brands that fear consumers will use the devices to skip ads. As consumers discover the convenience of a platform that requires no blank discs or tapes, even pre-recorded DVDs may fall out of favour. However, the effects will become more significant once HDDs gain the built-in facility for storing information long-term.
Another potential threat is Blu-ray. A next-generation disc format being developed by a group of consumer electronics and PC companies including Sony, Pioneer, Philips, Dell and Samsung, it uses blue lasers to allow for higher-density disc formatting. Blu-ray discs can store more than 13 hours of standard-definition TV and, in a reversal of the roll-out of DVD, has become available first in recordable form, with the 'read-only' format to follow once developers have thrashed out the details.
Secondary sales
Continued growth in the DVD sector will be fuelled by several factors.
More consumers will choose DVD to record TV content, especially as recordable discs will hold so much more information. But changing viewing habits will also have an effect. With almost 40% of UK households now owning more than three sets, many will consider buying more DVD players to use with them.
Also, almost 61% of households now owns a PC. At present, a quarter of PC owners download films, but prefer to view them on TV. As broadband use spreads, more people will need a player for that downloaded content.
Demographics could also come to DVD's rescue: the fastest-growing age group over the next five years will be the over-45s, who will be able to afford to catch up on advances in technology.
DVD PLAYER/SYSTEM MANUFACTURERS BY UK MARKET SHARE (volume)
2004 2002 02-04
Units % Units % % chng
(000) (000)
1 Alba* 752 11 340 9 121.1
2 Philips 684 10 417 11 64.0
3 Sony 615 9 416 11 47.8
4 Bush 479 7 189 5 153.4
5 Panasonic 410 6 302 8 35.8
6 LG 137 2 113 3 21.2
Others 342 5 340 9 0.6
Own-label 3417 50 1663 44 105.5
Total 6836 100 3780 100 80.8
Source: Mintel *including Goodmans, Roadstar
VCR MANUFACTURERS BY UK MARKET SHARE (volume)
2004 2002 02-04
Units % Units % % chng
(000) (000)
1 Alba* 380 19 666 18 -42.9
2 Sony 260 13 444 12 -41.4
3 Panasonic 240 12 407 11 -41.0
4 Philips 140 7 222 6 -36.9
5 Samsung 100 5 259 7 -61.4
Others 880 44 1702 46 -48.3
Total 2000 100 3700 100 -45.9
Source: Mintel *including Goodmans, Roadstar
UK OUTLETS' DVD PLAYER SALES BY VOLUME
2004 2002 02-04
Units % Units % % chng
(000) (000)
1 Multiple chains 3076 45 1852 48 66.1
2 Independents 1504 22 907 24 65.8
3 Catalogue showrooms 752 11 322 9 133.5
4 Department stores 410 6 265 7 54.7
5 Mail order 205 3 132 4 55.3
Others* 889 13 302 8 194.4
Total 6836 100 3780 100 80.8
Source: Mintel *supermarkets, variety retailers
ANALYST COMMENT - IAN BELL, SENIOR UK AND IRELAND RESEARCH ANALYST, EUROMONITOR INTERNATIONAL
The Dixons chain made a splash in 2004 by delisting video recorders, leading many to believe the days of tape were numbered. With DVD recorders coming down in price, it appeared inevitable that the humble VCR would soon be assigned to the audiovisual scrap heap.
However, the DVD recorder has struggled to live up to its billing, with leading retailers reporting disappointing sales, largely as a result of the off-putting retail price. Except for the initial enthusiastic reaction of early adopters, takeup of DVD recorders has remained low, with many consumers put off by the available recording time and, until recently, the price of the discs.
This isn't the full story, however, as there is suspicion that DVD recorders may follow the form of many technologies before it, and be quickly superseded.
The success of the iPod and other MP3 players has certainly awoken UK consumers to the idea that hard-drive recording systems are the future.
Although personal video recorders (PVRs) are expensive at the moment, many consumers may well bide their time.
Interestingly, in spite of the high penetration rates enjoyed by DVD players, both Pixar and Dreamworks studios revealed that sales of their most recent DVD releases, The Incredibles and Shrek 2, had failed to meet expectations, sparking fears of a downturn. Piracy is often held up as the chief cause, but with sales of video games,digital TV use and broadband connection rates going through the roof, competition for consumers' limited leisure time is becoming fiercer.
The problem for DVD recorders will be to persuade a Sky household with a VCR to trade up, when for many it has taken the best part of the past two decades just to set the timer.
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