HD-DVD vs. Blu-ray: LG's Combo Player Not Sweet Music for Sony

While svelte HDTVs are flying off store shelves, their companion next generation DVD players of the rival Blu-ray and HD-DVD varieties have collected more dust than interest since their introduction last year.

Many had expected the introduction of the PS3 (which doubles as a Blu-ray player) to tip the scales resoundingly in Blu-ray’s favor. Despite claims this week of victory by Blu-ray backers, there is mounting evidence to the contrary.

While Blu-ray has received a much needed boost from the PS3, its lofty price, Xbox 360’s continued console leadership, and LG’s announcement this week of a "dual-format" player are evidence that this battle will rage on for some time.

During the last half of 2006, demand for both formats, as measured by the number of U.S. consumers shopping online for the respective stand-alone players, was virtually identical. In December, for example, 46,000 U.S. consumers shopped for a Blu-ray player while 43,000 shopped for a less-expensive HD-DVD player. Among these shoppers, roughly a quarter shopped for both Blu-Ray and HD-DVD players.

Victory in this battle was so important for Sony that it delayed the release of its PS3 for months while it sorted out Blu-ray component and manufacturing issues. Sony’s strategy ensures a Blu-ray convert for every PS3 sold, but the challenge, of course, is convincing consumers to value the added functionality enough to pay a premium to go "all-in" with Blu-ray.

Microsoft, firmly in the HD-DVD camp, now offers a HD-DVD add-on drive which, when combined with an Xbox 360, roughly matches the PS3’s functionality. Over 5 million Xbox 360’s have been sold in the U.S. since their introduction in late 2005. Microsoft is likely to cut the price of the console over the next couple of months, and if strategically warranted, could subsidize an even greater portion of the HD-DVD add-on in order to spur adoption among Xbox 360 users. While only 3% of Xbox 360 console shoppers shopped for the HD-DVD accessory in December, a price cut will undoubtedly give it a boost while making the price disparity between the Xbox 360 and the PS3 even more glaring.

LG’s unveiling of a "dual format" player at this week’s CES, and the accompanying rumors of a potential "truce" in this battle would be great news for consumers but a nightmare for Sony. If dual-format players take hold and studios continue to support only one format, PS3 owners will be stuck with a device that only works with some titles. The very Blu-ray player Sony was so determined to include in the PS3 might, in the end, render the PS3 obsolete instead.

Note: Online demand for these formats was calculated based on the monthly unique visitors to Blu-ray and HD-DVD stand-alone disc player product pages at the leading online electronics retailers.

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About Matt Pace:
As VP of Millward Brown Digital’s financial services, retail and consumer products practices, Matt is responsible for vertical growth and strategy and the delivery of digital insights and best practice marketing consulting to leading Fortune 500 advertisers. Follow Matt on Twitter @mattpace.

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