Site created 12/15/97.		page created: 1/12/99 DVD Panel Discussion (transcript - continued) back to page 2 Moderator: Questions? Question #2: Thus far we've been talking about different formats for DVD players. An interesting side note, is that depending on who you believe, as many as 40 million DVD-ROM units could ship this year. And Creative Labs has some research that a lot of people are hooking their DVD-ROM drives up to their TVs, and watching entertainment, either from their desktop, or through their desktop. There's also talk about DVD movies with content that would be unlocked via credit card, over the Internet. I wanted to throw that out, and get some comment on that. Moderator: Any comment on that? (no one steps forward to comment - more laughter) No? Next question...? Question #3: Is DVD the last physical medium for entertainment content, given all of the broad-band delivery systems that are being developed for the future? John Thrasher (Tower): Well, I think it's a long way to that point. However, the indications are that there is going to be some fairly severe cannibalization of VHS in the very near term. We've already noticed those consumers, that just 9 months ago, who were buying widescreen editions on VHS for their VCRs, have moved over to DVD. And the amount of sales that we're seeing on tape for the widescreen format, have dropped precipitously over the last year. From our standpoint, we're looking at the old 20 / 80, where 20% of the market is one format, and 80% is another. This next group of people that acquire DVD players are - hey, they're the most voracious collectors on the VHS side. And so, this first year has been great, where we're phasing out laserdiscs, we've got a very strong VHS market, and we have this exploding DVD market. So for the very near future, hey - you gotta wear shades it's so bright. (laughter) But at this particular point, you have to look two years down the road - the VHS market will be severely impacted. And I think you'll see price erosion on VHS, where you'll see price come down, and standard will be $9.95. DVD offers a great value for both the retailers and the studios, to protect that price point, and to still stay in business. So we're very bullish on the future, but there's a series of things that are gonna be taking place in the very near future. Warren Lieberfarb (WHV): But like with the compact disc, where you had analog vinyl records and analog cassettes in the market at the same time as the CD was produced, the trend in the record business, for a good 6 or 7 years, was that the new media brought incremental revenues to the music companies. It is our view that the incremental performance of DVD, net of the displacement in VHS, will be the largest source of growth in our company, for the next several years. Yours truly (center) and Gary Reber (Widescreen Review - right). You know how on TV news, they always have the "nodding" shot of the reporter listening? Well this is our version. Moderator: Question? Question #4: How long will it be before Divx software becomes more widely available at retailers other than Circuit City? Richard Sharp (Circuit City & Divx): Just about as soon as they want it. (laughter) Moderator: Do they want it? (more laughs) Richard Sharp (Circuit City & Divx): Well, all that want it so far, have it. (a huge laugh now from the audience) No whether the performance of the business over the last quarter - and look, I understand all the confusion. Let me be real clear about this - this was a very successful launch of this product. And I don't think anyone can argue about that. We are very encouraged, and we have demonstrated that, with the existing retail partners we have, we can build a very successful market for this product. And we're going to be here. And I believe as others see the growth of this business continue, whether it's this month, or next month, or next year, we will gain additional distribution. I can't tell you today that I have someone ready to sign up. Moderator: In fairness, I want to give the other panelist an opportunity to comment, with regard to what Rick's numbers were this morning. Do you consider that a successful launch? They believe it was. Obviously, in fairness to Divx, some people were writing it off as dead some months ago, that the product wasn't selling despite Circuit City's best effort. Any comment on that? Warren Lieberfarb (WHV): I think it's very important to understand the out-of-stock position in the month of December of open DVD, the in-stock position of Divx, and ask oneself how much of the Divx sales were generated by open DVD having run out? It's a number none of us are gonna know. Moderator: Ah, John Keating is pulling the microphone closer... John Keating (The Good Guys): I'd just like to say, from our 79 stores on the West coast, that we did not have enough Divx players in our stores to sell, and I'm sure Richard would echo some comments on the Circuit City side. And although I don't want to quote exact numbers, we still did sell a very significant portion of our overall DVD hardware units to be Divx players. One of our most significant hardware units in the DVD arena, was the ProScan Divx player, and shortly behind that was the Panasonic, which we didn't have enough of either one. There weren't enough open DVD players and Divx players. Warren Lieberfarb (WHV): So that being true, there wasn't enough in either, what was the ratio, in The Good Guys, between open DVD and Divx in the month of December. John Keating (The Good Guys): Uh, that's... that's something we're not prepared to announce at this point in time. (some laughter again) Moderator: OK, further questions? Question #5: I was wondering, does the consumer ever really own the Divx movie, or just the plastic platter? Richard Sharp (Circuit City & Divx): Well, there's a - in defense of the gentlemen who asked the question earlier, what he described was basically a conditional access system, despite all the talk about - what the consumer wants is video on demand. What they want is to watch what they want, when they want, they want to be able to pause it, stop it, restart it, and have all those flexibilities. And they want it conveniently delivered to them. And we've said for some time, that if the infrastructure could be built, to provide that capability to consumers cost effectively, then there wouldn't be a need for Divx. There wouldn't be a need for you either - for your chain either - and a whole lot of players here. The reality here is that today, the infrastructure to get that capability to the consumer, with Divx, is $399. It will be going down just like all DVD will be going down. That and giving them all the features - watching what they want, when they want, without having to leave home. And now, another way to do that, would be to provide the media in the home, and unlock it through some sort of connection in the computer. We actually think we're a little more convenient for that, because the player unlocks it without having to use the phone line each time, it records the information and sends it in in the future. So, again, we think there's an infrastructure capability here, where we can provide - we will stay ahead of the infrastructure cost of providing video on demand to the consumer, as the price of this product comes down, and it gives the consumer virtually all of those capabilities. You know - shop for Divx discs when it's convenient to buy them, you take them home, put them on your shelf, watch them when you want, and you don't have to return them. I think that's pretty darn close to video on demand. Warren Lieberfarb (WHV): There are people building that video on demand infrastructure: AT&T, TCI, Time Warner, Cox. There is going to be a near term, installed base of digital households, with digital set-top boxes, with highly developed servers, in the next two to three years, in tens of millions of households, the capability that Richard is taking about. That is the risk that we all face in this room, be it VHS rental, DVD rental, DVD sale, or the Divx alternatives. I go back to how that set of distributions work out, and who survives economically - being economically viable, is what this essential question is about. Moderator: I did want to ask a question earlier. Rick and others on the panel mentioned the promotional environment, in a somewhat different context. Is the DVD format, software and hardware, at this point, self-sustaining enough to allow it to continue it to flourish, without the 5 free rentals, the buy a machine get 5 free Divx discs? Is this a self-sustaining market yet? Jeff, from a marketing standpoint...? Jeff Yapp (Hollywood): Yes, we do believe the market is now at a point where it self-sustains. I think someone mentioned earlier, you're getting enough word of mouth from consumers who have had the experience, and shared it with other people, that it's gonna continue to grow. There's no questions that the promotions this quarter, for both Divx and open DVD, were critical in getting it to explode. But I think you're getting to a point now, with a million units or 1.1 million units installed, where people are going to begin talking about it, and where word of mouth will start to take over. And you're at a point, where the basic market now looks at open DVD as an alternative upgrade to their VCR, which is an on-going business. So we do believe that it has momentum. There's one other thing I'd like to mention, which is that the video on demand - the pay-per-view that we've been talking about - is great for hit titles. But the drop off for lesser titles, and catalog titles, is tremendous. Video on demand also can't deliver the extras that consumers are starting to appreciate. Both of those areas are met by the current packaged goods media - by DVD. Moderator: More questions? Question #6: Mr. Sharp, earlier you said that your research indicated that your consumers are buying 11 Divx discs, and yet you also said your totals are around 500,000. Can you reconcile those numbers with your hardware numbers? Richard Sharp (Circuit City & Divx): Sure. The research I quoted was for Divx owners that had had their players for 4 to 6 weeks. You know, 2/3rds of Divx players have only been in consumers' hands for less than a month. A significant majority of them have only been there for about two weeks. So we had to go back to history. Of those that bought their player recently, and took their 5 movies home, they probably have a while to go before they're ready to get back to the store and buy some more, so it's merely a timing difference. We expect that the demand for Divx discs will increase significantly, as this group of players that was sold through the Christmas season, sort of works through the 5 or more they took home with them, and gets into the market for the next set. Moderator: You mentioned this morning Rick, that you couldn't talk about consumer activations, but there is somewhat of a lag between the purchase of the player and the activation of the account? Richard Sharp (Circuit City & Divx): Correct. The consumer takes the player home - it's obviously capable of playing open DVD discs right out of the box - to the extent that they are ready to start their Divx experience, they do need to install it with a phone line, and call the Divx registration center. I think to some extent, during the holidays, there's gonna be a lag there. We've seen a consistent lag since we started in June, but our research indicates that they all get there in a reasonable period of time. So we'd expect, by the end of this month, to see virtually a very large percentage of those players sold in December registered. Moderator: It would suggest that either people haven't taken it out of the box, or are renting or buying open DVDs. Richard Sharp (Circuit City & Divx): Absolutely. Moderator: Further questions? Question #7: You earlier said that there would be some 2 million players sold in 1999. Do you have any further estimates beyond that? Moderator: Larry? Larry Pesce (Thomson): Ah, we haven't made anything published yet on going beyond that. I'm not sure we know well enough to be able to predict that. Moderator: CEMA just, in a report issued today, said 1.6 million, so we're already... ah, Mike? Mike Fidler (Sony): Nothing beyond... I think I'd be fairly consistent with what Larry's estimates were for 1999 with 2 million units. We think that might be a little conservative, given the kind of explosive growth we've had in this year, but I think that's a reasonable expectation of growth for next year. I have nothing at this point in time for beyond that. Question #7 (follow-up): Isn't 2 million a small percentage, given a household base of 110 million? Warren Lieberfarb (WHV): We think by the end of 2002 or 2003, there will be an installed base of 12 million households in the United States, and the growth rate will accelerate as CD-ROM is replaced, and is replaced with DVD-ROM, and people have two platforms on which to play their movies. Moderator: Question? Question #8: I think it's pretty clear that open DVD is the way to go. (big laugh from the audience) Given all of the DIvx rental fees, it seems that open DVD rental would be cheaper, and you can take it over to a friend's house at no extra charge. So tell me how Divx is better? Moderator: The gentlemen makes an argument for open DVD... Rick? Richard Sharp (Circuit City & Divx): Well, I really don't want to bore the audience. I think you all have been through the DVD versus Divx battles, and understand. Again, let me point out that we don't view this as a battle. Divx is a feature for DVD. We want DVD to be successful, for Divx to be successful, and we're absolutely supportive of both kinds of players, both with Divx and without. The benefits Divx offers are pretty straightforward - the ability to purchase digital quality content, at the lowest possible price, and if you only want to watch the movie once or twice, it is absolutely a low cost option. And is highly convenient. Question #8 (follow-up): What about all the fees? Richard Sharp (Circuit City & Divx): There are no fees. If you buy a Divx movie for $4.49 and take it home and watch it, there's no charge. That includes one 48 hour viewing period. Question #8 (follow-up): One - that's the magic word. With open DVD, you can watch it as many times as you want! Richard Sharp (Circuit City & Divx): Right - at a significantly different price. Next. (laughter) Moderator: (to questioner) I invite you to, um... Richard Sharp (Circuit City & Divx): No, no thanks. (lots of laughter now) Moderator: OK, invitation rescinded. Further questions? Question #9: Who is going to set the baseline rental fee for DVD? Will it be Divx, or will Hollywood step in? John Marmaduke (Hastings): I can tell you right now that we're matching pretty much what we do with VHS. And the consumers think that's a great bargain. And it's less than the fee that we were just arguing about. (more laughs from the audience) Jeff Yapp (Hollywood): And at Hollywood, we do the exact same thing - it's in line with our VHS rental price, which is less than the Divx fee. John Marmaduke (Hastings): Let me say one other thing - I think something's being lost here. I really don't care as much about the Divx versus DVD battle as everybody seems to in this room. Because our customers don't seem to care a heck of a lot about it. And that's really what drives me. And the bottom line is, it's a great format - meaning DVD, and whatever mousetrap you want to add to it - and our customers see it as a clear step-up. And that step-up offers more features, and more clarity, that hopefully is going to take some of the couch potatoes away from the death star [Editor's note: meaning satellite and Direct TV, I assume] and all these other things that are keeping people out of our stores. I think that we've got to consistently improve our offering all the time, or somebody is going to do it for us. And so I'm really excited about DVD, and I hope Divx doesn't confuse the customer. They haven't in small town America, but they sort of like it simple anyway. (laughter) And I think it's going to happen, regardless of some of the arguments on this panel. Moderator: Thank you for a lively and intelligent debate. (vigorous applause) (back to main CES '99 menu)
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