Where Is Pacman? Killer Apps And Positive Numbers At The Dawn Of The DVD Age
A presentation by Charles Van Horn, IRMA Executive Vice President, at DVD '99 Conference, August 5, 1999, Universal City, California Good morning. I'm Charles Van Horn, Executive Vice President of IRMA, the International Recording Media Association, co-sponsor of DVD '99. I want to talk to you today about this conference, this medium, and the prognosis for it. And I will be sharing some exciting and exclusive numbers focusing on the strength of the DVD format. Last year, when we first launched this conference, we were at the start of the DVD age. This year is the continuation. This is the first year of full standardization, with the DVD-audio format finally seeing the light. Now we can get down to business. But there can be no euphoria. This is not the time to sit back and pat ourselves on the back about a job well done. The job, I am afraid, has only begun. Despite a tremendous lift-off, DVD still has a way to go as far as customer awareness and mass market purchases are concerned. Yesterday we heard from a number of highly knowledgeable people. From Phil Pictaggi, the Conference Chairman, we heard about Hollywood's commitment to and concerns for new formats. We heard from the technical side, the practical side, the creative side, the marketing side. Today we will hear an even more diverse number of opinions ó from the music business, both the labels and the practitioners; from the packagers; from all the interested parties to this new format. This conference is very much in keeping with our mission at IRMA ó To foster honest dialog among all segments of this nascent and extremely promising business. There is no doubt that we are all sitting here today to help determine ""what's next"" for DVD. How can we all, collectively, make DVD the next mass format, a format that can change the way people think, learn and enjoy. If we do our jobs properly, we can add value to packaged media at a time when electronic delivery is garnering a tremendous amount of attention from the press and the investment communities. The signs so far are extremely positive: We know that the DVD disk is the single most successful packaged media launch in history. We know that DVD hardware is the single fastest growing consumer electronics product in history. We know there is a level of consumer acceptance and satisfaction that is superlative. We know there have been enormous strides since we all met here last year. According to the Consumer Electronics Manufacturers Association (CEMA), we are talking about two million players in consumer homes. Well over a million DVD players were sold by the start of this year, and another million shipped since then. CEMA figures show almost 1.3 million units shipped in the first half of 1999, with 875,000 units shipping just in the second quarter. We're talking about well over 3,000 titles available ó over 3,500 as a matter of fact, according to one of this event's co-sponsors, the DVD Video Group. And the latest DVD Video Group figures show 25 million discs shipped to retail in 1999. Two hundred new titles are being released each month, and nearly 5,000 titles are expected to be available for rental and sell-through by the end of this year. But here's the rub. DVD still has probably no more than a 60 percent awareness level by the general public. This is taken from an internal CEMA study last fall that found 40 percent awareness. In a more recent interview, the CEMA researchers estimated that another 20 percent can be added to that number since the survey was originally undertaken. So that still leaves 40 percent of the U.S. population having no idea what a DVD is. And even worse: when a focus group was recently asked about DVD, the participants became hopelessly confused ó DVD, digital television, HDTV. It all became lost in a muddle of new technologies in the consumer's mind. Which is what? How do we define DVD in the simplest terms for the prospective customer ó and the current customer? Let's remember that, even the current customer is in danger of disappearing if he or she sees DVD as nothing more than a movie machine that doesn't record. We need to consider the killer application. Where is the lotus 1-2-3? Where is the lion king? Where is the Pacman? Where is the application that convinces everyone that, yes, they need their DVD, as previous applications convinced the consumer that they needed a PC, that they needed a VCR, that they needed an electronic game console. As an industry, we haven't even been able to quantify yet how satisfied the DVD consumer is. Or how much they feel they need their DVD. We are just beginning to get the major features out on disk: the new nonlinear way to watch; the multiple angles; the Easter eggs, the seamless hybridization. How much does it matter to the consumer? That is what we have been debating here. And I would like to emphasize that these are probably the most critical questions that we, as an industry, need to address. We have to be careful, though. Of course, we need to sell what we've already made. We have to get the word out that the current crop of DVDs are, indeed, spectacular products with crystal clear audio and video and a range of new high tech ways to be entertained by directors' cuts, by historical material, by trailers, by interactive watching. We need to capture, thoroughly, that early adopter. Marketing theory currently in vogue says that you can never get back the early adopters once you have lost them, you can never get back the high tech customers once you have bypassed them. So we have to be careful. We have to be careful that, while those of us in this room must plan ""what's next"" for DVD, we also have to remember that for most consumers ""what's next for consumers"" is really the assortment product that we currently have stocked in the stores. Still, those of us behind the scenes would be remiss if we didn't truly address the question: ""what's next?"" At least in the privacy of our own boardrooms, planning sessions, and production meetings. We have a winner here; a killer product category. And the creatives and the producers need to create a killer application to make this more than a movie machine. Frankly, despite the naysayers, video tape continues to grow at rates that defy all predictions. The mass market consumer is satisfied with this analog, linear format. In fact, while 1.3 million DVD players were shipped in the first half of 1999, 10.3 million VCRs, including TV/VCR combos, were shipped during the same time period, a 27% increase over 1998. For DVD to make its mark it must offer something quite different. Let's face facts. Most of us are so busy keeping up with the demand for products, that there has, frankly, been little time to focus on doing something absolutely amazing with DVD. Many DVD releases show only a modest amount of added-value content. We are focusing our current business model on dragging consumers away from their VCRs, rather than building an entirely new business. Some recent developments may help change all that: Last year we still had some grumbling among the early adopters and the marketers alike about an absence of a critical standard in the DVD pantheon, that of audio. This year that problem has been solved. And that business is poised to take off and offer a new standard for home and in-car entertainment. The way has been cleared for the universal DVD. The single biggest growth for all formats is in music videos. King Crimson showed that they know how to do it on DVD. Cheap Trick is back in the studio mixing for DVD. New music patterns even for older musicians are critical and are challenging. Music on DVD has tremendous promise for all of us in this room. Games will be DVD by next year. That is another entertainment category that will grow with the introduction of new players from Sony and Nintendo. Hybrid DVD's will provide new ways to market and new ways to provide information. Making the critical internet connection is something that must be exploited and explored. Yes, the future is rosy. Despite the cautions I've outlined, we should be proud of what we've accomplished so far and extremely excited about the future. As long as we encourage our creative departments to push the envelope. As long as we recognize that this is not just a small laserdisc or a video CD-ROM, but rather an entirely new entertainment medium. IRMA's statistics indicate that DVD is, indeed, faring nicely and continuing to carve a sizable niche in the $17 billion international recording media marketplace. I am about to share with you a sneak peak at our newly researched statistics for the DVD market. These stats are part of the IRMA just-off-the-press 1999 Market Intelligence Report for Optical Media. And the numbers are very encouraging indeed. Our research for 1998, despite the absence of several of the best-selling video titles, Titanic among them, showed remarkable strength for DVD-video players and programming, especially during the fourth quarter. For 1998, there were 74 million replicated units worldwide, with a revenue to replicators of $144 million. For 1998, DVD households just in North America, came in at 1.1 million. And when we correlated number of DVD discs to number of households ñ We found a whopping number of 59 DVD units replicated per household. That's nearly 60 disks for every DVD household. Some of that may have to do with pipeline filling; some of it with using DVD-ROM drives to play DVD-video programming. As a matter of fact, we go with the estimate of 30 percent of DVD-ROM drive users purchasing DVD-video programming. What do we see in the future? For North America in 2003, the last year we are forecasting, we see total DVD-video replication of 450 million. Closer at hand, for 1999 we estimate DVD-video replication in North America to be 125 million. That translates into worldwide totals of 165 million for 1999 and 970 million for 2003. While North America clearly has the lion's share of the market - 76 percent in 1999, we see that share declining, ending up at 46 percent of the share of the worldwide DVD-video market in 2003. As far as the hardware goes, our figures show 5 million players worldwide in 1999, the bulk of them in North America, rising to 24.6 million players in 2003. While the major number of players will still be in North America, the share of the worldwide market will have decreased by 2003. The DVD-ROM market while showing smaller numbers for the foreseeable future, shows tremendous growth ahead. Worldwide, we estimate a total of 44 million units for 1999, rising to 598 million units by 2003. We looked into DVD-audio, which is essentially starting from scratch, Since 1998 production was primarily for testing purposes. We estimate 7 million units produced worldwide in 1999, with a forecast in 2003 of 290 million units. Again, the bulk of the replication is in North America. Those are some of the numbers. Those of you interested in our report and in IRMA's range of membership activities should contact me or any other of the association staff who are with us here this week. Obviously, we at IRMA have a vested interest in seeing this medium succeed. After all, our members represent 80 percent of the worldwide optical replication capacity. But there would be no sense in wearing rose-colored glasses. Our positive forecasts are made with careful research and consideration. Forecasting five years in advance depends on our assumption that the producers and content creators of DVD will rise to the occasion and produce product that people will want to buy once they have filled in their collections of old favorites and the occasional blockbuster. There is a critical challenge in not letting the creative impact of this medium die on the vine. Attention must be paid to the capacity - in every sense of that word - to move people, to keep the factories moving, and to provide new ways of thinking and reacting and creating. There is a new book out in the market that is beginning to make a buzz. It is called ""The Experience Economy,"" and it is subtitled ""Work is Theater and Every Business a Stage."" We are fortunate enough to be in a business that doesn't have to grasp at theatrical metaphors. We are in the theater. And we can offer the consumer a true, a new, and an authentic experience. Something that can be magical and expansive. However, DVD is providing our business with a new opportunity ó to create an entirely new theatrical experience and to expand the stage beyond a single platform to an unlimited and varied number of virtual platforms upon which we can play. We have to keep our eyes and our energies on this concept. Where is the theater in DVD? What is the business? What is the medium's best reason for being? I will leave you with those thoughts. I will welcome the killer app that you will no doubt invent. And I thank you for your many contributions to making DVD '99 an annual event that ultimately helps the entire entertainment industry determine ""what's next"" for this dynamic new entertainment medium. Thank you. For more information, contact Charles Van Horn at 609-279-1700.