3D: Not dead, but headed for a niche

The New York Times has an article about the back-to-back poor boxoffice performance of 3D versions of "Pirates of the Caribbean: On Stranger Tides" and "Kung Fu Panda 2". "Pirates of the Caribbean" only sold 47% of its tickets in 3D, and "Kung Fu Panda 2" only sold 45%, even though both movies were heavily promoted as 3D titles. In fact, 3D's share of boxoffice revenues has been declining almost since "Avatar" left the theaters. Audiences are getting tired of movies that were originally shot in 2D and then poorly converted to 3D (like "Clash of the Titans" and "Thor"), along with the low brightness, glasses and headache-inducing qualities of 3D as shown in most theaters, and, perhaps most importantly, the steep ticket prices.

As the New York Times points out, the movie studios have a bumper crop of 3D titles coming out this year, and the industry has become dependent on 3D's higher ticket prices to try to compensate for declines in DVD sales and the failure of Blu-Ray to pick up the slack. It now appears that 3D isn't the "Hail Mary" pass that the movie industry was looking for.

That doesn't mean that 3D is dead, but it does mean that the studios will have to become a lot more selective about the movies they release in the format. 3D needs to be reserved for "event" movies that can truly take advantage of the effect--the novelty of 3D for its own sake has worn off. Studios also have to drop 2D to 3D conversions; the audience has caught on, and we're rapidly approaching the point where it will cost more to do the conversions than the incremental revenues that movies will earn with 3D.

The studios also have to, once and for all, get over their spending addictions. DVD sales underwrote a wild period of production and marketing cost escalation, but since the Great Recession, the studios have been looking for replacements for DVD revenues like crack addicts looking for a fix. It's time for the studios to go into rehab. Average production costs of $150 million or more have got to drop to more reasonable amounts. The studios can easily afford 3D becoming a niche format for special events, but only if they bring their spending in line with market realities.

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.

How fear of change is paralyzing political action

I very rarely write about politics, but political movements in the U.S. have a huge effect on the economy, and that's something that I cover. In my opinion, both the right and left wings of U.S. politics espouse very different philosophies but are being driven by the same thing: Fear of change.

The right wing, especially the Tea Party, wants to go back to a pre-New Deal period where the Federal Government's role is dramatically reduced and focuses primarily on national defense. The left wing wants to increase the social safety net. The problem for both wings is that they don't want to face, let alone deal with, the dramatic changes in the U.S. and the world over the last two decades. Here are a few examples:

• In the Reagan years, the "glory days" of the right wing, the U.S. still had a robust manufacturing base. Today, the U.S. manufacturing base is thoroughly hollowed out, and our country is dependent on manufacturing in China, Taiwan, Mexico and other countries. The manufacturing jobs that we once had have largely been replaced with lower-wage service jobs or are gone entirely. High tech industries haven't come up with replacements for steel, cars, etc., and most high tech manufacturing has gone overseas.
• Our primary and secondary public schools are falling further and further behind schools in other countries, but the left wing sees only one solution: Reform the existing schools. The problem is that neither administrators nor teachers are willing to make changes that jeopardize their jobs or work rules. The solution is robust competition from outside the existing school systems, in the same way that effective competition weeds out ineptly managed companies and makes the survivors better.
• Our financial institutions are no longer trustworthy. The financial meltdown demonstrated that the management of most of the top consumer, commercial and investment banks was (and still is) incompetent. Our securities exchanges are dominated by programmed traders that buy and hold securities for milliseconds. Humans are no longer in control of the process, as last year's "flash crash" illustrated.
• The Internet has made talent and capital global. High-quality talent in the U.S. has to compete with talent from around the world, most of which is willing to work for less money. Similarly, capital flows around the world to where it can get the best return; it's no longer limited to a single country or continent. While the U.S. is still seen as the "go-to" place for entrepreneurs, scientists and engineers around the world, it's losing its appeal as other countries grow.
• Our infrastructure (roads, bridges, sewers, water and gas lines) is deteriorating at a dramatic rate. We're nearing the point where we can no longer maintain much of our existing infrastructure--it will have to be replaced.

The U.S. doesn't have the money to maintain its existing social safety net. Nor does it have the money to maintain its military at its current level. It certainly can't do both while fixing its educational system and infrastructure, and it can't rebuild its financial system on a foundation of quicksand. If unemployment levels out at 8% rather than 5%, where does the money that the formerly employed had been paying in taxes come from? If property values level off at 20% to 30% below where they were before the Great Recession, how will our schools and local governments compensate for decreased property tax revenues?

We're going to have to radically change our spending priorities. This is a daunting challenge, and it brings me back to my original point: Rather than face the real challenges, the right wing wants to go back to a time before the challenges existed, and the left wing wants to keep spending money in the hope that a miracle will occur. Both sides are afraid of dealing with where change has taken us today, and will take us in the future. Until both sides get over their fear and start dealing with the real issues, the U.S. political system will be a perfect example of "sound and fury, signifying nothing."