Less-expensive Options Arrive for Blu-ray and Online Movie Streaming: What do They Mean?

by Paul Erickson, Director, DVD and HD Market Research

Two notable events over the past week involve the release of more-affordable products enabling people to consume digital content: the arrival of a $298 Blu-ray player at Wal-Mart and the release of the $99 Netflix Player by Roku. Each represents a significant milestone within its respective fold, but what is their overall significance to the mainstream consumer?

First, Wal-Mart began stocking shelves last week with the $298 Magnavox NB500 Blu-ray Disc player. Built by Funai, the player is the first and only device within a crop of newer models from Samsung, Philips and Sony that breaks the $300 barrier. Though sub-$300 players appeared briefly at the end of 2007 from Sony and Samsung at the height of the format war, entry-level pricing returned to $399 shortly thereafter. Price has long been lamented as a significant hindrance to the mainstream adoption of Blu-ray, borne out by NPD consumer survey research over the last year. Moreover, NPD’s research also revealed that consumers also weren’t buying Blu-ray due to satisfaction with existing standard definition DVD. In the face of these attitudes, and with 1080p upscaling DVD players already as low as $35 at Wal-Mart, the release of a $298 Blu-ray player with movies that are 50-100% more expensive may not seem like significant progress.

While overcoming consumer resistance to the still-considerable price differential may continue to be difficult in the near term, the launch of the Magnavox player still represents progress in driving mainstream accessibility forward. With Wal-Mart now firmly behind pushing several brands of Blu-ray hardware, in-house and second-tier brands such as Insignia and Olevia poised to enter, and the entry price decreased by $100, Blu-ray’s advance has finally begun to take significant steps forward after the conclusion of the format war. The power of Wal-Mart, along with a softening economy and newer second-tier entrants, may even push non-brand-name pricing close to the $200 mark by holiday 2008, much sooner than most analysts expected. Should this occur, while it will certainly not help player manufacturers’ revenues, it may prove crucial to the overall growth of Blu-ray Disc in a price-sensitive environment increasingly filled with alternatives.

That brings us to the second product mentioned above, the $99 Netflix Player set-top box released this week by Roku. Allowing existing Netflix subscribers to utilize the previously PC-only Watch Instantly option from the company on their television, the box enables subscribers to watch content from a selection of roughly 10,000 titles for no additional charge. Reviews have generally been positive for the device’s ease of use and functionality, though the current limitations on the content library and average picture quality have also been consistent caveats. The box is firmware-upgradeable to 1080i HD output, and currently the service’s image quality is capped by a 2.2 Mbps bandwidth maximum. As average consumer bandwidth increases and Netflix upgrades both its infrastructure and content library to handle HD streaming, HD delivery to the Netflix Player is a certainty. While the impact of this niche device is limited by the fact it is only for Netflix subscribers, it does create a number of interesting questions regarding both packaged media and online content delivery.

Netflix has now been heavily involved in jumping ahead of two existing norms: the brick-and-mortar video rental business and currently, the use of physical media itself. Blu-ray Disc has been under assault by media and analysts since the end of the format war, with many raising questions about the format’s chances for success against traditional DVD as well as growing options in digital downloads. While my assessment has been more conservative than that of others in digital downloads’ chances to displace physical media in the near to mid-term, the Netflix Player is evidence that the work to improve the ease of use and practicality of broadband-delivered video continues to make progress.

One must also consider that Netflix continues to work with LG and other CE manufacturers to bring the same functionality to more mainstream set-top devices, including game consoles. Sony and Microsoft continue their work in online content delivery. Televisions with Ethernet ports are showing up in increasing numbers on CE manufacturer product roadmaps. In the long-term picture, digital downloads (whether or not from Netflix) will eventually evolve into a realistic, mainstream-consumable option for the public. In the meantime, broadband speeds still languish, online content delivery services still retain significant caveats, downloaded content (particularly HD) is not easily transportable and the public is still new to the concept after many years of experience with physical discs—a considerable window of opportunity for physical media still exists.

As DVD declines, Blu-ray is poised to take up the slack if the public is willing to cooperate. Sales data and consumer surveys have shown that at nearly $400 for the hardware, often almost double the price for the BD version disc, and with high satisfaction with existing DVD, the mainstream consumer largely hasn’t been willing to cooperate. As online delivery services from Netflix, Microsoft and other players continue to evolve and mature over these next few years, and consumer bandwidth increases, there is considerable pressure for Blu-ray to make its mark on the mainstream. Price-based accessibility has remained a significant constraint. Therefore, the recent introduction of a sub-$300 Blu-ray player is a step in the right direction. Should the collective companies and studios with a stake in Blu-ray Disc engage in price aggression on both hardware and software over 2008 and 2009, it will greatly increase the format’s representation in the eventual mix of video content delivery options being utilized by the consumer of the future.