Digital Home Thoughts: The HD TV Evolution: Part 1 - Apocalypse 2009?

Estimated digital TV shipments for calendar year 2005 would nearly double the installed base. Of those, a large portion (around 50%) are not HD sets, properly speaking, because they do not fully and natively display either of the standard High Definition resolutions. Although some of them are billed as such because they can receive ATSC signals and/or meet the minimum official spec of displaying 720 progressive lines or 1080i interlaced lines, albeit at a reduced horizontal resolution. The number of actual HDTVs in use is thus masked, but a reasonable estimate is that about 10-15% of all TVs in use by the end of 2005 were actual native-HD sets.

Now, here’s where things start to get interesting. If only 15% of all TVs in use are HD-capable, and analog broadcasts go away in three years, that would imply that 85% of all TVs need to be replaced over the next three years, right? Fortunately, no. Because, as pointed out above, it is possible to receive HD content and display it on non-HD TVs and monitors. Thus, all the fuss over the end of analog broadcasts something of a red herring, especially when one factors in that somewhere between 80-90% of all US households get their TV via cable and/or satellite set-top boxes. Now we have our first rule for the HDTV era:

Rule one: The ability to receive an HD signal is totally independent of the ability to properly display it. You can have either one without the other. Assume nothing.

Nonetheless, while HD sets are not necessary to view HD content, expectations are that by 2009, 75% of all TVs still in use will be HD displays of one kind or another.

Which brings up the question of how such a transition is to happen.
Until very recently (the last two-three months), HDTVs have uniformly sold for prices well above the $1000 mark. Often many multiples of $1000 in fact. Add in that the average TV selling price in 2004 was $628 and the paradox grows.

Consider:
- The most popular TV sold in the US in 2004 was a 27” CRT at an average price of $266 (22.6% unit share, 7.11 million units) of which 95% sold for prices under $399.
- The second most popular configuration was for 20” CRTs at an average price of $186 (17.6%, 5.54 million units).
- The third most popular configuration was for 32” CRTs at an average price of $513 (12.6%, 3.97 million units), of which 53% sold for under $399.

We’re talking serious sticker shock, no? The cheapest HD equivalent to that basic $399 27” CRT would be a 32” LCD display at prices starting around $1000 for second-tier products and easily going to $2000 for name-brand products.

It’s rather hard to envision the market changing so much in three years that consumers would be willing to go that high or technology changing so quickly that existing price points can be met. Hard, but not impossible.

In the HDTV retail business, there was a lot of talk late last year of “the great price war of 2005”. Mostly in tones suggesting it was an anomaly, and that 2006 would see a return to the market dynamics of 2004 and earlier. Retailers and manufacturers can only hope so because over the last five years they have grown accustomed to HDTV stacked profit margins of 46% of retail (not MSRP!) prices. 2005 saw prices drop, on average, well over 25% year-over-year and those nice juicy profit margins won’t last much longer if the price-dropping continues.

So, what we have today is a market that has grown fat and lazy off the profits of early adopters and home theater enthusiasts, running head-on into a horde of mainstream consumers accustomed to end-of-life-cycle CRT pricing on their mainstream TVs. Given the clear superiority of the HD display quality, (surveys have shown) consumers are in fact willing to pay a premium for their first mainstream HDTVs. However, they are not willing to go much above $600, yet for that money they want a flat panel display at least as tall as their current TV, not a bulky CRT.

Something is going to have to give. And it will. The result will be a bloodbath favoring consumers.

NEXT: In part two, I will focus on how this is likely to come to pass and on the technology and economic trends that are pushing manufacturers and retailers towards giving consumers what they want, whether they like it or not.

But in the meantime, Chime in on our quick survey.

Felix Torres is a dabbler in home entertainment electronics and a survivor of both the home computing wars of the '80s and the multimedia wars of the '90s who is currently most interested in home media networks and the North American transition away from broadcast media.