Could 3D be the Blu-Ray of HDTVs?

Dealerscope has written about a CEA (Consumer Electronics Association) report that U.S. HDTV sales declined on both a units and dollars basis for the first time in 2011. The decline wasn't completely unexpected, because there was a huge increase in sales when digital television broadcasting replaced analog service, which made tens of millions of television receivers obsolete.

In 2006, consumer electronics companies and motion pictures studios hoped to make DVDs obsolete with Blu-Ray discs. At the time, DVDs were still breaking sales records, but motion picture studios were concerned about DVD piracy, and consumer electronics companies saw their profit margins on DVD players being eroded by Chinese manufacturers. Blu-Ray was supposed to be the solution to both groups' problems: It had enhanced anti-piracy systems for the studios (and could encourage consumers to replace their standard definition DVDs with high-definition Blu-Ray discs). In addition, Blu-Ray players required new licenses and were significantly more difficult to manufacture than DVD players, which kept the Chinese manufacturers on the sidelines (at least initially).

What both groups failed to foresee was the Great Recession, which forced consumers to go back to renting movies rather than buying them. That gave a huge boost to Netflix and Redbox, but it caused the overall market for DVDs to decline. Most consumers were also unwilling to pay the premium demanded for Blu-Ray players, so player and disc sales failed to compensate for DVD's decline. In response, consumer electronics manufacturers have had to drop the price of entry-level Blu-Ray players under $100. Now, digital streaming and downloads are depressing sales of physical media even further. Since most Blu-Ray players are compatible with one or more Internet movie services, they're encouraging expansion of streaming video without a commensurate increase in demand for Blu-Ray discs.

The CEA's sales results suggest that a similar scenario is playing out for 3D. Both consumer electronics companies and movie studios hope that 3D will spur a new round of TV purchases, and will stimulate sales of 3D-capable Blu-Ray players. However, the first generation of 3D HDTVs was expensive and required active glasses, which typically cost around $100 each. Glasses from one HDTV manufacturer generally don't work with televisions from other manufacturers. The increased cost, multiple formats and discomfort of wearing active glasses discouraged consumers from adopting 3D.

This year, at the Consumer Electronics Show, several manufacturers showed 3D systems that use less-expensive passive glasses or no glasses at all. However, early reviews state that the loss in resolution that some of these systems require in 3D mode (they can only display 25% of 1080P resolution) is noticeable and distracting. Some systems also use filters that distort conventional 2D video. The glasses-free systems require viewers to sit in specific places in order to see the 3D effect. The proliferation of 3D formats (active, passive, glasses-free, and variations of each approach) is likely to confuse consumers even more than last year. What's worse is that the problems with various 3D formats may not be clear in retail showrooms, but will become obvious once consumers get the TVs into their homes. That will lead to product returns and negative word of mouth, which will taint all the 3D products, even the best ones.

At the same time, millions of consumers are using HDTVs as the primary screen in their living rooms and tablets as a second screen that can augment the first screen in some cases and replace it in others. Consumers are buying tablets, which don't do 3D well but are portable, rather than 3D HDTVs. It's much too early to say that 3D in the home is dead, but the probability is increasing that 3D will be a niche format, in much the way that Blu-Ray is a niche.

U.S. holiday buyers are avoiding high-end consumer electronics

Yesterday, the price of Best Buy's stock plunged on the company's report of lower year-to-year sales for its fiscal Q3, and expected lower sales for the entire year. Analysts said that Best Buy poorly merchandised its "Black Friday" deals, while the company said that it deliberately decided not to offer the "third tier" (their term) consumer electronic brands and deals that Walmart and Target offered.

Even though the U.S. Commerce Department reported that overall retail sales rose 0.8% in November, consumers were much smarter about their Black Friday purchases this year. Historically, retailers have offered a limited number of low-priced products on Black Friday, expecting customers who find the product they want to be sold out to buy more expensive (and profitable) products. This year, consumers either walked out without buying anything if the bargain they were looking for was sold out, or put so much pressure on store management that they were allowed to purchase more expensive products at the price of the sold-out models.

At the same time, ECN Magazine is reporting that consumers are avoiding 3D and Internet-enabled HDTVs. The article quotes a fund investor who questions the logic of CE companies pushing expensive new 3D HDTVs just a year or two after most people purchased their first big-screen HDTVs. Consumers don't see the value proposition, especially in a still-fragile econony. In addition, consumers are put off by the requirement to purchase expensive 3D glasses for every person who wants to watch. There's also a dearth of 3D content, and consumers are afraid of becoming nauseated or getting headaches if they watch 3D.

In addition, consumers are avoiding Internet-enabled HDTVs if they're priced significantly higher than comparable non-networked devices. They realize that they can add Internet connectivity by purchasing an Apple TV or an Internet-enabled Blu-Ray player (some of which are available for under $100). They're also comparing the prices of those products with Google TV-enabled devices, and are going with the less-expensive products. As with 3D, they don't get Google TV's value proposition and can't justify the higher price.

What does it all mean? 3D HDTV won't really take off until an economical, reliable system that doesn't require glasses is available--which is what the CE industry should have waited for in the first place. As for Google TV, it may already be dead, but it certainly won't take off until the price is $99 or less. Google and its partners had no good reason to rush the products, which were clearly half-baked, into the market so soon. By the time they fix their many problems, consumers will have moved on.

Making 3D TV Practical

You'd have to be living under the proverbial rock to not be aware of the explosion in 3D technology, first in theaters and, more recently, at home. However, a lot of work needs to be done in order to make consumer 3D more practical. Here are three examples:

• 3D sets are far more expensive than their 2D equivalents. For example, the cheapest 3D set that Best Buy current has in the U.S. is a 40" Samsung model that sells for $1,800. A roughly equivalent 2D Samsung model can be had for $1,080.00, and if you're willing to settle for a 42" 2D Vizio from Walmart that's even better equipped than the Samsung, you can get it for $900. Best Buy's prices run as high as $6,300 for a Samsung 55" 3D model.
• Viewers need to use 3D glasses in order to see the 3D effect, and every receiver manufacturer has its own format for 3D glasses. Glasses for a Samsung set won't work on a Sony, and vice versa.
• A small but far from insignificant percentage of 3D viewers get headaches or have other problems when they watch it, due to the refresh/flicker rate. 

There are solutions in the pipeline for all of these problems, but they're going to take some time to implement:

• Prices for 3D sets will go down as manufacturing quantities go up, but it's unlikely that the price difference between comparable 3D and 2D sets will ever go below $250 or so.
• The Consumer Electronics Association and a company called XpanD are both working on 3D glasses that will work with any 3D television set.
• Last week, Toshiba demonstrated a technology that enables viewing 3D video without the use of glasses. (That was far from the first time that 3D without glasses has been demonstrated.) The new technology has a number of shortcomings: It requires three LCD panels to be sandwiched together, which dramatically decreases the brightness of the display, it cuts the resolution of the 3D image by almost 90% compared to the 2D image, and it has nine fixed viewpoints from which a 3D image can be seen. So, it's likely to be years before a 3D technology that doesn't use glasses and is both practical and cost-efficient will be available.
• The flicker rate issue is going to remain controversial for some time. Most 3D sets currently use a 240Hz refresh rate, and that may be enough to solve the problem for most people.

3D's content production problems are getting solved faster than the problems of viewing 3D in homes, so we may find ourselves with with a lot more content than viewers for quite a while.