Video Trends in 2003-2004

· Digital television (DTV) sales lift falling revenue from declining analog sales.

· DTV sets and monitors account for majority of sales of 40-inch and larger color TVs.

· DVD player sales reach a peak year in 2003.

· DVD recorder sales to increase as prices drop under $300.

The six-year-old U.S. transition of television broadcasting from an analog to a digital platform is bringing new growth in sales of key video segments.

Wholesale revenue from all video products rose 1.6 percent to $19 billion in 2003, despite a combined whammy of a deflationary economy, increased volumes of low-priced products from Asia and eliminating analog products that still represent the bulk of industry sales. CEA forecasts revenue to rise almost 5 percent to $20 billion in 2004, as digital products become more entrenched.

Profit opportunities abound from consumers replacing old analog televisions or adding new big-screen sets to their home theater systems. These buyers are opting to purchase displays capable of better pixel resolution and higher frequency scan rates of digital television (DTV) signals and take advantage of the improved video fidelity offered by popular DVD players.

Although prices are higher for DTVs than comparable analog TV sets, the end result is crystal clear pictures in wide frames and sound that resembles movie theater screens. Many viewers also are personalizing their viewing experience with new interactive peripheral products that let them control programming and even record from the Internet.

Some view 2004 as a watershed year for the DTV transition, as more DTV products move into mainstream distribution channels and digital broadcasts multiply across the country.

In 2004, the DTV category will spur growth in the video industry due to the following developments:

· DTV sets and monitors continue to represent the majority of sales of all televisions with screen sizes measuring 40-inches and larger.

· An influx of new manufacturers and brands from the Far East is pulling down prices in DTV products, making them affordable for more consumers. DTV purchases continue to shift from the high-end custom installers and specialty electronics stores to volume-oriented regional and national electronics chains, mass merchants and warehouse clubs, including retail giant Wal-Mart.

· CEA forecasts DTV factory revenue to climb 33 percent to more than $8 billion by the end of 2004, and DTV product sales to climb more than 39 percent to 5.8 million units. Factory sales of DTV displays exceeded CEA forecasts in 2003, with wholesale volume growing 41 percent to nearly $6 billion.

· New display technologies are boosting DTV growth, with sales of plasma TVs projected to reach 550,000 units on $2.2 billion in factory dollars, following sales of nearly $1.5 billion in for 2003, up from $515 million a year earlier. LCD TV sales are forecast to climb to 1.67 million units, on factory sales of more than $1 billion, following 2003 that saw $651 million in wholesale revenue.

· The DTV transition is following an adoption course similar to the successful DVD category, now regarded as a mainstream product.

· The DVD category may have peaked in 2003, with wholesale dollar volume for standalone hardware hitting $3 billion, up 25 percent over 2002. In 2004, CEA expects standalone DVD player sales to dip slightly for the first time, with revenues projected at $2.9 billion.

· DVD recorders should gain momentum with new sub-$300 price points, extensive advertising and promotional plans and consumers’ desire to find a digital replacement to the VCR.



 

· The 2006 transition completion becomes more of a goal than a deadline.

· Manufacturers begin to follow the FCC’s DTV tuner mandate.

· Manufacturers continue two-pronged sales approach in 2004.

DTV is an umbrella term for a new class of TV sets and monitors that accept the higher-frequency scan rates of digital television broadcast formats to produce images with more than twice the resolution of traditional analog TVs.

CEA defines a DTV product as an integrated set or monitor capable of presenting a picture with at least 480 progressively scanned active vertical lines (480p). A DTV can be classified as a high-definition TV (HDTV) display, capable of presenting up to 1080 interlaced (1080i) or 720 progressively scanned lines (720p) on the screen. Some models now can outperform the resolution of the best ATSC digital signals with native 1080 progressive-scan resolution.

Most HDTV broadcasts also contain multi-channel (5.1) Dolby Digital surround sound to complete the realism of the viewing experience within a home theater system.

Digital Television Is Born:
The digital television transition began more than 20 years ago when the television broadcasting industry asked the Federal Communications Commission (FCC) to reserve unused spectrum for the HDTV system that it wanted to develop.

The DTV system in use today emerged in the 1980s from a group of companies working cooperatively through a "Grand Alliance" to unify their various HDTV system proposals. The resulting specification, approved by an overseeing Advanced Television Systems Committee (ATSC) and also by the FCC, contained the blueprint for an all-digital hybrid system that allows broadcasters to select their signal output from literally dozens of possible resolution levels and bit rates. The ATSC established a table of 18 formats that are commonly used for broadcasting.

DTV: A Mixed Resolution Bag:
A broadcast signal must fit inside a narrow 6 MHz frequency band that uses a digital compression scheme. DTV sets and monitors present any of the 18 digital broadcast formats in one or more of four display formats –480i, 480p, 720p and 1080i. Each of these formats may be assigned one of several bit rates. On the receiving end, these formats are assigned the following classifications based on how they are displayed on TV screens: standard definition television (SDTV, 480i), enhanced definition television (EDTV, 480p) and high-definition (HDTV –720p or 1080i), respectively. HDTV signals also must present a 16:9 widescreen aspect ratio. Meanwhile, the FOX Network chose to transmit a 480p EDTV format in a widescreen aspect ratio.

DTV receivers in consumers' homes can receive any of these broadcast formats and convert them so the TV display device can use them.

Transition on the Clock:
The government planned the gradual phasing in of DTV stations leading to the end of analog broadcasting by 2006 and/or when 85 percent of U.S. households have digital television receivers. The FCC granted every television station one additional 6 MHz channel slot to continue broadcasting their current analog channels, while simultaneously replicating digital versions during the transition period.

In 2006, and/or when 85 percent of the nation receives DTV signals, each broadcaster must return a channel used for analog broadcasting to the FCC. These returned channels then will be put up for auction to wireless service providers and other private parties to help pay down the nation's debt.

Under the plan, broadcasters now must ensure that 50 percent of their analog programming is simulcast on a digital channel. The number rises to 75 percent in 2004, and 100 percent in 2005.

The mandate requires broadcasters to deliver a digital channel but does not require them to broadcast an HDTV signal. Still, most broadcasters and networks that have made the digital commitment recognize the value of HDTV and provide some HD programming, usually during primetime viewing hours.

Manufacturers Develop Component DTV Approach:

DTV sets are sold in two basic configurations:
· As fully integrated DTV sets that package a digital ATSC tuner and usually an analog NTSC tuner into the electronic chassis of the display.

· As two-piece components consisting of a separate DTV monitor and a set-top box containing the digital tuner.

Although most analog TVs were sold fully integrated, DTV manufacturers at first focused on the component approach to reduce the comparatively high cost of the DTV displays and receivers as various standards were finalized. This accounts for the majority of DTV sales. Because broadcasters have been slow in getting digital stations on the air, many consumers have purchased DTV monitors to enjoy the resolution of DVD movies, while holding off on the purchase of the set-top tuner. This has frustrated broadcasters who balk at the high cost of implementing DTV broadcast facilities with a relatively small percentage of the population capable of viewing the result.

Powell Plan Prods Industries into Action:
In April 2002 to help speed up the DTV transition process, FCC Chairman Michael Powell issued a multi-point "voluntary plan" for broadcasters, cable and satellite providers, and consumer electronics (CE) manufacturers. The plan included a suggestion that was later mandated for television manufacturers to put digital tuners in all video displays with screen sizes of 13-inches and larger along with a phased-in timetable.

The Powell Plan, as it was dubbed, sought to increase the quantity of compelling digital television content and ensure it would be delivered over cable as well as over-the-air and via direct-to-home satellite systems. Powell asked programming producers, including broadcast and cable networks, to provide HDTV or other enhanced DTV content during at least 50 percent of their primetime schedules starting with the 2002-2003 season.

He urged local network affiliates in the top 100 markets to pass through unaltered network programming, including HDTV, by Jan. 1, 2003. By the same date, cable systems with 750 MHz or greater channel capacity were asked to carry up to five DTV broadcast stations or other enhanced DTV programming for 50 percent of primetime schedules.

Cable operators also were asked to give subscribers the option of leasing or buying an HD-capable set-top box with digital connectors (such as IEEE-1394 "FireWire" or DVI).

Satellite TV providers were asked to carry up to five DTV channels providing enhanced digital programming during at least 50 percent of the primetime schedule by Jan. 1, 2003.

FCC Mandates Integrated DTVs:
In response to demands by the broadcast industry, the FCC ordered all TV sets 13-inches and larger, and other products that normally carry TV tuners to include ATSC terrestrial (DTV) tuners, by July 1, 2007. The mandate outlined a phased-in approach over five years starting with larger screen sets.

Phased-In Tuner Schedule:
The FCC time table calls for DTV tuners to be included in the following: 50 percent of television sets measuring 36-inches and larger by July 1, 2004 and 100 percent by July 1, 2005; 50 percent of sets measuring 25- to 35-inches by July 1, 2005 and 100 percent by July 1, 2006; and 100 percent of sets measuring 13- to 24-inches by July 1, 2007. The mandate also calls for 100 percent of other devices that include TV receivers - such as VCRs and personal video recorders (PVRs) - to include DTV tuners by July 1, 2007.

Two-Piece Packages Qualify: The FCC says that combinations of DTV monitors and set-top DTV tuners, if marketed together at one price, qualify as integrated sets.

· DTV displays will reach 5.5 million units in 2004.

· Widescreen aspect ratios will hit 80 percent of DTV sales.

· Average DTV price will drop to $1,406 in 2004

With the first phase of a DTV tuner mandate approaching in July 2004, some TV manufacturers expanded their lines of fully integrated DTV sets in 2003 and 2004 models. Still, the penetration of DTVs capable of receiving digital broadcasts in U.S. households is small in comparison to DTV monitors.

Digital Set-top Box Sales:
According to CEA Market Research, digital set-top tuners, required for DTV monitors to receive over-the-air terrestrial DTV, are forecast to sell 498,000 units by the end of 2004. The industry sold 241,000 set-top tuners in 2003.

DTV on Growth Curve:
Consumers invested more than $10 billion in DTVs from the last quarter of 1998 through January 2004. In five years, nearly 8.87 million DTV products were sold, according to CEA statistics. The $16 billion invested by consumers in digital television by early 2004 will grow to more than $24 billion by yearend, according to CEA market forecasts. In 2004, CEA projects sales of 5.7 million units.

The bulk of DTV sales are high-definition television sets and monitors. Digital television equipment sales beat CEA’s target 3.8 million for DTV products in 2003, finishing the year with 4 million unit sales to dealers. Because of this, CEA has increased sales expectations slightly for the next three years, with 5.8 million DTV units expected in 2004, 8.3 million in 2005, 11.9 million in 2006 and 16.2 million in 2007. Earlier, CEA anticipated 5.4 million in 2004, 8 million in 2005 and 10.5 million in 2006.

CEA says 81 percent of DTV displays sold in 2003 were capable of displaying a picture in HDTV resolution, while the remaining 19 percent were enhanced definition televisions (EDTV). Due to expanded DTV assortments, the percentage of HDTV sales slipped from 85 percent. Another contributing factor to the decline are expanded offerings of plasma and LCD TV flat-panel displays with more affordable enhanced definition TV resolution.



Since the DTV launch the average price has fallen almost 50 percent. More consumers now see the value in their DTV purchases. The category’s average selling price has rapidly decreased since the launch. In 1998 the average DTV price was $3,147, while in 2003 the average selling price dropped to $1,557. This year, CEA expects average DTV prices to dip to $1,406.

DTVs Get Wider:
Consumers also are casting their voting dollars for DTV displays that have widescreen 16:9 aspect ratios. By the end of 2003, approximately 74 percent of all DTVs sold had wide screen sizes, up from 60 percent in 2002. That percentage is expected to rise to nearly 80 percent in 2004. The remainder has the more squarish 4:3 aspect ratio.

· 2004 DTV displays to reach 5.8 million units.

· Widescreen displays to account for 65 percent of DTV sales.

· Projection TV accounts for 75 percent of DTV sales.

· Front projection DTVs take on larger role.

Among the hottest trends for 2004 is the growing variety of models powered by fixed-pixel light engine designs and large-screen direct view flat panels. The 2004 International CES showcased an array of next-generation digital display products. These products ranged from CRT direct view and rear projection models to plasma, LCD, DLP and LCoS technologies.



Aspect Ratio's Bring New TV Dimensions:
Many of the first DTV monitors sold had a traditional 4:3 aspect ratio, commonly used in analog TV sets. But widescreen displays are gaining ground, and will dominate DTV purchases in 2004, rising to nearly 80 percent of all DTV sales in 2004.

A 4:3 DTV display can be classified as an HDTV set or monitor if it fits the width of an HDTV image at full top-to-bottom resolution inside the screen – a process called letter boxing. Letter boxing presents a wide picture with black bands at the top and bottom of the frame.

Widescreen sets will stretch the letterbox frame to fill the screen without showing the bands. In addition to HDTV broadcasts, various standard definition programs are available in letterbox format. This often is found on DVD movies. Another process frequently used in the production of DVD titles is anamorphic squeezing. This technique gets 33 percent more vertical information in a widescreen picture. Anamorphic processing compresses the wide picture shape of a film frame into a 4:3 image area.



On 16:9 aspect ratio displays, the horizontal is stretched to the full width of the set with minimal distortion. When anamorphic images are presented on 4:3 sets, the characters appear tall and thin, so the image must be corrected by squeezing the vertical.

Projection TV Leads DTV Market:
More than 60 percent of DTVs sold in 2003 were projection TV systems. These are available in two basic configurations. The most popular are one-piece, self-contained rear projection systems with screen sizes ranging from 40-inches to 80-inches. In 2003, rear projection models accounted for 58 percent of all DTV purchases, 2.4 million units sold. In 2004, rear projection DTV sales are expected to grow 7 percent to 2.6 million units, according to CEA forecasts.

Alternative, two-piece projection systems employ either front- or rear-firing projectors that can sit on small tables or are permanently mounted on ceilings to cast projected video images on separate video screens. These systems produce pictures of 100-inches and larger.

Many rear-projection models come complete with built-in surround sound, multi-channel audio systems that create a home theater experience in one unit. Because rear-projection sets can be too large for some homes, manufacturers are producing slimmer cabinets. The size of some 40-inch models has shrunk so much that they are sold as table models.

To date, most TV projectors – front and rear – use a combination of three cathode ray tubes (CRTs) projecting images in the red, green and blue color spectrums to produce large full-color pictures when the three separate images converge on the screen. Various alternatives now further reduce size, eliminate problems related to the misalignment of the CRTs and produce brighter and sharper images.

Front Projectors Pick Up Pace:
A growing segment of the high-end home theater video display market is coming from front projectors. Once viewed strictly as options for the ultra elite, the category has been shifting more to mainstream audio/video distribution channels as unit sizes and prices shrink.



According to the market research firm, the Home Theater Research Group (HTRG), the consumer front projector market should top its $325 million dollar volume total in 2003 and by 49 percent in 2004 to $485 million.

“A blossoming of the entry-level segment fueled the growth in 2003,” according to the HTRG. From 2002 to 2003 average selling prices declined by 32 percent, reflecting the growth of entry segment, where prices started at under $3,000. Interestingly, the HTRG said growth in 2004 is expected be fueled “by a rebirth of the high-end segment.”

New models are fully optimized for the consumer market, with most capable of supporting native widescreen aspect ratio, 720p and 1080i HDTV resolution compatibility, and manufacturers' suggested retail prices starting under $3,000 for some LCD-based models.

Digital light processing (DLP) projectors represent over half of all units. The HTRG reported that DLP front projectors out sold LCD-based units almost 2:1 in 2003, and that gap is expected to widen in 2004. CRT projectors, once the dominant segment, now are a minor segment of the business and dropping steadily, due in part to their large bulk size, high prices and set-up difficulty.

LCD Projection:
Projectors based on liquid crystal display (LCD) panels use tiny LCD chips as light valves. These models, now found in front- and rear-screen configurations, are much smaller than their CRT counterparts. Some front-firing models are so small that they are used as portable TVs and can be carried in a briefcase.

Traditionally, LCD devices have been built as a sandwich between two glass plates, with liquid crystal in between. Very high-resolution displays generally are built using thin film transistor (TFT) technology.

Although larger LCD panels can be used as direct-view displays, the technology also can be adapted to produce larger screen sizes in front and rear projection systems. Most employ three small LCD panels carrying images in the red, green and blue spectrums. The projected image of each panel converges into a single full-color picture.

LCD projectors use high-brightness bulbs and can be adjusted to throw a three-foot to 10-foot display on movie screens. Image resolution can be affected by limitations in the number of pixels that can fit on an LCD panel, but recent technological advances in the shape and configuration of pixels have improved resolution and brightness. New breakthroughs in reflective panels improve resolution, contrast and color purity.

DLP Projection:
Another alternative is the two-piece system using digital micro mirror, light valve technology. These displays, called DLP (digital light processing) projectors, are based on semiconductors with surfaces covered with hundreds of tiny-hinged mirrors that move many times a second to produce brighter and sharper pictures than most CRT- and LCD-based systems. The image is projected through a revolving color wheel of red, green and blue filters or using new scrolling color techniques to produce a full color image.

LCoS Projection:
Liquid crystal on silicon (LCoS) was developed as an alternative way to use liquid crystals in high-resolution imaging. LCoS devices use only one glass substrate, and employ a silicon surface for the back of the display. Silicon processing technology provides an efficient means of patterning several million pixels and their related drivers on a one-inch square section of crystal. Pixels are coated with a reflective aluminum layer and a polyamide alignment layer.

Three-chip LCoS systems produce the red, green and blue color spectrums that combine to produce a full-color image on the screen.

Single-chip LCoS systems project the image through a color wheel or using scrolling bands of red, green and blue produced by a spinning prism array to produce the full color image.

Flat-Panel TV Sales Accelerate:
Some of the most popular video display technologies employ large, thin flat panels that deliver a movie theater experience and take up less room in the house. Once relegated to commercial and institutional applications, declining prices are enabling these flat-panel displays to become virtual mainstream products.

The flat-panel TV segment is comprised of plasma display panels and large LCD TV screens. It will be one of the DTV category's biggest growth segments in 2004.

As more retail stores added flat-panel TV departments and the ranks of flat-panel manufacturers grew in 2003, industry sales swelled. Sales of plasma TVs nearly tripled from 106,000 units in 2002 to 315,000 in 2003, and are expected to hit 550,000 in 2004, according to CEA Market Research.



CEA predicts factory dollar volume for plasma displays will reach nearly $2.2 billion for 2004, up from $1.5 billion a year earlier; LCD TV sales during 2004 will total $1 billion up from $651 million in 2003. Sales of LCD TVs will rise from 1.1 million units in 2003 to 1.7 million in 2004, as the average price of an LCD TV drops to $627.

Consumers are fascinated by the form factor of flat-panel displays. These often large and thin panels – measuring just four-inches deep – can be hung on walls like framed pictures

Plasma Displays:
Plasma sets consist of sealed glass envelopes filled with rows of thousands of small individually charged chambers. Each chamber holds a mixture of neon and xenon gases that discharge to activate brightly glowing phosphors. The result is a sharp picture that can be viewed anywhere within a 160-degree angle, vertically and horizontally.

Because production costs are high, the first plasma TVs to reach consumers was priced at more than $12,000 for a 42-inch screen size with EDTV-level resolution. But entry prices now are nearing $2,000 for that performance level. Meanwhile, prices on HDTV-level panels also have declined, with models starting at less than $6,000. Plasma screen sizes vary from 32-inches to more than 60-inches, with the bulk of sales in the 42-inch screen sizes. Virtually all plasma panels are manufactured with a widescreen aspect ratio.

LCD and Plasma Collide:
Continuing trends in flat-panel TV manufacturing to make plasma panels smaller than 42-inches (the smallest plasma display screen size to date is 32-inches) and LCD panels larger than 30-inches (the largest LCD TV screen size this year will be 55-inches) are moving the two technologies toward an inevitable collision. As the screen sizes over lap, consumers will purchase a TV panel that presents the best picture for the money. Today, plasma panels have a cost advantage over very large screen LCD TVs, but LCD technology produces a picture with greater brightness levels and better longevity. Meanwhile, prices rapidly are declining for both technologies.

Digital Interfaces for DTV Proliferate:
Another growing trend in DTV displays is the inclusion of one or more digital interface connectors – typically either a connector based on the IEEE-1394 standard (a.k.a. iLink or FireWire) or on the digital visual interface (DVI) standard. Many fully integrated HDTV sets include both, while most DTV monitors include copy protected DVI connectors as the sole digital interface.

IEEE-1394 Evolves:
In most cases the IEEE-1394 digital interface is used to connect a digital receiver with an HDTV recorder (such as a D-VHS VCR) to record and playback the highest quality programming possible. The connector also can be used to distribute programming to multiple devices connected to an in-home network. The interface ships digital signals in a manageable compressed form and can include digital networking protocols that allow components to communicate back and forth to simplify the operation of an entire system with minimum commands from users.

The IEEE-1394 interface was developed by Apple Computer in 1986, and was called "FireWire" for its fast operating speed. In 1995, the Institute of Electrical and Electronic Engineers (IEEE) adopted this serial bus as the 1394 standard. Sony trademarked their name "iLink" for their implementation of the 1394 bus as a four-pin connector. The specification was updated in 2000 as the 1394a standard, supporting speeds of 100Mbps, 200Mbps and 400Mbps over a distance of 4.5 meters, and up to 63 peer-to-peer electronic devices, also known as nodes.

IEEE-1394b Arrives:
In 2001, the IEEE 1394b standard was adopted as a network technology. This version is capable of moving data streams at faster speeds over longer distances than the original version. The new form supports up to 3.2 Gbps and additional forms of cable. Speeds as high as 100Mbps over 100 meters will be supported by 1394b using Category 5 cable, 400 Mbps over 100 meters using plastic optical fiber, and as high as 3.2 Gbps over 100 meters using glass optical fiber. The "b" standard is compatible with the "a" standard at up to 400Mbps. All 1394 devices support hot swapping and plug-and-play, so components automatically will recognize each other and configure themselves upon connection. The 1394b standard is being adopted by growing numbers of DTV product manufacturers for multi-room networking solutions.

DTCP – The 1394 Gatekeeper:
In DTV applications the 1394 interface is safeguarded with the Digital Transmission Content Protection (DTCP) system to prevent the illicit duplication of copyrighted programming. The DTCP system also is known as "5C" for its five developing companies – Intel, Hitachi, Matsushita, Sony and Toshiba.

DVI Selected for Digital Monitors:
Many of the digital television sets, monitors and set-top boxes are equipped with a digital connector designed to relay uncompressed digital signals from a receiver or playback device to a digital video display device. Called the digital visual interface (DVI), the connector ships uncompressed digital video-only signals through a highly secure pathway.

Because DVI signals are not compressed, current consumer devices cannot easily record them; neither can they be sent out to multiple devices in a digital home network. As with the IEEE-1394’s DTCP system, content passing over DVI connectors also can be protected against copyright violations through a system called high-bandwidth digital content protection (HDCP).

In 2001, the CEA's DTV Interface Subcommittee announced a new standard for the use of DVI called EIA/CEA-861A. The standard defines a method for sending digital video signals over DVI and OpenLDI interface specifications. The standard is fully backward compatible with earlier DVI standards. New features include carrying auxiliary video information, such as aspect ratio and native video format information.

HDMI Arrives:
Final specifications were approved in late 2002 by seven developing companies for a newly enhanced form of DVI with HDCP called – the high definition multimedia interface (HDMI). This interface is used between any audio/video source, such as a set-top box, DVD player, or A/V receiver, and an audio or video monitor, such as a DTV. HDMI supports standard, enhanced or high-definition video, plus multi-channel digital audio on a single cable. The format transmits all ATSC HDTV standards and supports eight-channel digital audio (at up to a 192kHz sampling rate), with bandwidth to spare for future enhancements.

HDMI also uses a more compact and consumer electronics-friendly 15mm, 19-pin connector and will be fully compatible with the former DVD-HDCP standard.

HDCP – The DVI/HDMI Gatekeeper:
Not included as part of the HDMI standard – but widely understood to be a necessary compliment to the interface – was the Intel-developed HDCP protocol designed to protect HDMI and DVI signals from piracy.

A key advantage of HDMI is that when the individual devices are enabled, a single remote control can operate everything in a home theater system. The HDMI spec covers the conversion of video formats so that signals on a PC can be properly relayed for display on a TV monitor, for example. The audio stream is serialized and the data packetized for transmission along with the video signal. At the receiver, the two streams are segregated and the data is depacketized for playback.

Because the format was designed as a connection to send uncompressed digital video signals to TV displays, it does not facilitate home networking. Signals are relayed at a rate of 2.2 Gbps, sufficient for 1080i HDTV signals, although the spec allows for up to 5Gbps. The first HDMI products were introduced in late 2003 and it is rapidly being adopted by manufacturers to replace the old DVI connectors in models slated for arrival later in 2004.

Broadcasters Throw Broadcast Flag:
Another form of content protection that is soon to arrive is called the broadcast flag. Broadcasters and content producers pushed the FCC for years to mandate a system that would place an identifying bit inside a broadcast signal to tell properly enabled devices to restrict the transmission of that program over the Internet.

Many representatives of the broadcast, consumer electronics and content industries agreed on a broadcast flag system based on the Digital Transmission Content Protection (DTCP) technology that was developed for 1394 interfaces, but with added safeguards against Internet re-distribution.

On Nov. 4, 2003, the FCC proposed setting a standard for broadcast flag copy protection technology. This move gave content providers some assurance that digital programming would not be copied from over-the-air broadcasts and widely redistributed over the Internet. It also prevented some broadcasters from following through on threats to discontinue their HDTV broadcasts if a content protection system was not adopted for content broadcast over the air. The rules also extended broadcast flag protection to local television stations’ news and public affairs programming.

The proposed broadcast flag standard includes codes for digital rights management by tagging content with special copying limitations such as “Copy-Once,” “Copy-Freely” or “Copy-Never.” As of March 2004, the broadcast flag adoption procedure was still in a comment period before the FCC.

Adaptations for Digital Must Carry’ Rules Sought:
Broadcasters have urged legislators to amend standing regulations calling for the mandatory carriage of local over-the-air broadcast programming on analog cable systems (and satellite operators in markets served by local channels) to cover the new issues presented by digital television. Broadcasters have asked that their free, over-the-air digital signals be carried in their entirety without signal degradation, whether that involves standard definition, high-definition, multiple standard definition signals or other free over-the-air services to the consumer. Cable system operators, meanwhile, have argued that broadcasters should not be allowed to charge for redistribution of those signals over cable systems, as some stations suggested.

Wireless Home Networking Arrives in Video Components: Increasing numbers of digital video products enable interconnectivity and interoperability through a process called home networking. Equipment fitted with Ethernet ports and other digital interfaces enable interconnection through wired or wireless pathways to distribute signals from a central room in a home to multiple receiving stations throughout the house.

At the 2004 International CES, a number of companies announced plans to market advanced set-top boxes, DVD players and hybrid home media center PCs with wired and wireless home networking capabilities.

Home networking simplifies the set-up and operation of multiple components in a home theater system and permits the distribution of content from the home theater room to multiple entertainment centers in the house. This allows users in different rooms to draw programming from one centralized home entertainment server.



For example, one user could view a program in the living room, while an HDTV signal is produced in the den on a PVR server. This eliminates duplicate equipment and cabling used for each TV in a household. Through a network, users viewing multiple TV sets could share devices such as VCRs, set-top boxes and DVD players. This brings cost savings and flexibility of use. Both wired and wireless systems will distribute audio and video content on these pathways. Even bandwidth intensive HDTV programming can be accommodated.

Some of the systems that are in the works and were demonstrated at the 2004 International CES include various networking servers that distribute video over 802.11a, 802.11b and/or 802.11g wireless networks. Some networking technology developers, meanwhile, showed a wireless system that handles multiple streams of MPEG-2 video, and multiple HDTV streams, with the same performance as a wired system.

· During-the-air digital television broadcasts reach more than 98 percent of U.S. households

· ABC adds Monday Night Football to its HD lineup.

· CBS carries Super Bowl XXXVIII In 1080i

· First State of the Union Address carried In HDTV

· UPN begins small slate of HD broadcasts

During the last two years, broadcasters significantly have added to the amount of HDTV programming they carry in their primetime lineups. The three largest networks – CBS, NBC and ABC – each produce some HDTV programming almost every weeknight.

Meanwhile, FOX Network, which delivers digital content in the widescreen EDTV format, plans to begin its first high-definition broadcasts, possibly by the end of 2004.

Although most news programming and popular reality TV series still are produced in standard definition, the majority of programming produced on film now is available from most of the major networks in HDTV. In addition many major sporting events – such as the Super Bowl and Olympics – are now produced in HDTV.

The 2004 State Carried in HDTV:
Another HDTV first occurred on Jan. 20, 2004, when President George W. Bush’s State of the Union Address was produced in HDTV. CBS, NBC and ABC carried the speech and the Democratic response in HD.

ABC Focuses on Sports:
ABC made a significant contribution to HDTV in 2003, by offering approximately 16 hours per week of its primetime schedule in 720p high definition format. It also contributed a slate of major sporting events in high-def including the Monday Night Football games and the NFL Wild Card Playoff games. HD programs include most theatrical movies and all scripted programs, excluding reality shows and news magazines.

ABC's HD sports coverage included the National Hockey League's (NHL) Stanley Cup Finals and the National Basketball Association (NBA) finals.

CBS Remains Primetime HD King:
CBS continues its HDTV broadcasting leadership role by offering about 27 hours of HDTV programming per week. For the fifth consecutive year, a majority of the network’s primetime lineup is available in 1080i format. It also produced a number of special live events in HDTV, including the NFL’s 2003 AFC playoffs and Super Bowl XXXVIII.

NBC Expands HD Lineup:
NBC added seven shows in HDTV in 2003, bringing its weekly output to more than 10 hours. It also has offered “The Tonight Show With Jay Leno” and occasional sports events in the 1080i HDTV format for several years. One of the key high-definition sports events in 2004 was the Daytona 500 NASCAR race.

The WB Continues HD Service: The WB Network and Chicago-based Tribune Broadcasting, that produces many of the networks primetime shows, offered approximately 10.5 hours per week of primetime 1080i HDTV programming to WB affiliates in 2003 and continues to increase its programming.

UPN Begins Limited HDTV Services:
UPN jumped into the HDTV game in 2003 by transmitting two of its most popular series – “Star Trek: Enterprise” and “Jake 2.0” – in digital 1080i. In addition, the network is offering an expanding selection of movies in HDTV. By March 2004, the network had 24 affiliates, including 14 of its top 20 stations, carrying the HDTV service.

FOX Announces Move to HDTV:
FOX Network plans to get on board with HDTV, possibly late in 2004, after initially shunning HDTV broadcasting in favor of what it calls the "FOX Widescreen" format. This is essentially a 480p 16:9 picture, also called widescreen EDTV. In preparation for the move to high definition, FOX enhanced its FOX Widescreen service in the 2003 season with the addition of 5.1 surround sound on select programs.

PBS Continues to Grow:
As of February 2004, 234 PBS affiliate stations covering 84.75 percent of American households had digital television stations on the air. The PBS network routinely supplies between 15-20 programs in HDTV per month, and also offers multi-cast SD programs and enhanced interactive content, powered by the Internet in some markets.

New Stations Come on Board:
At the end of February 2004, there were 1,155 stations operating digital broadcasts in 203 markets. That means that at least one over-the-air DTV broadcast station was available to 99.42 percent of U.S. households. In addition, some 84.42 percent of more than 106 million U.S. TV households are in markets with five or more broadcasters airing DTV, and 60.86 percent were in markets with eight or more broadcasters sending signals.

FCC Loosens the Noose:
Under FCC guidelines, 1,288 U.S commercial stations covering 95.8 percent of U.S. households were to be transmitting DTV signals by May 1, 2002. PBS stations were not required to start DTV broadcasts until May 1, 2003.

However, in 2001 the FCC threw a bone to some broadcasters facing financial or technical difficulties by loosening its deadlines. Under the relaxed requirements, commercial broadcasters are no longer required to replicate their entire NTSC service area by the end of 2004, and non-commercial stations do not have to do so by 2005. Instead, they must reach only their communities of license to ensure interference protection.

Other than the NTSC simulcasting deadlines of April 1, 2003 (50 percent), 2004 (75 percent) and 2005 (100 percent), DTV stations are no longer required to operate outside of primetime. The FCC also ruled that financial hardship is a valid excuse for missing a deadline.

Additional Uses for DTV Spectrum Emerge:
Testifying to the versatility of the digital broadcast platform, some broadcasters around the country have elected to transmit multiple channels of standard definition video in the same amount of spectrum now used for analog broadcasting (6MHz). These secondary channels are used for around-the-clock weather, traffic or sports updates, but occasionally the technique is used to broadcast multiple games of a basketball tournament or to feature highly-localized news content within a broadcaster's market.

Still to come are datacasting services, that promise to deliver new formats of text and graphics, delivered over the broad bandwidth of the television broadcast channel. These services could be used to provide ancillary news or other information in addition to offering interactive add-ons to the standard video broadcast.

The Cable Story

· Cable/CE/content industries work on 2nd phase of Interoperability Agreement

· ESPN launches HDTV channel

· Starz! announces HDTV service slate

· TNT-HD will begin in 2004

In 2002, most of the country’s cable television multi system operators (MSOs) embraced HDTV with special urgency. At the 2002 International CES a group of top executives from some of the nation's biggest MSOs walked the exhibit floors and saw dozens of new HDTV sets and monitors all connected to satellite TV systems delivering HDTV images.

Competition from satellite television operators, who had offered HDTV from the beginning, and fears about a possible mandate from the FCC, served as a wake-up call to the cable industry to ramp up HDTV services over the new broadband pipelines afforded by upgrades to digital cable platforms.

The news was a breakthrough for the CE and terrestrial broadcasting industries, which had been at odds with some cable operators for their apparent lack of interest in carrying HDTV channels.

The ranks of HDTV cable systems have grown steadily since. As of Sept. 1, 2003, cable operators offering HDTV service passed 60 million TV households, and the service had spread to 83 of the top 100 television markets. See www.NCTA.com for the latest cable TV statistics.

Where the MSOs Stand:
· Comcast Cable now offers HDTV programming to more than 65 percent of its subscribers. At mid-year 2003, the operator was offering the service in more than 20 major markets including New York, Los Angeles, Chicago, Philadelphia, San Francisco, Boston, Washington, D.C., Detroit and Atlanta.

· To spur HD cable adoption, Comcast and national electronics retail chain Best Buy formed a partnership, through which 31 Best Buy stores sold digital-ready HDTV sets and Comcast Digital Cable using a co-branded kit. These stores are in markets including Philadelphia, PA; Baltimore, MD; Knoxville and Nashville, TN; and Washington, D.C.

· Cablevision in 2003 began offering HD set-top boxes to most of its New York-area digital customers who have HD-ready televisions. The operator offered local terrestrially broadcast HD channels, as well as HBO-HD and Showtime-HD. It plans to add new channels in 2004, including Bravo HD+.

· Time Warner Cable now offers HD service tiers in more than 50 markets representing most of its subscriber base. Many of its systems carry Showtime and HBO in HDTV. In addition, many TW territories now carry local DTV broadcast stations.

· Cox Communications first began offering HDTV to its customers in Omaha, NE, and in 2002 began offering service to customers in Las Vegas, NV; Phoenix, AZ; Fairfax County, VA (suburban Washington, DC); and San Diego, CA. In 2003, Cox added Cleveland, OH, and Oklahoma City, OK.

· Charter Communications expanded its HDTV service to a total of 12 markets in 2003, and plans further expansion in 2004.

· Insight Communications began offering HDTV service in December, 2002, and currently provides HDTV service in the following areas: Champaign/Urbana, Illinois; Peoria, Galesburg, and Bloomington/Normal, Illinois; Springfield, Lincoln and Decatur, Illinois; Anderson/Noblesville, Indiana; Bloomington, Indiana; Evansville, Indiana; Lafayette/Kokomo, Indiana; Covington, Kentucky; Lexington, Kentucky; Louisville, Kentucky; and Columbus, Ohio; and has plans for HDTV launches in Pekin and Morton, Illinois.

FCC to Review Must-Carry
So far, the FCC has stated that cable operators are not required to carry both digital and analog local over-the-air broadcasts, but left open the possibility of imposing digital must-carry requirements in the future. However, in the rare instance that a broadcaster offers a digital channel and no analog channel, the cable operator must carry the digital station.

In setting requirements for DTV carriage via cable, the FCC states cable operators need only carry one program if a broadcaster elects to offer multicast programming with its digital spectrum. Not required for cable carriage are datacasts and program-guide information unrelated to the primary program. HDTV broadcasts must be carried as HDTV. Most cable operators are expected to convert DTV broadcast signals from the ATSC required vestigial side band (VSB) modulation scheme to either the 64 or 256 quadrature amplitude modulation (QAM) schemes. The QAM system was selected for digital cable delivery due to its bandwidth efficiency within wired pipelines.

Cable Interoperability Agreement Reached:
In September 2003, the FCC took a major step in the DTV transition by adopting rules for base-level digital "plug-and-play" cable compatibility. The rules make it possible for consumers to plug their cable directly into their DTV set without a set-top box (STB) and receive both basic and premium cable channels. The approved standard provides for an integrated one-way only digital cable television receiver. This would not enable such features as video-on-demand (VOD), return path of the cable system and the use of the electronic program guide (EPG) services provided by the cable operator.

Consumers need a CableCARD (formerly known as a point of deployment or POD card) from their local cable operator, which is inserted in the TV to unlock scrambled premium content. Consumers will still need a STB to receive two-way services, such as VOD, impulse pay-per-view (PPV) and cable operator-enhanced EPGs.

Currently in discussions is the next phase of the plug-and-play system, which is a bi-directional standard that would enable two-way services. Some expect an agreement on two-way cable plug-and-play technology to come in 2004, leading to the first bi-directional cable-ready fully integrated DTVs in 2005.

FCC Adds Stipulations to Agreement:
At the urging of broadcasters, the FCC modified an earlier standard agreement between the consumer electronics and cable industries by requiring all DTVs labeled as "digital cable ready" to include an over-the-air DTV tuner.

The FCC order also barred all multi-channel video programming distributors (MVPDs), including satellite TV providers, from using selectable output control with their services. This would prevent the MVPDs from reducing the resolution of broadcast programming (or "down-resing") over unprotected broadband analog outputs, while limiting transmission of high-definition signals to copy protected digital interfaces, that were not included in most early HDTV-capable television displays.

The FCC said it would seek further input before addressing down resolution of non-broadcast programming. In the interim, MVPDs that plan to down-res non-broadcast programming are required to notify the FCC at least 30 days in advance.

Under the copy protection encoding rules adopted by the FCC, there are no restrictions on copying broadcast TV. Consumers also can make one copy of basic and extended basic cable service, but they cannot copy pay-per-view or video-on-demand material.

Cable Operators to Deliver Plug-And-Play Boxes:
The agreement provides for the phased-in use of two digital interface connectors on digital cable-ready TVs and cable set-top converter boxes. These include IEEE-1394 FireWire/iLink connections with DTCP to relay compressed digital signals to recorders and home networks and DVI or HDMI with HDCP connections to relay uncompressed signals between digital televisions and cable set-top boxes.

Starting April 1, 2004, cable operators must supply, upon request, HDTV boxes with functional IEEE-1394 (Firewire) connectors, and by July 1, 2005, all HDTV set-top boxes require a DVI or HDMI interface.

The so-called plug-and-play system is based on the dynamic feedback arrangement scrambling technique (DFAST) technology and the POD interface of the Host Interface License Agreement (PHILA), devised by CableLabs, the cable industry technology standards setting body. In 2003, the terminology was simplified with the POD name changing to CableCARD.

CableCARD Availability Ramps Up:
In 2003, most cable operators continued to distribute digital set-top boxes without CableCARD capability directly to subscribers. However, that will shift in 2004 as cable set-top box manufacturers and HDTV set makers begin to integrate the system in both set-tops and sets.

Additionally, in 2004 more cable operators are embracing consumer electronics retailers to help them enlist cable customers for digital and high-definition packages at the point of sale of a HDTV. Retailers are encouraged to sell an HDTV set with a cable service bundle as an enticement to sell more HDTV sets. However, in some cases cable operators elect to pay the retailer a commission or allow them to sell a HD-capable cable set-top box at a profit.

Manufacturers labeling their DTVs as digital cable ready are required to complete a testing and verification process as well as equip the sets with DVI or HDMI outputs using HDCP. The interface requirement will be phased-in on a screen-size basis along a similar timeframe as the DTV broadcast tuner phase-in schedule.

HD Cable Content Continues to Expand:
Like HD-satellite providers before them, HD-cable operators have the ability to offer HDTV content from such providers as HBO HD, Showtime HD, Discovery HD Theater, HDNet, HDNet Movies and ESPN-HD.

Meanwhile, a number of new channels are on the way for 2004, including Bravo HD, Starz! HD and Turner’s TNT-HD. Most cable operators also have struck deals to rebroadcast the signals of at least some local HDTV stations.

As newcomers such as ESPN-HD came on line in 2003 asking for additional fees, cable and satellite TV operators, many of whom initially sent along HDTV channels at no additional charge, instituted HDTV premium tiers to help cover the additional programming costs.

ESPN Launches 24-Hour HD Sports:
In March 2003, the Disney-owned cable sports network ESPN began its new ESPN-HD channel, by presenting in native 720p format some 100 live game telecasts from Major League Baseball (MLB), the NBA, the NFL and the NHL. ESPN converts programming not produced in HD to the 720p format. The network plans to expand its hours of natively produced HDTV content significantly in 2004.

Starz Encore Announces HDTV Support:
At first hesitant about HDTV, Starz Encore plans for a variety of HDTV channels in 2004, including a new 1080i HDTV premium movie channel called “Sharper Movies HD,” a high-definition subscription video on demand (SVOD) called “Starz! On Demand-HD” and an HDTV version of its popular Starz! channel, called “Starz! HD.”

The "Sharper Movies HD," channel is part of some cable operators’ HD tier services, unlike the Starz! HD channel, which is delivered as part of traditional Starz! Encore premium channel packages. The channel offers films from the Starz Encore library, including many first-run titles.

Another SVOD service called “Starz On Demand-HD,” offers for a monthly charge, select films from Starz! as an impulse viewing option with pause, rewind and fast-forward capability.

Bravo HD+ Makes Entry:
NBC Cable moved into the HDTV world in the summer of 2003 with the delivery of Bravo HD+, which is billed as an arts, culture, sports and entertainment HD service. Unlike some other HD cable channels, Bravo HD+ will not be a straight upconverted version of its regular Bravo channel, but will offer “unique HD content.”

TNT-HD Announced:
Turner Broadcasting plans to offer its first HDTV channel, TNT-HD. It will feature series, sports, movies and TNT originals. The launch coincides with the network’s coverage of the NBA Western Conference Finals.

HBO Continues to Set HD Pace:
HBO-HD was among the first premium cable TV providers with an HD service (HBO-HD). The company continues to set the pace for the industry by offering the bulk of its film-based programming in full 1080i format, including some of its popular original content.

Showtime Shows HDTV Leadership:
Like HBO, Showtime also was an early pioneer in the delivery of HDTV content. The company continues to steadily increase the amount of native 1080i HDTV content, which represents more than 75 percent of its primetime content.

HDNet Expands Distribution to Cable:
HDNet, a high-definition-only channel started by entrepreneur and Dallas Mavericks owner Mark Cuban, originally launched as one of DirecTV’s first HD offerings. The channel was picked up by a number of cable operators and satellite provider EchoStar in 2003, along with its newest 1080i channel HDNet Movies.

Cable Companies Court CE Retailers:
In 2003, CableLabs launched a computerized HDTV cable locator service as an extension to its Go2Broadband (G2B) HD system. The G2B HD platform assists CE retailers in selling cable-enabled HDTV devices and services at the point of sale of an HDTV set. Such MSOs as Comcast, Cox and Time Warner Cable all have started partnerships with local CE retailers using the G2B system.

The G2B HD system is an outgrowth of a similar G2B system developed to help sell cable modems at retail and identifies the markets in which HD content and digital cable services are carried. It also lists the service tiers and pricing for the HD channel packages.

FCC Assigns Digital Cable Ready Terminology:
Citing the inability of all relevant industries to reach a consensus, the FCC in 2001 issued its own set of DTV nomenclature so consumers can judge a product's level of interoperability with cable TV signals and equipment. The FCC specified three categories for cable ready DTVs including:

· Digital Cable Ready 1 - Devices receiving analog back, digital basic and digital premium cable programming.

· Digital Cable Ready 2 - Adds the IEEE-1394 digital interface connector to digital cable ready 1 devices

· Digital Cable Ready 3 - DTV sets that decode and display digital cable along with DTV broadcasts and interactive services, although no IEEE-1394 connector is specified.

 

· Analog TV sales continue to represent bulk of 2004 color TV sales

· Flat-glass direct view sets continue to advance on curved-tube sales

· DTV continues to squeeze analog rear-projection numbers

Despite the gains of DTV products in 2003, unit sales of analog color televisions were nearly seven times larger in 2003, and will continue to surpass DTV for the next several years. So-called analog TVs display pictures in one picture format known as 480i under ATSC terminology. These sets are unable to produce the higher frequency scan rates of HDTV or enhanced definition 480p broadcast signals.

However, manufacturers have fine-tuned analog TV technology to get superior pictures from inferior (by DTV standards) signal sources.

Sales of all analog color TVs are expected to decline 17 percent in 2004 to 23.6 million units, following 2003 that saw analog sets decline 10.9 percent to 25.4 million units. The average price for an analog direct view TV is expected to drop 2.5 percent to $233.



Flat is in for Direct-View TV:
Replacement and additional set purchases for analog direct-view color TV represent more than 90 percent of all sales.

To mark a change in a mature category, manufacturers are placing more emphasis on style and design making trusty old analog picture tube sets resemble their new high-tech DTV cousins. Perhaps the biggest trend in analog and digital direct-view CRT designs in the last three years is the proliferation of sets that have picture tubes with virtually flat screens. In fact, some manufacturers are phasing out lines of curved glass direct view sets altogether, in favor of the popular flat-glass models.

LCD TVs for Analog Signals:


Another popular twist on old technology is small flat-panel LCD TVs, marketed for special applications in specific rooms of the house such as kitchens and bathrooms. LCD TVs with screen sizes below 20-inches are designed for use with analog signals only, and are not equipped with connectors to accept DTV signals. These have 4:3 aspect ratios as well. Typically, larger models have 16:9 widescreen aspect ratios and are designed for both DTV and analog TV input, as well as PC data, in some cases.

Analog Projection TVs Slip:
No other analog television category is seeing the impact of DTV more than analog projection TV. Factory sales of analog rear-projection TVs are expected to drop 44 percent in 2004 to 154,000 units, while factory dollars plunge to $144 million, according to CEA estimates. At the same time the average price of an analog rear-projection TV is expected to fall 5.6 percent this year to $959.

TVs are Parent Friendlier:
As of Jan. 1, 2000, all color TV receivers 13-inches or larger incorporate a "V" (for violence) chip in accordance with federal mandates. This circuit allows TV owners, usually parents, to program their sets to block out broadcasts with excessive levels of violence, sexual content or objectionable language. The ruling applies to consumer TV sets and does not extend to VCRs, set-top boxes, TVs for commercial use, video circuit boards for PCs and satellite and wireless cable receivers.

Some manufacturers design their V-chips to enable parents to block unrated programming, such as news, sports and locally produced programs and commercials.

 

· DVD diversifies as market expands

· DVD sales may have reached peak at 20 million units

· Progressive scan capability expands as DTV sales accelerate

· DVD recorders head to mass market

· HDTV disc recorder launches in Japan

Sales of DVD players continue to astound the CE industry, with double digital sales increases year after year. Driven by the format’s exceptional picture and sound quality, as well as its interactive features, consumers continue to snap up DVD players in various configurations. The category also has received a significant boost from rapidly compressed price points. Low-end DVD player sales were available at prices under $30 during special holiday promotions, after only seven years on the market.

Sales of DVD players rose 34 percent to 34 million units in 2003, following a 50 percent increase in 2002 and a 69 percent increase in 2001, according to the Digital Entertainment Group (DEG, www.digitalentertainmentinfo.com)¸ a format-promoting coalition of hardware and software suppliers. Since the launch of the format in March 1997, DVD players have amassed an installed base of almost 57 million households, up 27 percent from 2000’s 15.2 million.

A true hybrid technology, DVD players originally were designed to deliver digital quality pictures and surround sound primarily to analog television sets and audio receivers. However, with the introduction of digital TV sets and monitors, the digital signals these players decode from optical discs are being displayed in their full potential on high-scan video screens.

The strength of the DVD format will remain, although DEG and CEA both predict sales volumes to decline slightly in 2004. By the end of 2004, DEG projects that 65 percent of U.S. households will own a DVD player in one form or another. These forms consist of component and portable DVD players and DVD-equipped home-theater-in-a-box (HTiB) systems, that package all of the audio-related components needed to create a surround sound experience into a single purchase.

The DEG projects DVD player sales at retail to decline 12 percent in 2004, but to still command a total of 30 million units.

DVD Software Sales Benefit:
Although movie-ticket sales fell one percent to $9.2 billion in 2003, consumer spending on the purchase or rental of video software (VHS tape and DVD) rose 18.2 percent to $22.5 billion, according to DEG. DVD accounted for 72 percent of total home video spending

Consumer spending to buy and rent DVDs rose 39 percent in 2003 to $16.1 billion following a 71 percent gain in 2002. Of 2003’s total, the amount spent to buy discs rose 33 percent to $11.6 billion, while consumer spending on disc rentals rose by 55 percent to $4.5 billion.

All told, the $16.1 billion spent by consumers on DVD software in 2003 easily exceeded the $9.2 billion spent on movie tickets during that year, DEG said. Add in another $6.4 billion in VHS purchases and rental in 2003, and the gap between home video and movie-ticket sales grew even wider.

DVD Movie Sales Top 1 Billion Units:
The record-setting adoption rates of DVD hardware, in turn, are stimulating DVD software sales. In the U.S., movie-studio shipments of DVD discs for sale or rent broke the 1 billion mark for the first time in 2003, DEG says. Shipments rose 49 percent to more than one billion units in 2003, following an 88 percent gain in 2002.

Disposable DVD Discs Re-Appear:
In 2003, the Walt Disney Company’s home video division, Buena Vista Home Entertainment (BVHE), began test marketing new "self-destructing" disposable DVD movie discs called EZ-D discs. An EZ-D disc is playable for 48-hours after its vacuum-sealed packaging has been opened. Consumers can play the movie as many times as they want in that period.

Discs are initially bright red, and gradually turn to an unusable black with exposure to the air. The red disc is compatible with all players, DVD drives and gaming systems that can play DVDs. The system was reminiscent of an earlier pay-for-play disc system called Divx that allowed users to pay a rental fee to unlock a disc for a 48-hour viewing period. That system eventually failed to generate a sustainable market.

Progressive Scan Progresses:
Since 2000, DVD player sales have included a progressive-scan output feature, which is designed to feed a 480p format picture to DTV-capable sets and monitors. Most progressive-scan units now in the market use a system known as 3:2 pull down, which is a special process for converting films shot at 24 frames per second to the 30fps rate of video. Like the progressive scan system, the technique helps to further clean the image of artifacts to produce a film-like appearance.

Audio Takes on Bigger DVD Role:
As for other new product trends, more DVD players are adding the ability to play back different forms of audio files like the Internet-friendly MP3 and Windows Media Audio (WMA) compressed audio formats. Many step-up players also can decode one or both of the new high-bit-rate multi-channel audio formats – DVD-Audio and Super Audio CD (SACD). In addition to presenting higher-fidelity stereo music than CDs, these formats allow the use of high-resolution multi-channel music playback. For more information, see the audio section of Digital America.

DVD Combo Systems Proliferate:
Manufacturers increasingly add DVD in combo TV systems (TV/DVDs or three-way TV/DVD/VCRs). In other cases, DVD players show up in integrated HTiB shelf systems, digital satellite TV decoders and in hard-drive-based personal video recorders (PVRs). For more information see the audio section. In 2003, CEA reported the TV/DVD combo player sales category sold 1.5 million units to dealers, representing a 187.7 percent increase. CEA forecasts unit sales climbing to 2.3 million in 2004.

Digital Imaging Comes to DVD Video:
A popular feature in many 2004 DVD video players is the ability to play back digital still photos in the JPEG image format from CD-R/RW discs or, in some cases, from removable flash memory cards using built-in flash media readers. Some players even let users connect to a printer via a USB port to make hard copies of still images.

DVD Recorders Generate Mass Market Acceptance:
For four years, DVD recorders have been building momentum as a replacement for the VCR. These decks offer users the ability to record programming at resolution levels falling somewhere between analog S-VHS VCRs and 480p EDTV. Additionally, the discs can archive precious home movies in a format that lasts longer than magnetic recording tape.

According to market research firm InStat, U.S. DVD recorder sales reached 750,000 units in 2003, and will grow 313 percent in 2004 to some 3.4 million units.

Several manufactures have introduced combo DVD recorders that combine a hard-disc enabled PVR with a DVD recordable drive. This combination enables camcorder owners to make rough video edits on an internal hard drive before burning a final copy on a DVD disc using an integrated DVD recording drive.

According to InStat, combination DVD recorder/hard disc recorders sold 195,000 units in the United States in 2003. This is forecast to grow 464 percent to 1.1 million units in 2004.

DVD recorders are in three camps based on their ability to accept one or more types of rewritable DVD media - DVD-RAM, DVD+RW or DVD-RW. Most will accept one of two forms of less-expensive write-once media - DVD+R or DVD-R.

DVD-RW:
Developed by Pioneer and authorized by the DVD Forum this rewritable format also was and boasts playback compatibility with most DVD Video players, depending on the selected bit rate settings.

DVD-RAM:
This rewritable format was developed by a group of companies including Panasonic, Hitachi and Toshiba and is supported by Samsung. The format is authorized by the DVD Forum but is not compatible with most current DVD Video players or most DVD-ROM computer drives. It is offered in the standard disc size, although a smaller version is used in a new class of DVD-RAM camcorders. The format's primary applications are for video editing or for use in dedicated DVD-RAM recording decks. A key advantage over the other disc formats is its flexibility when performing non-linear video editing. Sequences are easily moved around on a disc. This is helpful for the use of chasing playback functions that allows users to view the beginning of a recording while the programming still is recording. Typically, DVD-ROM decks also will record on DVD-R write-once discs.

DVD-R:
This is one of the most universal recordable DVD formats. DVD-R was sanctioned by the DVD Forum, which authorizes the DVD Video standard. It is used by PC drives based on either the DVD-RAM or DVD-RW rewritable disc formats. Recordings made on the discs can be played back in most home DVD video players and DVD PC drives.

DVD+RW:
Developed by Philips and Sony, this format was hyped as the most universally compatible rewritable disc format for playback on existing DVD video players. The standard-setting DVD Forum has not authorized the DVD+RW format, although Philips has aligned a number of recorder and drive manufacturers to support the system, including Yamaha, Hewlett Packard, Ricoh, Thomson (RCA) and Mitsubishi.

DVD+R:
This is the write-once sub format for DVD+RW system. Its attributes are said to be ease-of-use –no disc formatting or finalization are required in certain applications – and compatibility with a majority of DVD video players.

In Early 2004, DVD recorders from some new far East factories were promoted by a handful of retailers at prices close to $300. The trend continues to drive the popularity of DVD recorders, while cutting into sales of player only models. Instat estimates DVD play only saleswill decline three percent in 2004 as a result.

DVD-Multi Deck Arrives:
The first DVD recorders compatible with multiple recordable disc formats arrived in retail stores in 2003, sparking a trend among some manufacturers to offer decks that will play and record discs based on two or more recordable formats. While most such decks record in the -RW, +RW and -R formats, a handful of models are now available based on the RAM, -RW and –R formats. This broadens the deck's ability to produce a disc that can be played by most DVD players.

IEEE-1394 Capability:
Most DVD recorders include IEEE-1394 digital connectors designed to accept only signals in the digital video (DV) format used by most digital camcorders. Lacking multi-industry acceptance of a digital copy protection solution for DTV signals, manufacturers have held off using more robust digital connectors for direct digital recording of DVDs and other sources.

High Definition Optical Disc Formats:
On the horizon are new optical disc formats designed for use with high-definition video content. The disc formats require special lasers in either red or blue color spectrums specially developed to read more densely compacted pit alignments on a disc.

Several plans were floating around the 2004 International CES to bring high-definition video content to red-laser DVD systems.

Computer software giant Microsoft now has 16 HD movies on (red laser) DVDs that use the HD video capabilities of Windows Media 9, also known as "WMV HD." Several deck manufacturers are previewing possible DVD players that support the format.

Without component players, WMV HD playback support is limited to Windows XP PCs or Windows XP Media Center-PCs equipped with a 2.4GHz Pentium 4 or better processor.

WMV HD movies so far focus primarily on nature and adventure titles from IMAX, National Geographic and Artisan.

Chinese Government Announces Plans for EVD System: In 2003, the Chinese government directed manufacturers under its control to develop players based on a new DVD disc system that can be used for standard and high definition content, called EVD (enhanced versatile disc). A Chinese-government-backed consortium developed the format to avoid heavy royalty payments Chinese manufacturers must pay for the right to produce DVD technology.

Chinese factories currently produce most of the world’s DVD players. China also is one of the largest markets in the world. The format, however, faces a stiff challenge – U.S. studios have not agreed to make their content available in EVD. The format initially is targeted at the Asian market.

Warner Brothers Explores Red Laser Option:
A disc format using red laser is being explored by movie producer Warner Brothers and others for use with a new class of pre-recorded, playback-only discs. The content developer, involved in the development of the standard DVD format, is contemplating using red laser technology for a HDTV disc format that conforms to DVD Forum standards.

The system uses the HD-DVD-9 disc format with MPEG-4 compression to store up to 135 minutes of HD data on an 8.5 GB capacity DVD disc and performs at bit rates between 5 to 7 Mbps. Future players will be compatible with current DVD and future players and HD-DVD-9 discs could be used, at least on an interim basis, as a less expensive alternative for packaged HDTV media.

To ensure backward compatibility with current DVD players and future high-definition DVD players, a system was developed for the HD-DVD-9 disc using two video streams. The first would carry the standard definition video content stored with MPEG-2 compression, and the second – called a "difference' stream" – would be encoded as MPEG-4, carrying the difference between the base SD signal and the full HD picture. The two streams would be interleaved on the disc to enable playback on existing DVD players. Newer players with MPEG-4/10 decoding capability would assemble the two streams to present the full HD image.

Blue Laser Optical Disc Systems for Next-Generation Standard:
Although various red-laser HDTV systems have been discussed, most manufacturers are working to develop next-generation products based on blue-laser systems that store more data on a disc by using densely packed pit structures.

In early 2002, nine CE companies jointly established the basic specifications for a next-generation large capacity optical disc video recording format capable of recording and playing back HDTV programming.

Called Blue-ray Disc, the new format is similar to the DVD format only in the size of the disc, and is not expected to be applicable to DVD Forum specifications. The specification enables the recording, rewriting and play-back of up to 27 gigabytes of data on a single-sided single-layer disc. It employs a short wave length (405nm) blue-violet laser for high density reading and recording.

A Blu-ray Disc can carry more than two hours of HDTV video and more than 13 hours of standard TV broadcasts (VHS/standard definition picture quality, 3.8Mbps). The high bit rate (36Mbps) capability of the system also enables recording high-definition images from digital video cameras, while the random access capabilities of the disc will simplify and add greater flexibility to video editing.

The format is not backward compatible with current recordable DVDs but can use blue lasers to read prerecorded standard DVD-videos. So most Blu-ray recorders will be developed to read both Blu-ray and legacy DVD-video discs.

Companies involved include Hitachi, LG Electronics, Matsushita, Pioneer, Royal Philips Electronics, Samsung, Sharp, Sony and Thomson Multimedia.

At the 2004 International CES, Hewlett-Packard and Dell signed on with the Blu-ray Disc camp citing the format's larger storage capacity than rival systems and its anticipated lower cost to produce hardware.

The Blu-ray Disc founders plan to finalize the complete format specifications portfolio in 2004. A read-only version format (BD-ROM), developed in collaboration with Hollywood studios and the IT industry, should be available in 2004 and could lead to the first BD-ROM products being available by the end of 2005. The BD-R (write-once) format is nearly finalized, and the BD-RE (rewritable) format, which is now available, will be expanded to meet different industry requirements.

Sony was the first manufacturer to deliver a Blu-ray Disc recorder in April 2003, when it unveiled a combination satellite decoder/Blu-ray recorder to the Japanese market. No U.S. introduction plans have been announced.

LG, meanwhile, announced at the 2004 International CES, two Blu-ray Disc recorders, including a model that includes a hard drive video recorder. Most other Blu-ray Disc members plan to offer their first models in 2005 or later.

Advanced Optical Disc Becomes HD-DVD:
In 2002, Toshiba and NEC announced a second blue laser recordable disc format, first dubbed Advanced Optical Disc but later renamed HD-DVD. A read-only version of the format was approved officially by the DVD Forum steering committee in 2003, and a nearly complete rewritable specification was approved in early 2004. Companies aligned with the Blu-ray Disc format, which is not based on the DVD disc system, did not seek DVD Forum approval.

At the 2004 International CES, format backers demonstrated an HD-DVD player prototype that could play HD-DVD discs and current DVDs, and previewed prototypes of HD-DVD recorders that will look for DVD Forum sanctioning in 2004. The prototype player has an optical pick-up head with both a red laser and blue laser, diodes a single objective lens that works with both. HD DVD is not expected until 2005. The read-only format would use a 405 nanometer optical wavelength blue laser and single-sided, dual-layer media. The recording capacity of the discs should be between 20GB to 40GB. This would store between two and three hours of HDTV content, and could be expanded to four hours using different compression systems.

DVD Forum Looks for Compression Standards

For 2004 the DVD Forum is considering the best compression scheme to approve for the HD DVD system. MPEG-2, H.264, Microsoft's Windows Media Video 9 (WMV9), or possibly multiple formats are in review for Forum approval. A 36 Mbps data-transfer rate is expected to be required.
 

· VCRs sales will plummet to 4.9 million units in 2004

· Average deck pricing will dip to $56

· D-VHS VCRs continue to offer HDTV movies as disc solutions are readied

· Growing TV/DVD category impacts TV/VCRs

The runaway success of the DVD video player category and accelerating sales of hard-drive-based personal video recorders and DVD recorders, has taken its toll on the analog videocassette recorder (VCR) business.

The VCR category hit its peak in 2000, with sales of 23 million combined decks, TV/VCRs and camcorders, according to CEA Market Research, and has been on the decline since. In 2003, combined VCRs plunged 37 percent to 15 million units, according to CEA sales-to-dealer numbers. Sales of VCR decks, alone, dropped 52.6 percent to 6.4 million units in 2003, and CEA expects the decline to continue in 2004 to 4.9 million units. Meanwhile, average deck price is forecast to drop from $60 in 2003, to $56 in 2004.



Most VCRs today conform to the VHS videocassette standard, which calls for half-inch magnetic tape encased in easy-to-load cassettes. With VCRs more affordable, many consumers have replaced two- and four-head mono decks with hi-fi stereo models that can be used with surround sound home theater systems. Only a small piece of the market is high-band Super-VHS (S-VHS) VCRs that offer slightly better resolution than conventional VHS decks.



Advances enable S-VHS decks to use standard high-grade VHS tape to record and play back high-resolution videos. S-VHS deck prices also have dropped significantly, opening the door to customers looking for the highest quality video sources at value prices. In addition, two-deck VCRs in various configurations are widely available and include VHS/VHS for tape duplication or relay recording, dual 8mm/VHS format versions (used to dub 8mm home videos to VHS tape) and 8mm/Hi8 systems. Camcorder enthusiasts use the latter primarily as editing devices.

DVD/VCR Combination Decks Grow:
A growing trend combines VCR decks with DVD players and helped bring new life to VCRs in 2003. The dual-deck configurations are popular among households with limited set-top or cabinet space, and help to preserve the life of old videocassette libraries.

A new twist on the dual-deck concept arrived in 2003 – combination DVD recorders and analog VCRs. These systems offer a convenient means for consumers to easily convert their old VHS home movies to DVD discs, offering the playback convenience of the DVD/VCR combination systems.



Optional step-up features today include variable slow and fast motion, reception of non-scrambled cable channels, expanded programmability and on-screen function display. The most sophisticated units add auto-record programming systems, automatic clock setting, jog and shuttle dials that more precise control the fast-forwarding and rewinding functions. Some high-end decks add flying erase heads to make clean scene transitions when editing from another deck or camcorder.

Other common features include the use of 19-micron video heads that produce better quality recordings in the slower extended play mode, super high-speed fast-forward and rewind mechanisms and automatic tape-speed controllers that slow down a tape in the standard mode if a tape is running out during a recording.



Digital VCRs Slowly Gain Momentum:
The first home-based digital VCRs reached the market several years ago using the digital videocassette (DVC) format. Designed as editing tools for MiniDV camcorder owners, they were not intended for time shifting off-air or satellite and cable-based television programs.

Soon after, the first D-VHS decks arrived as recording devices for digital satellite systems. These first models recorded TV programs in standard definition, but only digital satellite programming in its undecoded bit stream form could be captured and played back with virtually no degradation in picture or sound quality. Because they lacked onboard digital-to-analog converters, early D-VHS decks required connection to digital satellite decoders in order to record and playback the bit stream content delivered by satellites.

HD D-VHS Decks Emerge:
In 1998 one company delivered the industry's first D-VHS VCR capable of recording HDTV signals delivered by terrestrial digital broadcasters. Lack of copy protection for the product, however, limited its availability, and eventually forced its removal from the market.

In 2001, a second attempt was made by Mitsubishi and JVC to market HDTV-level D-VHS recorders. This time both decks included a digital copy protection system called digital transmission content protection (DTCP) in conjunction with IEEE-1394 digital connectors. The combination enabled content producers to restrict illicit duplication of copyrighted material shipped over the digital ports. The decks, however, were marketed before all of the major Hollywood studios had formally agreed to IEEE-1394 and DTCP, and their support with pre-recorded software was not assured.

D-Theater D-VHS Arrives:
In 2002, JVC introduced a new packaged HD media copy protection system called D-Theater, in a D-VHS deck, and used it to enlist commitments from four Hollywood studios to produce HDTV D-VHS pre-recorded software. D-Theater is an option to the D-VHS standard for North America, and is a media-based security system, unlike other proposed systems that are used as gatekeepers on digital interfaces. JVC's D-VHS HD VCR with D-Theater uses analog component outputs to link to an HDTV monitor.

D-Theater includes a new proprietary encryption system to prevent the unauthorized duplication of high value content such as feature films. Only D-Theater-equipped machines can play back D-Theater-encoded cassettes. A D-Theater logo identifies D-Theater hardware and software.

The 44GB capacity of a D-VHS tape allows an entire feature-length HDTV movie recording at 28Mbps to fit on a single cassette. Most D-VHS decks also play and record in analog VHS and Super-VHS formats.

TV/VCRs Decline as TV/DVD Combos Grow:
Once a specialty product suited for commercial use, TV/VCR combination units now are a video hardware staple. Consumers like the convenience and space-efficiency it brings. The popularity of the concept has led manufacturers to produce other combo products including TV/DVD combo players and even three-way TV/DVD/VCRs.

Following the trend of direct view CRT televisions, manufacturers are building more TV/VCR and TV/DVD combo products with flat-screen picture tubes, although the use of the newer display component is more prevalent in the TV/DVD combo segment.

Due to their convenient size for kitchens and bedrooms, TV/VCR combination units in the 13- to 14-inch screen sizes continue to account for the majority, followed by 19-inch and 20-inch models. Models designed for 12-volt DC operation are used as video entertainment systems for recreational vehicles, pleasure boats and family automobiles. Most TV/VCRs come with remote controls and include on-screen displays and programmable recording.

Factory sales of CRT-based TV/VCR combos under performed CEA predictions in 2003, by declining 42.1 percent to 2.8 million units. Unit sales a year before had reached 4.9 million. The downturn was the result of new Far East manufacturers bringing aggressively priced TV/DVD combo players to the U.S. market. TV/VCR units are expected to decline to 2.4 million units in 2004, according to CEA forecasts. TV/DVD combos, meanwhile, saw factory sales increase a whopping 187 percent, to over 1.5 million units in 2003, after selling 450,000 units in 2002. TV/DVD combo sales should increase to 2.3 million units in 2004, CEA predicts.
 

· News Corp. acquires Hughes/DirecTV.

· 21.2 million DBS subscribers tallied in 2003.

· Cablevision launches Voom HDTV-centric DBS service.

· DBS companies deliver first HD-PVRs.

Despite the aggressive expansion of digital cable services nationwide, the direct-to-home satellite TV industry continues to tally subscriber gains and even gained a third service provider in 2003.

To counter the efforts of cable operators to regain lost customers, the nation’s two largest direct broadcast satellite (DBS) operators continue to step up offerings of high-definition TV channels and expand local broadcast TV services to additional cities across the country.

Meanwhile, a new DBS entrant, called Voom, was launched by the Rainbow DBS venture, owned by cable TV multi-system operator Cablevision. The service focuses mainly on HDTV enthusiasts and offers a greater variety of HDTV channels, most of which were produced by another Cablevision-owned venture. At launch, the service promised to have as many as 39 24-hour HDTV channels within the first year of operation.

Both DirecTV and EchoStar offer combined assortments of broadcast HDTV channels and HD versions of some premium cable channels. The services offer more than seven channels of HD-content and expect to add more in 2004. Because the companies sometimes place HD channels on satellites in secondary orbital positions, larger dishes or dual-dishes are required to receive a signal, in addition to a special HD-compatible decoder box.



News Corp. Acquires Hughes/DirecTV:
Rupert Murdoch's News Corp. won federal regulatory approvals to acquire a controlling stake in DirecTV and its parent Hughes Electronics in a $6.6 billion deal with General Motors. To gain the approvals, News Corp. said it would not deny its cable competitor’s access to News Corp.-controlled content and TV technology and eventually would provide local TV services over DirecTV. The company also announced aggressive plans to offer affordable set-top satellite decoders with personal video recording functionality to new and current subscribers, and to increase its HDTV programming. By February 2004, the direct broadcast satellite provider had upped its HDTV channels to seven, with the inclusion of CBS Television Network feeds for some qualifying markets in the country.

Satellite TV Today:
Satellite TV industry once relied on large movable circular C-band dishes that could be aimed at different satellites to pick up the analog signal feeds of network broadcasters and cable program providers for free. As the industry began to grow, program providers added scrambling systems to their signals to protect their pay subscription services. With the introduction of small dish systems powered by digital compression technologies, called direct broadcast satellite (DBS) systems, the digital direct-to-home pay satellite industry arrived in the mid 1990s, building mass-market acceptance in record time.

According to company reports at the end of 2003, the two primary DBS providers reached a combined 21.2 million subscribers, up 8.2 percent from 2002. That represents 22 percent of U.S. households. DirecTV ended 2003 with just over 12 million subscribers, while EchoStar finished with 9 million subscribers.

Voom, the HD-centric newcomer to DBS, launched service late in 2003, and still had well under 100,000 subscribers in early 2004.

Although CEA predicted sales of DBS set-top equipment would decline in 2003, the number actually rose slightly to 9.6 million units. In 2004, CEA forecasts sales of satellite set-top equipment to rise by 20,000 units to 9.658 million units. Dollar volume on set-top sales is forecast by CEA to dip 7.4 percent to $1.4 billion in 2004, while the average price of a DBS receiver will decline 7.7 percent to $132.

DBS Continues to Add Local Channels:
Both EchoStar and DirecTV continue to add to their services local broadcast stations for retransmission into local markets. By the end of 2004, DirecTV says it will serve local stations in more than 130 markets, while EchoStar plans to have local service in between 130 to 150 markets. With limited satellite capacity, Voom elected not to offer local channel services on its platform.



Under a 2001 federal must-carry mandate, the satellite providers were required to carry all of the local over-the-air channels in any market they chose to serve with local TV services. Previously, the providers only offered major network stations in the most populated markets. The two satellite TV carriers argued the must-carry mandate was a driving factor for the proposed merger. They say it would be hard pressed to expand services to all cities nationwide without sharing their satellite spectrum.

The addition of local TV stations to the DBS programming, lineups sparked new subscriber growth levels in the cities that received the local TV signals via satellite, when those services were first offered in 1999. The DTH satellite industry and CE industry won a major legislative decision that year when the Satellite Home Viewing Improvement Act (SHVIA) made it legally possible for satellite companies to carry local network TV broadcasts via satellite for local viewers.

New Receivers Bring More Options:
Although basic-level satellite decoders remain relatively unchanged except for much smaller sizes during the year, the DBS providers did present an array of step-up equipment offering such features as automatic program recording via built-in hard-disk drives and dual over-the-air/satellite HDTV signal decoding.

Both DBS providers offer interactive data and communications services that new generation set-top receivers can display on top of video programming. The data-enhanced services offer everything from supplementary text information about a TV program to interactive online shopping via TV.

Although Internet access via satellite has been available for several years, early versions offered only high-speed downloads to PCs, while a separate dial-up Internet access service was required for back-channel communication. In 2000, services on both platforms enabled broadband downloads and back-channel communication through one dish. That same dish also could be used to receive TV services.

DBS Brings Better Pictures and Sound:
Most DBS TV services deliver more than 200 channels of sharp, clear images and sound comparable to that of DVD players. Satellite providers also now deliver standard definition broadcasts with special 5.1-channel Dolby Digital audio surround sound, comparable to that offered by DVD players, on both HDTV and some standard definition TV channels.

The systems each require small dishes, either 18-inches or 24-inches in diameter to collect digitally compressed signals carrying more than 200 channels of video and audio programming. Both services pushed subscriber registrations with promotional incentives, including free installation and virtual hardware giveaways in exchange for minimum service commitments of a year or more. Both systems offer similar programming packages that comprise basic and premium cable networks, pay-per-view movies, news, information and sports networks. But the larger capacity available to satellite operators offers a greater selection of premium and special interest programming than most analog cable systems. However, the arrival of new digital cable services reduces that advantage.

EchoStar Claims Interactive TV Leadership:
EchoStar's DISH Network says it has more than 5 million households that can access more than 15 interactive TV channels. Some analysts estimate the total would make the direct-to-home satellite system the leading provider of ITV content in the U.S. The provider offers an on-demand service with access to news, weather, entertainment, sports and other information normally found from other resources, all available through the remote control.
 

· Growth of PVR devices accelerates in 2004

· New video-over-IP services offer new on demand options

· Set-top Internet TV terminals struggle

· PC/TVs evolve into home media centers

Beyond the movement to deliver new performance levels for pictures and sound, the CE industry, in association with other business sectors, is developing various interactive TV technologies to enable consumers to personalize their TV viewing experience.

Interactive TV (ITV) is a broad term for various hardware products, middleware applications and support services that deliver and make use of interactive content and enhancements on TV screens. In some cases these systems combine traditional TV watching with the interactivity of the Internet. Programming can include richer graphics, links to websites through TV crossover links, electronic mail, chat rooms and online commerce through a back channel (T-commerce). ITV should develop into mainstream use through the nation's burgeoning digital television system. The all-digital platform more efficiently uses the broad bandwidth of broadcasts, and eventually will deliver datacasts that augment regular DTV video content. Today interactive television is associated with PVRs, video-on-demand options, electronic program guides and video games.

Personal TV Recorders Take Hold:
Alternately called PVRs and digital video recorders (DVRs), these devices employ a hard-disk-drive, like those used by PCs and electronic program guides that simplify the process of finding and recording TV programs. When first introduced, PVRs received considerable press attention and wildly optimistic reviews from industry analysts, but manufacturers found the concept was a complicated story to get across to consumers.



Digital video recorders are used to digitally record programming to a hard drive that can store many hours of content at a time. This creates a personal video channel containing stored favorite programs that a user can access at will. Programs are recorded to the hard disk using an MPEG-2 compression scheme and offer very clear pictures in comparison to analog VCRs. The unit saves the incoming live TV signal from a cable, antenna or satellite system. As the hard disk fills, oldest programs are automatically erased to make room for new content. These DVRs continuously cache all live programming, enabling viewers to pause or rewind TV shows on the fly to catch segments they have missed or wish to view again. The technology also allows viewers to watch a program from the beginning even as it is being recorded. Although the concept has generated enthusiastic reviews among early adopters, sales were at first slow to develop, before accelerating significantly in the last year.

DVR makers have attributed this to the complexity of the feature benefit story, which many consumers fail to grasp. Some object to subscription fees the DVR services require for continuously updated program guide listings.

According to CEA Market Research, the category will continue to grow in 2004, with sales to dealers more than doubling to more than 750,000 units, following sales of 535,000 units in 2003. Factory dollars are expected to rise $251 million, as average unit pricing drops to $335. According to CEA, sales of PVRs jumped more than 239 to more than $193 million in factory dollar revenue.

TiVo Expects Growth:
TiVo ranks as the king of the personal video recorder services, and its popularity was proven in its fiscal 2004 subscriber numbers that were released in March 2004. TiVo tallied 1.3 million subscribers in the year, up from 624,000 year-on-year. For the 12 months of fiscal 2005, the company expects 1.5 million to 1.6 million subscription additions, with 1 million coming from DirecTV subscribers and 500,000 to 600,000 from new TiVo service sub additions. The result will be an installed base nearing 3 million subs by the end of January 2005.

EchoStar Claims PVR Leadership:
Satellite provider EchoStar also claimed significant gains in the sales of PVR-enabled satellite tuners. The company said its total PVR subs passed the 1 million-unit mark in September 2003. It was among the first to offer PVR capability, and prior to 2003, claimed to lead the industry in PVR sales. The company offered its satellite subscribers free PVR service, but elected to go with a paid model similar to TiVo’s in 2003.

Cable Operators Add PVR Services:
Looking to get into the PVR act, some cable operators now are offering subscribers set-top decoder boxes with integrated PVR functionality. In fact, the technology is so popular that it has helped some set-top box manufacturers build market share over rivals that were not as prepared with integrated offerings. Cable operators, eager to scare off the competitive threat from satellite service providers, quickly moved to add integrated cable decoder/PVRs to their self-distributed product portfolios.

However, with the advent of the digital TV plug-and-play system, the longevity of independent cable set-top boxes is in doubt, as television set manufacturers are expected to integrate not only CableCARD decoding circuitry but PVRs into the chassis of next-generation TV sets.

HDD Recorders Combine with Other Categories:
Today, many PVRs are sold in combination boxes, usually married to a digital satellite TV receiver or digital cable converter box. Incoming signals are stored directly to the hard drive in bit stream form, making for a cleaner picture and more efficient use of disk space. Additionally hard disc drive (HDD) recording has moved into the audio space as home jukeboxes capable of storing many hours of music in various compression formats.

Hard-disk recorders are split into two classes. The first class, such as those produced by DVR developer TiVo, includes intuitive programming software that monitors users' viewing habits to automatically record programs that match their preferences. Alternately, this intuitive system can be shut off or can make selection suggestions without recording the program. The second type relies on the user to manually program the unit to record all programs.

Satellite-Powered HDTV DVRs Arrive:
At the 2004 International CES, direct-to-home satellite providers DirecTV and EchoStar announced delivery plans for new hard-drive-based PVRs that combine satellite tuners and ATSC over-the-air (OTA) DTV tuners. In both cases the devices contain very large hard drives capable of handling the extensive extra data in HD telecasts. The HD DVRs can store either 25 or 30 hours of HDTV programming or around 200 hours of standard definition content.

Several manufacturers also shipped stand-alone PVRs, that are designed to hook up to various set-top boxes and integrated HDTV sets using digital connectors to record and playback high-definition programming on large capacity hard drives.

DVRs Serve as Forerunners to In-Home A/V Networks: Companies view these devices as the first step toward digital in-home network servers. A new feature enables greater flexibility as a home-networking tool. The function enables sending programs recorded to a unit's hard drive to a connected television in another room in the house. Eventually, similar devices will find and record programs to hard drives for a 24- to 48-hour viewing window, and then if the user desires, the program can be archived for future play on DVD-R discs in a connected jukebox recorder. These jukebox servers, as some call them, act as central hubs to other devices throughout the home, each connected to the other through wired and wireless infrastructures

Servers Serve up DVD Videos:
The first manufacturers offering video servers just hit the market. These devices include massive hard drives that let consumers store their entire movie collections internally. These devices have a server, movie player and DVD reader, and provide access to any movie in the collection from any viewing zone in the house. In addition to videos, most models will store and playback other entertainment media files.

Video servers use a proprietary operating system with encryption that encodes the signal. DVDs can be imported bit-for-bit in native MPEG-2 compression, including copy protection. Through the operating system, hardware components stationed throughout a home can communicate with each other using an Ethernet connection. Built-in movie guides are delivered via the Internet.

Video On Demand Offers Convenience, Selection:
Cable and satellite TV operators are offering another form of video personalization called video-on-demand (VOD) that gives subscribers the ability to view premium movies and video events at any time with the push of button.

The most robust VOD systems are offered on digital cable systems. These services offer small libraries of films that recently appeared in movie theaters for instant playback. The services also allow rewinding and pausing films, in a fashion similar to a DVD, but without the need to return a disc to a rental store.

Satellite operators offer limited near video-on-demand services, that make use of hard-drive-based personal video recorders to automatically record programs for later on-demand playback, for an additional monthly stipend.

The Walt Disney Corp. entered the VOD game in 2003, by launching a “near video on demand” service called Movie Beam. The service delivers recent theatrical movies for storage on hard-drive-equipped set-top boxes using existing broadcast spectrum. The service offers subscribers up to 100 different films to view at any time, with DVD-like functionality. A set-up box with a built-in hard disk drive is used to receive and store content for later playback.
 

An emerging trend in personalized video entertainment is new services that deliver video-on-demand or near video-on-demand content over high-speed Internet connections.

The advent of high-speed Internet access in consumer homes and new video compression CODECs that make possible the efficient streaming and downloading of data-intensive video within the relatively narrow constraints of Internet pipelines have opened the gates to a new revolution.

Just as it has done with the delivery of text-based content and MP3 music, the Internet is carrying a wide variety of video programming sources that can be conveniently accessed and personalized for the user.

The future continues to grow brighter for this delivery method. Vast libraries of titles can be offered on regionally located servers to one-day enable a viewer to see virtually any video title at a time for a purchase fee or through a monthly subscription model.

Although Internet video services today offer mostly below DVD-quality images and sound, new compression technologies are on the way to eventually enable the viewing of even high-definition TV programming over the Internet.

New multi-channel Internet video services have sprung up offering virtual video-on-demand convenience via media center PCs or new broadband Internet connected TV set-top boxes. This is poised to one-day rival traditional cable and satellite TV systems or packaged media, as a major television service delivery medium. These new subscription services provide video programs ranging from movies and sports to special interest content and interpersonal communication.

Although gaining in popularity, Internet video services are small in comparison to the VOD services of digital cable TV and satellite systems, and packaged media sales are many times higher than those.

Internet TV Subscription Rates Grow:
According to market research firm In-Stat/MDRs, consumer on-line streaming video subscriptions grew 52.7 percent in 2003 to 1.7 million subscribers. In-Stat forecasts that to grow 47 percent to 2.7 million in 2004, and on to 9.85 million in 2007.

Adding to this potential is the rapidly growing acceptance by consumers of high-speed Internet services. According to In-Stat, more than 30 million households have high-speed Internet connections, and as many as 130 million households are forecast to have high-speed Internet connections by the end of 2007.

The War in Iraq helped to spark new interest in IP-delivered video services, as families with loved ones in military service sought out new information sources to keep abreast of the latest details. Steaming video pioneer RealNetworks was a significant beneficiary of the trend as many new subscribers signed on for its RealOne SuperPass streaming video service, as well as other providers’ premium streaming video news services. Taking notice, Microsoft’s MSN and Yahoo! are preparing to launch their premium online video streaming subscription services.

Content Variety Drives Adoption:
So-called premium content in consumer online subscription video streaming services will further expand this trend, In-Stat predicts.

The four leading drivers of premium video-over-IP content include sports-related programming; movie and TV streaming video services; general interest premium streaming video services and video-over-IP video communications services.

The current content leader for Internet video is adult movies. Adult video blazed the trail for Internet video delivery, and remains the reference for gauging the success of more mainstream content services. According to In-Stat forecasts, the annual value of consumer-oriented services will surpass the annual value of adult content in 2005.

Compression Standards On The Way:
The key enabler of the delivery of video content over the Internet are new data compression technologies that will simplify the handling and transfer of video on the Internet while preserving as much as possible the quality of the original source material.

MPEG-4 Stakes Its Position:
One promising system – called MPEG-4 – is being finalized as a potential standard for video compression. The MPEG-4 H.264L technology, which has emerged in part from Apple’s QuickTime technology, provides high-efficiency encoding and decoding (CODEC) algorithms that will be used widely for digital television and videoconferencing applications, In-Stat predicts.

The system is being explored for HDTV as well as standard video content. In 2004, several manufacturers introduced DVD video players capable of decoding MPEG-4 encoded discs for playback.

Among other things, the MPEG-4 system adds new rich media formats, including enhanced graphics and multiple audio tracks and provides extensions to enable interactivity. For more information on MPEG-4 see the MPEG-4 Forum website at www.m4if.org.

DivX Digs In:
The world’s most popular MPEG-4 compatible video compression technology – called DivX – currently numbers more than 75 million users worldwide. Popular mainly in Europe and other International markets, the system was developed by DivXNetworks, and is sometimes called the "the MP3 of video." The system offers DVD-quality at 10 times greater compression than MPEG-2 files. This allows placing full-length films on CD discs or transferring them over broadband Internet connections. A handful of DVD players capable of decoding DivX encoded content appeared in early 2004.

Microsoft Promotes WMP 9:
Most content available through the major sports, movie and general interest video subscription services available today, is encoded using Windows Media Player (WMP 9) Series technology, and Microsoft’s Digital Rights Management (DRM) technologies. A number of content rights holders have opted for Microsoft’s DRM technology to safeguard their intellectual property, giving the software giant a leg-up among Internet video service providers.

Users of WMP9 content must use a Windows-based PC or another device equipped with a Microsoft-specific decoder capability.

The content that has been encoded using Microsoft Windows Media Technologies can be played back on selected portable handsets and the X-Box video game console, and soon can be decoded by some Internet Protocol (IP) set-top boxes.

Set-top Internet-Access Devices:
Despite significant hype and advertising that greeted the launch of set-top Internet TV devices, sales have been disappointing. Presented as Internet access for PC-phobic consumers, the concept failed to sustain a consistent following, and key developers and manufacturers disappeared or were acquired by larger Internet service providers (ISPs). These products provide Internet content that can be clearly viewed on TV screens – either interlaced or progressive.

The set-top device, which is billed as being easy to set-up and use, accesses the Internet through a specific Internet service, carrying a monthly subscription fee – typically running around $20 per month. Other units designed to be ISP agnostic, mean the user can shop for a third-party ISP, such as the one used for a desktop PC account.

The most prominent of these boxes is Microsoft's MSN-TV, which is designed for interlaced analog TV monitors. These boxes automatically enlarge text and change font types to those that are more legible on TV screens. They also use dark backgrounds with light lettering for easier viewing on video displays with slower refresh rates than PC monitors.

Most of these set-top boxes contain powerful CPUs, RAM, a modem, parallel and/or serial ports, small capacity operating system, Flash ROM (where the operating system is often stored), an optional hard drive, built in browser and/or software package which includes e-mail capacity.

According to CEA Market Research, 2004 sales of set-top Internet access devices are expected to decline by 75,000 units to 425,000. Factory dollar volume will drop to $47 million following sales of $63 million in 2003.

TV/PCs Become Home Media Centers:
TV/PC combination systems, which have been on the market for almost a decade, took a new path in 2003, as several PC manufacturers introduced A/V-centric entertainment PCs dubbed Home Media Centers. Manufacturers of these systems are tapping the natural multi-media attributes of PCs to serve as central component hubs serving home theaters with various video and interactive entertainment sources while presenting all the functionality of a desktop PC.

Because these systems employ large-capacity hard drives, they can perform personal video recording services. Many TV/PCs also include NTSC and digital ATSC tuner cards that enable viewers to receive off-air broadcasts and watch them on the system monitor.

As the home networking concept grows, this approach should become more common because the PC can be adapted to serve as a central server, distributing audio, video and computer functions to terminals in various rooms of a home.

 

CEA’s Video Division cultivates growth and profitability for the manufacturers and distributors of consumer video products. CEA seeks to:

· Bring digital television (DTV) transition stakeholders together at the annual HDTV Summit to discuss the issues confronting the analog-to-DTV transition.

· Provide forums, including the DTV Subdivision, to discuss issues related to DTV and the DTV transition.

· Create and distribute educational materials to retailers and consumers.

· Foster DTV awareness on a market-by-market basis through HDTV Update sessions featuring local retailers, broadcasters, carriers and the latest CEA research.

· Develop cable compatible video products with the cable industry and discuss the issues related to cable compatibility.

· Showcase the latest HDTV products at NAB, exhibits at consumer home shows throughout the year and the annual HDTV Summit.

· Launch an interactive Web-based DTV retail sales training program.

Top Issues for the Video Division

· Increase the amount of HDTV content.

· Enhance awareness of DTV products and services at the retail and consumer level.

· Create a competitive retail market for cable navigation devices.

· Protect consumer home recording rights.
 

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