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DVD Growth in Brazil, Advances in Streaming Video
and High Definition Formats Create Digital Media Market Opportunities
Industry Participants Toshiba, Internap, Netflix, Infosmart and
USA Video Interactive Positioned for Continued Market Penetration Across
Hardware, Content, and Storage Segments
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April 2007
Ann-Marie Fleming,
www.DigitalMediaStocks.com
The digital media industry is a consumer driven market and one that
is currently influenced by the demands for an improved video and audio
experience. The market has found itself at a crossroads as the existing
media format (DVD), which continues to be the industry standard as a
simple and high quality means of viewing and storing digital media
content, meets the next generation of digital home entertainment through
advances in streaming video and the growing level of high definition
technology and content.
As a result, opportunities are being created across a variety of
segments within the digital media industry. Infosmart Group, Inc. (OTC
BB: IFSG), a global DVDR manufacturer, is working to capitalize on the
rapid growth Brazil is seeing as the DVD format is only now being
adopted in this developing region. In addition, advancements in
streaming video and the availability of high quality downloads has
opened the doors for many players such as Internap (NASDAQ: INAP), a
global provider of integrated content delivery systems, and USA Video
Interactive Corp. (OTC BB: USVO; TSX: US.V), a provider of
video-on-demand and digital watermarking anti-piracy technology. As the
industry is shifting towards high definition content, innovators such as
electronics giant Toshiba are helping consumers to make the transition
from the existing format to high definition through HD DVD. On the
content side, positioned to benefit from continued demand for DVD movies
and the eventual shift to high definition, is online movie delivery
company Netflix (NASDAQ: NFLX).
Driving the consumer electronics and digital media market is the
growing consumer demand for better quality home entertainment. As
consumers look to replicate the theatre experience, they have continued
to spur innovation in televisions, players and recorders, as well as the
quality of content available.
“The industry has always used the superior quality of the theatrical
experience as its flagship product. All the subsequent markets - cable,
home video, and broadcast, derive their collateral marketing and product
awareness from the flagship market campaigns and success,” states
Patrick Gregston, Sales Manager with USA Video Interactive Corp (OTC BB:
USVO; TSX: US.V).
Continued Opportunity within DVD Market:
While the format battle continues to dominate high definition
circles, many companies have found significant market opportunity for
DVD and recordable DVDs in developing markets such as Brazil, where the
digital media movement is currently centered around the existing DVD
format.
According to Justin Davis, North American representative for
Infosmart Group (OTC BB: IFSG), “The existing standard of DVDR is only
now being adopted in places like Brazil. There are still great margins
in these areas which directly benefits DVD manufacturers. Right now in
Brazil you have 185 million people, 60 million TVs, but only 4 million
DVD players. This mirrors exactly what we saw in the U.S. 5-7 years ago
when most people were utilizing VHS and began transitioning from VHS
into DVD. And now in North America basically everyone is using DVDs and
most likely owns one or more DVD players. Brazil is at this transition
stage right now and with this market only now becoming a viable option
it creates tremendous growth potential. Infosmart Group is positioned to
take advantage of this opportunity through its newly opened facility
called Infosmart Discobras.”
According to the Company, Infosmart, which is already the leading
recordable DVD manufacturer in Hong Kong, expects that their new
positioning within Brazil will enable them to become one of South
America’s largest DVDR manufacturers this year.
As the ongoing battle between Blu-ray and HD DVD leaves consumers
with some uncertainty, it has become a positive driver supporting the
existing DVD format. Netflix (NASDAQ: NFLX) is seeing strong demand for
the existing format through strong online DVD rentals. Steve Swasey -
Director, Corporate Communications explains, “The format war has made
the transition to high definition complicated and most Americans want
simplicity. The less confusion the better for most consumers and that is
why DVD is so popular; it is so easy to use. The DVD format is light,
it’s portable, and it is of high quality. We are excited by the improved
quality that HD DVD and Blu-ray offers which provides much better
clarity, sound and significantly greater storage than the DVD, but it
comes with some confusion.”
With the foothold that the existing standard continues to hold,
Swasey sees DVDs as continuing to dominate. “We are a distributor and we
are going to continue to send out the formats that movie studios
continue to publish in and make that available to our customers. It is
however a DVD world and will continue to be for five to ten years at
least for several reasons. DVDs are ubiquitous and with the advent of
the HD DVD and Blu-ray, it is still the most popular way of getting
entertainment today,” states Swasey.
USA Video Interactive (OTC BB: USVO; TSX.V: US), developer of
anti-piracy products that utilize digital watermarking technology
continues to focus on the existing media format with an eye on the high
definition future and the needs for content protection that will
accompany this shift.
USA Video’s Patrick Gregston explains, “Right now the vast majority
of volume in distribution is in standard definition and our products are
working there. We are rolling out our WMV MediaEscort digital
watermarking application because that is the format of 85% of the files
being downloaded. We do however have in place a plan to execute for high
definition, in its many flavors, and look forward to the right
opportunity to implement that plan. Embedding the proof to catch the
crooks is how we enable honest people to have an open marketplace, fair
use of the content, and protect the rights holders. This concept is
applicable on all content regardless of format of image or channel of
delivery.”
Streaming Video Moves Mainstream:
Thanks to high profile sites such as YouTube, streaming video has
become a high growth and viable channel for content distribution that
many feel could change the face of consumer entertainment through the
availability of high quality downloads. Netflix’s Steve Swasey
describes, “I think the greatest threat to the high definition format is
the downloading, instant watching and electronic delivery. We have our
own electronic content called Instant Watching that allows for streaming
video over your PC that we feel has a lot of potential moving forward to
satisfy the growing demand for downloadable movie titles.”
The Internet has been a key contributor to the growing level of
digital content now available, however with this surge has come an
escalated amount of video and movie piracy, reaching global levels
exceeding $18 billion.
According to USA Video’s Patrick Gregston, “The challenge for the
industry is how to adapt to the fact that a much higher quality
experience is now going to be in homes, and that the various means of
delivery are all dependent on putting very high quality digital copies
into the hands of millions of customers. What makes the digital era
different is the speed and quality of what anybody can do, so the
threats are multiple, and within the means of millions and with the
surge of companies now distributing and selling video content over the
Internet, piracy issues have become a greater concern than ever before.”
According to Standard & Poor's Equity Research, “In 2007, we expect
potentially significant technology advances (with key milestones)
related to the implementation of effective digital fingerprinting
technology, potentially helping the likes of Newco, MySpace, and YouTube
to prevent unauthorized use of copyrighted material.”
With the ability to digitally watermark content as it is being
distributed over the Internet using the Company’s SmartMarking
technology (MediaEscort™), USVO is positioned to take advantage of this
fast paced delivery channel as they secure the rights of the content
producers and distributors.
Andrew Albrecht, Vice President Corporate Development for Internap
Network Services Corporation (NASDAQ: INAP), a provider of choice for
the world’s elite businesses on the Internet, believes, “We are going to
see video gaining the same acceptance as digital music has today by
people being familiar with and trusting downloadable rich media
content.”
Internap, through their recent acquisition of VitalStream has
extended their reach into the rich media content streaming delivery
business and is turning the growing demand for online video content into
a high growth business from an advertising perspective.
As described by Albrecht, “Our acquisition of VitalStream allows us
to put real time ads into streaming video, targeting the ads using
specific geographic and demographic information and providing reporting
back to the advertisers on the number of ads that were targeted and
delivered. Internap is looking to continue to develop this technology to
take advantage of the growing demand for rich digital media content
providing a means for monetizing digital media content through seamless,
streaming and targeted advertising.”
The Future of High Definition
In addition to the continued strength of the DVD market and the rise
in popularity of streaming video, it is difficult to deny the
opportunities associated with the inevitable shift to a high definition
viewing experience. Evidence that consumers are beginning to move
towards high definition is seen in the surging sales of HDTVs which are
equipping many of today’s consumers with technology to take advantage of
high definition media, with expectations that this pattern will continue
to grow at escalating rates.
According to Adam Thomas, Media Research Manager with Informa
Telecoms & Media and author of: 'HDTV: A Global Analysis', "We are
forecasting pretty strong growth for high definition TV, with more than
150 million HDTV homes worldwide expected by the end of 2011 – which is
more than three times the number at present. The US has 28 million HD
homes at the moment and we are expecting that to rise to 63 million over
the next five years.”
The Semiconductor Industry Association reveals that U.S. sales of
HDTV units more than doubled in 2006 driven by sharply falling prices
and increasing high definition programming with expectations for demand
to continue to grow sharply for the next several years.
Companies such as Toshiba are looking to capitalize on the surge in
HDTV sales as a means of expediting the market penetration of their HD
DVD players. Jodi Sally, Vice President of Marketing, Toshiba America
Consumer Products Digital A/V Group describes, “We see the rapid growth
of HDTV in the U.S. as a huge opportunity for HD DVD, as HD DVD allows
consumers to take full potential of their HDTV. With up to 6 times the
picture resolution of DVD, HD DVD offers the best picture for the HDTV,
surpassing the HD quality of over the air, satellite and cable
broadcasts.”
High Definition Challenges Create Market Opportunities:
While most see the increasing number of homes with HDTVs as a
positive for the home electronics industry, many contend that it is not
the high definition capability that is driving the TV sales, but more
the screen size that is attracting consumers to these big ticket
purchases.
Michelle Abraham, Principal Analyst for In-Stat’s Converging Markets
& Technologies Group describes, “In terms of the number of consumers
buying HDTV sets, one of the main reasons it is growing is because that
is all that is available in the larger TV sets. Over time people have
gone out and replaced a TV with a larger TV than the one they had before
and with that trend HD is a lot of the time all that is available. For
example, if you want a rear-projection TV set you can’t find one that is
not HD today and most of the flat-panel and certainly the larger sized
LCDs are all HD TVs. With this continuing, we are going to see more
HDTVs in homes and many people once they have one HDTV will want to have
more than one. Along with moving to HDTV also are also moving more
towards the flat panel TV sets either LCD or Plasma for aesthetic
reasons.”
Despite the number of HDTVs being sold, a significant portion of
owners do not have the necessary components and accessories to view high
definition on their sets. “Part of the problem is that many times
consumers don’t realize that they need additional hardware to watch a HD
TV signal. Another reason for the disparity according to Abraham is a
result of the costs associated with the additional hardware and for the
HD programming from your cable or satellite provider,” states Abraham.
Several factors are believed to help in overcoming this imbalance
turning the current challenges into significant opportunities. “People
are spending thousands of dollars on the HDTV purchases and don't
realize that they aren't getting the full HD experience. Content will
drive that market,” explains Toshiba’s Jodi Sally.
Informa’s Adam Thomas adds, “The universal problem holding back HD
globally is a lack of content, so the release of high definition content
via next generation players and recorders can only be a good thing.
However, this has to be tempered by the lack of industry agreement on a
standard and the resulting conflict between Blu-ray and HD DVD. Format
wars of this type always promote consumer confusion and the resulting
dent to confidence will undoubtedly hurt acceptance of the new
technology in the short- to medium-term."
Consumer Transition:
Many agree that a key part of the solution to raising the adoption
level for high definition is the reduction of prices, as well as making
the transition from the existing format to the next generation formats
as simple as possible. As a consumer driven market, the transition from
DVD to high definition is heavily reliant on the end users ability to
understand, use and afford the next generation of HD technology.
In an effort to increase adoption levels, Toshiba positioned its
product line and focuses its marketing efforts around helping consumers
to make the shift from old to new. “We have been using both consumer
friendly marketing and consumer friendly pricing. First of all, HD DVD
is a better format name, as consumers are already familiar with HD and
DVD. We have been marketing our players as quite simply, ‘Watch movies
on High Definition on your HDTV and your DVDs will look even better.’
Additionally, current CEA research indicates consumers intent to
purchase increases significantly when price points drop below $500.”
states Sally.
Helping consumers to make the transition Sally adds, “We feel
backwards compatibility, which means HD DVD players can play DVD movies
and CDs just as easily as it plays HD DVDs, is key. In fact, DVD movies
will look even better when played on a HD DVD player because the player
will upconvert DVDs to near high definition picture quality. HD DVD also
offer combo discs, discs having an HD version and DVD version on the
same disc. Currently, only HD DVD offers this technology, this is great,
as the disc can be used in existing DVD players, as well.”
Storage media is a space with a great deal of upside and opportunity
as a result of the shift to HD creating significant benefits to
producers such as Infosmart Group (OTC BB: IFSG) because unlike
hardware, storage media such as HD DVDs and HD DVDRs are frequently
purchased items, creating a re-occurring source of revenue. However,
with the current format battle between Blu-ray and HD DVD continuing,
Infosmart Group is taking a cautious wait and see approach and turning
to the experience of their Management team in terms of timing their
production boost in this area.
“Infosmart’s management team has seen these battles come and go, and
they are going to tentatively enter the space. The Company is slowly
moving into this market but has the ability to ramp up HD DVDR
production if necessary,” states Davis.
The Depth of Digital Media
The diversity of segments within the digital media market has created
viable business opportunities surrounding the existing DVD standard,
which in some areas of the world is only now being adopted and even in
developed regions where high definition is becoming more main stream,
the DVD standard continues to dominate.
Despite the uncertainty surrounding what the next generation standard
will be, the future will undoubtedly see a shift to high definition as
consumers look to replicate the theater experience in the home beyond
the capabilities of DVD.
Establishing itself as a new distribution channel is streaming video
and downloadable content that is rapidly gaining in quality, speed and
popularity. As the Internet creates a larger user base and access to
content becomes even more difficult to regulate and protect against
fraudulent activity, issues of security may be the next topic of
discussion for players within this space.
As companies work to fill the growing needs of the digital media
market in all its diversity and opportunity, companies with the ability
to continue to take advantage of the existing standards while also
having the ability to move into new areas such as high definition and
streaming video, certainly appear to be well-positioned for the future.
Ann-Marie Fleming
Ann-Marie Fleming completed her MBA in the United States, where she
attended Webster University. She also holds an Honors B.A from the
University of Toronto. She has over sixteen years of experience within
the financial industry to include retail banking and brokerage,
investment banking, and mortgage brokerage within the United States and
Canada, with a firm background in corporate research.
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