DVD dawns, but CD replication profits press on – digital video disc
Debbie Galante Block
Perhaps replicating the 100,000th copy of Jumanji on DVD may sound glamorous in an advertisement or press release, but is that work really paying the bills of today’s replicator? Like the rest of us, replicators may get caught up in the frenzy that surrounds DVD, but it’s cranking out covermount CD-ROMs and Internet-provider freebies that keeps a plant’s production lines humming and electric bills paid.
Many replicators say new CD customers continue to proliferate, particularly as CD-ROMs use as a sales tool becomes ever more prevalent. Brian Wilson, Executive Vice President of Sales and Marketing for Hauppauge, New York-based Allied Digital Technologies is among several replicators who have identified this unabating upsurge of CD-ROM usage. Although most discs replicated at Allied are CD-Audio, Wilson says, “we still saw an increase of 2 to 3 million units of growth in CD-ROM last year not only because customers are increasing order sizes, but because we continue to gain new customers.”
While some industry soothsayers see CD-ROM falling by the wayside as bigger and better technologies like DVD emerge, most replicators expect their CD-ROM production demands to grow until the turn of the century at least, with another couple years of good business expected after that. Avrum Mayman, CD product manager for Kao Infosystems, Fremont, California, says, “Customers will not move to DVD until they see what it can do for them. Moving into DVD is like moving into a big house. At first you don’t know what do with all of the room.”
DVD hasn’t eroded CD-ROM demand for several reasons, ranging from a staggering cost-of-goods differential to a much smaller installed base to the fact that the two technologies are playing into different markets at present. The biggest early DVD push has been in the video and movie market, while scattered DVD-ROM titles have focused mostly on making single-disc versions of formerly multidisc CD-ROM databases–which leaves CD-ROM all the multi-application, multimedia real estate in between, plus probably a good chunk of the data-oriented DVD market while DVD-ROM drives remain relatively scarce.
As a result, many replicators are readying themselves for DVD technologically, but still preparing for predominantly CD-oriented business. Bob Freedman, Vice President and General Manager for Hollywood-based replicator Crest National, says that Crest, which started up CD replication in 1996, started with output of 150,000 discs. That number moved up to over 15 million in 1997 and Freedman expects to replicate 18 to 20 million discs in 1998. Crest is in the middle of an expansion, and if completed this year, capacity could go up to 37 million discs this year. “Only about I percent of that is DVD,” Freedman adds. During the busy season last year, Freedman says, “we had the opportunity to do 8-12 million more discs than we did, but because we didn’t have the capacity we had to turn business away.”
Bob Headrick, President of Nimbus Information Systems of Charlottesville, Virginia, says, The 1997 holiday season was a clear indication that there is still huge growth in CD-ROM. Lower-priced computers continue to offer growth to the installed base.”
Infotech, a Woodstock, Vermont-based market research firm, says that worldwide unit sales of CD-ROM drives increased 27 percent in 1997 to 74.1 million, contributing to today’s 200 million worldwide installed base of CD-ROM drives on PCs and videogame consoles. Compare that to 330,000 DVD-ROM drives–all installed in 1997–and compare 60 DVD-ROM titles in print to nearly 46,000 CD-ROM titles in print, and it’s not hard to see why CD-ROM remains the replicator’s meal-ticket medium. Even Microsoft vaunted Windows 98–which now supports DVD-ROM-friendly MPEG-2 video file types and is what most feel will give DVD-ROM legs–will be released on CD-ROM, and that title alone is likely to keep CD manufacturers working day and night. DVD-ROM will not likely replace CD-ROM until about 2002, Infotech forecasts. But, projections aside–only by looking at genuine replication numbers can we realistically gauge the relative stature of CD-ROM and DVD in today’s optical disc production market. How much of a replicator’s business is CD and how much is DVD?
Most of today’s leading replicators say about 1 to 5 percent of the discs they produce are DVD, and the rest is CD-ROM. According to UK-based Understanding & Solutions Ltd., which offers specialty information and consulting services, “The CD-ROM pressing industry has continued to experience growth with output increasing by 35 percent last year. In terms of CD-ROM production, it is expected that worldwide output will expand by 18 percent this year, to reach dose to 2.7 billion discs.” Although Understanding and Solutions estimates that 43 percent of the CDs produced worldwide come from the United States, the Asian market has enjoyed the most growth in the last two years, and that market is likely to continue to expand even as U.S. growth begins to level off, sources say.
So, if you’re a developer with CD-size content and CD-style tools, and DVD development remains more daunting than enticing; or if you’re in the disc replication business and haven’t amassed the capital to migrate to DVD, have no fear: DVD is coming, but CD-ROM is here.
THE MAJOR BENEFITS OF CD-ROM
Today’s replication customers, according to most major manufacturers, have a healthy interest in DVD, but that interest hasn’t translated into a whole lot of business thus far, at least not compared with known-quantity CD-ROM. Most replicators say they are being besieged by clients for information on DVD, but those same customers are comfortable with CD, continue to invest in it, and have been put off by DVD’s delay and ongoing confusion about competing formats.
Harry Morgan, Vice President of IPC Software Services of Irvine, California, says, “99.9 percent of what our customers want is CD. In 1997, we were brokering about 5,000 to 10,000 DVDs per month. Out of 170 clients, only two of them asked for DVD last year.” IPC plans to offer DVD-5, 9, and 10 in 1998, but only five percent of the discs they will make are likely to be DVD. “If any replicator feels that DVD will be the bulk of their business in 1998, they can feel free to send IPC their CD-ROM customers,” Morgan says. Kao’s Mayman comments, “Consumers buy new computers every three or four years, and I expect that’s how long it will take to get a reasonable installed base for DVD.” And what constitutes a “reasonable” installed base for developers to begin writing to the new format? Kao’s Mayman guesses about 40 to 50 percent, but admits that “perhaps 20 percent is enough for a killer application.” Development time also needs to be considered. Some observers say DVD-ROM development time will at least be six months longer than for CD-ROM.
The major benefit of CD-ROM right now is availability. All replicators know how to make a quality CD whereas only a handful of replicators can actually make DVD-5 and DVD-10. Although many claim to be able to do it, DVD-9 remains a struggle for most as well. A lot of bugs need to be worked out of the authoring process and the replication process before DVD becomes a routine order.
Aside from the ease of manufacture, CD-ROM is cheap. Except for the period between August and November each year, replicators experience a lot of disc overcapacity due to sluggish and unpredictable off-peak market cycles. According to Understanding & Solutions, the total demand for CD-ROMs in the U.S. in 1998 was 560.89 million units compared to the actual supply of 1,163 million units. All of the overcapacity has led to lower prices. A moderate estimate of CD/DVD cost-of-goods differentials prices DVD in the $2 per disc range, and CD-ROM in the 50 cent per disc range. And as Crest’s Freedman says, “Most CDs are not even full, so why switch to a more expensive format?”
Fifteen to 20 minutes of multimedia-rich content can be delivered on CD and in many cases that’s enough. Allied’s Wilson says, “For the publisher, DVD offers almost too much capacity at this point. If you’re selling a program in its parts, you don’t want to sell it all together. Often times, there is more money to be made in selling data in smaller increments.”
Of course, Bill Gates said not 15 years ago that no one would ever need more than 681KB for anything, so the lesson here is that as capacity grows, content will grow to fit it. But such evolutions take time, and while the bulk of content providers work to catch up with DVD, the medium of choice for cheap production and mass distribution will remain good old CD-ROM.
WHAT ARE REPLICATORS BUYING?
The bottom line is that most replicators with a few dollars under their belt–or, more accurately, a few million for ramping up to DVD-ROM–will produce DVD if their customers want it. It doesn’t appear that real research is going into improving CD, so R & D budgets are increasingly re-channeled to DVD. As Nimbus’ Headrick says, “Prices have dropped so low on CD, there is little interest in putting more money into developing the product! However, that doesn’t mean some well-directed tweaks aren’t in order; replicators are always looking for ways to improve their cycle times, to increase their yields, and thereby to increase efficiency and quality. For instance, Cinram, replaced all of its equipment in the last 12 to 18 months, according to Rusty Capers, Vice President of Business Development. Kao’s Mayman also says, “We gained some capacity last year–about 10 percent–by improving productivity of our machines.”
Despite overcapacity, some CD manufacturers are still expanding. Most of those expansions come, however, when replicators have commitments from clients and they know they will need it. Other more cautious replicators outsource, Product during the busy season so as not to have idle lines the rest of the year.
If a replicator is expanding, they are likely buying machinery that can be used for CD now–to meet their primary demand in that arena–and then later switching to DVD when demand for that product picks up, says Nimbus’ Headrick. That is the case with IPC which started up CD-ROM replication in 1993. “We’ve been conservative in expansion, but we’ve seen 40 to 90 percent growth every year, including 1997,” according to IPC’s Morgan. “Last year, our equipment ran seven days per week. We even had to outsource CD-ROM for two months of the year. In January, we moved into a new facility and purchased four new replication lines. Although the lines were built for DVD, we are likely to use them for CD at first. Even the in-line bonder can be used as a spin coater,” according to Morgan.
Even the most DVD-aggressive replicators admit, CD-ROM is where their bread is buttered right now. Sean Smith of JVC Disc America says JVC’s optical disc capacity in 1997 was 120 million per year; only 7.2 million of that was DVD. In 1998, the DVD number will almost double to 1.2 million; still, Smith says, “that is only a small percentage of what we do. We are adding a couple of additional machines to do standard CD–we expect that market to grow until the year 2000–there is too much of an installed base to ignore the format,” he explains.
Nimbus has probably taken one of the deepest DVD plunges of any replicator to date, and even their numbers are heavily skewed toward CD-ROM. As Nimbus’ Headrick says, “Our CD capacity is 170 million per year, but our DVD capacity is only 22 million per year.” Kao’s Mayman reports a similarly CD-heavy production set-up. “Our total North American optical disc capacity is 530,000 per day; only about 10,000 of those are DVD units.” And Sanyo-Verbatim CD Company saw a 35 to 40 percent growth rate in CD-ROM last year, according to spokesperson Tom van Gessell. While the company’s total optical disc capacity is around 65 million per year, only about 200,000 of those produced are DVD discs, he notes.
WHAT WILL THE FUTURE HOLD?
JVC’s Smith charts the growth of CD and DVD markets past and future much as his competitors do. He clearly sees a market in transition from an older technology to a newer one, but a slow-cooking transition to be sure. “Between 1990 and 1995,” Smith says, “CD-ROM growth was 200 percent per year. In 1996, that figure was 18 to 25 percent, and in 1997 the CD industry experienced an 18 percent growth rate. However, I expect growth to be flat in 1998 as DVD starts to happen. As DVD replication prices begin to come down, it will begin to replace CD-ROM.”
When will it be cost-efficient for publishers to set their sights on DVD–when prices come down? Some replicators say that’s already starting to happen. Jim Lance, Executive Vice President of Pioneer Video Manufacturing of Carson, California, says DVD pricing has been aggressive already, but that trend seems to have slowed. Perhaps the reason is that replicators who intended to get into DVD have decided to be cautious and wait to see which way the market is going before making the hefty investment. Lance says, “I don’t expect DVD pricing will ever get as low as CD pricing because, for one thing, DVD royalties are three times more than CD royalties. I expect DVD prices–which are roughly $2 per disc now–“will end up at about $1.75 to $1.95.” One saving grace in getting developers and publishers to change over to DVD-ROM is its backwards compatibility to CD-ROM, says JVC’s Smith. They will be spending more money initially, but they won’t lose customers; they only stand to gain. The next 12 to 18 months should prove an important time for DVD-ROM.
And what role will the Internet play in this ever-evolving content distribution game? Are replicators and developers spending all of their time and money worrying about a new format only to be replaced in a very short while by online-only applications? Sony Disc Manufacturing of Terre Haute, Indiana, commissioned a study exploring that issue. Gary Wesley, Sony’s Director of Strategic Planning and Technical Marketing, says they asked customers what they expect their products to look like in the next five years. “Most said they expect hybrid solutions–a CD with online connections, for instance. But, whether it is CD or DVD, packaged media will remain a component of what consumers will want.”
And what are the media-choice and application-type breakdowns of what that audience is buying now? Currently, Understanding & Solutions says promotional and covermount applications hold 30 percent of the overall CD-ROM market (other sources put that number even higher at 35 percent). Games are the next highest application at 28 percent, with “edutainment” titles at 18 percent, computer software at 12 percent, and higher-priced corporate and database applications commanding 6 percent of the market. Most industry experts say promotional and covermount applications–the largest segment of the market–will be last to turn to DVD-ROM. At the time of this writing, few DVD-based games had actually been announced. And the word from the companies that physically produce the discs that comprise the market, circa mid-year 1998, is that CD-ROM remains the delivery medium of choice for commercial title publishers and consumers alike.
RELATED ARTICLE: Worldwide CD-ROM/DVD-ROM Drive Installed Base, 1994-2003. From The Infotech Report: “Optical Publishing Industry Assessment”
Reader Units CD-ROM DVD-ROM
1997 195,301,700 33,123
1998 264,450,700 7,029,407
1999 316,311,800 31,239,700
2000 338,110,900 77,927,650
2001 290,937,600 180,810,500
2002 232,286,600 295,177,700
2003 166,799,000 407,233,500
RELATED ARTICLE: Companies Mentioned
Allied Digital Technologies 15 Gilpin Avenue, Hauppauge, NY 10019; 516/234-0200; Fax 516/234-5660; http://www.allieddigital.com; InfoLink #403
Cinram, Inc. 1409 Foulk Road, Suite 102, Wilmington, DE 19803; 800/433-3472, 3021479-2500; Fax 302/479-2527; InfoLink #409
Crest National 1000 N. Highland Avenue, Hollywood, CA 90038; 800/309-3472, 213/466-0624; Fax 2131461-8901; InfoLink #412
Infotech, Inc. P.O. Box 150, Woodstock, VT 05091-0150; 802/763-2097; Fax 802/763-2098; http://www.infotechresearch.com; InfoLink #423
IPC Software Services 9400 Jeronimo, Irvine, CA 92718; 714/588-7765; Fax 714/588-7763; InfoLink #424
JVC Disc America 9255 Sunset Boulevard, Suite 717, Los Angeles, CA 90069; 310/274-2221; Fax 310/274-4392; http://www.jvcdiscusa.com; InfoLink #425
Kao Infosystems Co. 40 Grissom Road, Plymouth, MA 02360; 800/274-5520, 508/747-5520; Fax 508/747-5521; InfoLink #426
Nimbus P.O. Box 7427, Charlottesville, VA 22906; 804/985-1100; http://www. nimbuscd.com; InfoLink #432
Pioneer Video Manufacturing 1041 E. 230th Street, Carson, CA 90745; 310/518-0710; Fax 310/522-8698; InfoLink #435
Sanyo-Verbatim CD Company 1767 Sheridan Street, Richmond, IN 47374-1811; 800/704-7648, 765/935-7574; Fax 765/935-7570; http://www.sanyo-verbatim.com; InfoLink #438
Sony Disc Manufacturing 123 International Way, Springfield, OR 97477-1047; 541/988-7600; Fax 541/988-8099; http://sdm.sony.com; InfoLink #440
Technicolor Optical Media Services 3233 East Mission Oaks Boulevard, Camarillo, CA 93012; 800/732-4555; Fax 805/445-4280; InfoLink #442
Understanding & Solutions Kensworth Gate 200-204 High Street, South Dunstable, Bedfordshire, LU6 3HS UK; 44 1582 607744; Fax 44 1582 472946; InfoLink #443
Debbie Galante Block (email@example.com) is a freelance writer based in Mahopac, New York comments? Email us at firstname.lastname@example.org or check the masthead for other ways to contact us.
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