By Tim Burt
Financial Times
 

(This article appears in Financial Times (London, England) on Oct. 15, 2004.)

In the bowels of Sony Plaza, the Japanese electronics group's flagship New York store, a massive screen dominates the "Donghia Dream Room" - a discreet showcase for the latest high-definition television. Behind the crystal-bead curtains and designer sofas, a small sign reveals the cost of crystal-clear viewing: $19,999.

The price tag disguises a quiet revolution in US viewing habits. After years of development, high-definition or HD television is gaining traction in the world's largest entertainment market.

In spite of Sony's high TV prices, demand for HD televisions is set to rise rapidly over the next few years. Analysts estimate almost a third of all US households will have an HD set by the end of the decade, spurring similar but slower growth in other parts of the world. Prices for entry-level HD televisions are, in some cases, barely $1,000 more than for a regular TV.

"We are past the tipping point," says Aditya Kishore, senior media and entertainment analyst at the Yankee Group, the Boston-based research firm. "HD was stuck for a long time because no one agreed on (industry) standards. Now it's moving because everybody -- the set manufacturers, the broadcasters, regulators and programmers -- is pushing it."

High-definition is being pushed by consumer electronics manufacturers amid growing consumer enthusiasm for wide-screen televisions, which lend themselves to the far superior picture and sound quality of HD broadcasts.

In a retail industry dogged by intense competition and risks of commoditisation, HD sets offer the manufacturers some promise of a premium segment.

Similarly, pay-TV distributors in cable and satellite see HD programming as a way to secure top-paying customers -- those who adopt the technology early and have already acquired devices such as personal video recorders, which allows them to compile their own program schedules.

To its proponents, HD and the superior quality of viewing it offers represents a leap in programming standards, using high-cost production systems and sophisticated cameras to offer new angles, viewing close-ups and images not available in regular TV. Advocates of the technology argue that it can promote TV-set sales and subscription services by offering consumers a radically different viewing experience, particularly coupled with bundled services such as on-demand films or interactive functions for big sporting events.

The cost of producing such programming, however, is high while broadcasts have been hampered by the cable capacity required to transmit the data. Such issues are now being solved by advances in camera systems and with additional satellite capacity. That has encouraged more broadcasters to adopt the services. Among them, Premiere, the German pay-TV group anticipates healthy subscriber demand.

Announcing plans last month to launch three HD channels, Georg Kofler, Premiere chief executive, said: "With HDTV, fans of cinema and documentaries will be able to discern details that they would never have been able to see before ... the picture is sharper and more brilliant than either on DVD or the cinema screen."

He added that the systems would provide a strong boost to hardware manufacturers and the TV production sector. Although high definition was first developed in Japan more than a decade ago, the initial response from most broadcasters and potential customers was lukewarm. A lack of programming, mixed reliability and high costs all proved powerful deterrents.

Today, HD is enjoying its first real growth spurt. It has been fueled by a combination of consumer electronics groups developing truly superior wide-screen TVs and cable and satellite operators searching anxiously for new ways to lure subscribers. That, in turn, has encouraged a consensus on broadcast standards and persuaded more program-makers to film in HD.

Governments, from the US to Britain and France to Japan, are supporting the HD initiative. For them, it promises another step towards consumer acceptance of digital TV, enabling countries to switch-off and potentially re-sell aging analogue TV spectrum.

While more than 30 million US households are expected to buy HD sets within the next three years, analysts at Data-monitor, the London-based research firm, expect European take-up to increase from 50,000 at the end of 2003 to 4.6 million by 2008.

"Germany, the UK and France should lead the adoption of HDTV, with Italy a distant fourth," according to Datamonitor. "Recently Sky in the UK and M6, TPS and TF1 in France, have announced plans to offer HD content to viewers. TPS should launch services in 2005 and Sky in 2006."

James Murdoch, chief executive of British Sky Broadcasting, Sky's parent and affiliate of the News Corp media group, says the initiative reflects changing consumer tastes and the battle for premium subscribers. "We will do it with a package of channels and events to drive take-up of HD," he says. "The creative community will converge around it because it is so exciting."

Sky is following in the footsteps of US networks such as Discovery, which has been producing HD programming for two years. HBO, Time Warner's premium cable channel and and ESPN, the Disney-owned sports network, are also driving the initiative in drama and sports, respectively. Pay-TV groups such as Cablevision and DirecTV - Sky's sister company in the US - are heavily promoting the technology.

HD's appeal lies in electron firepower. Televisions use cathode ray tubes to create their on-screen display by firing electrons from a 'gun' in the back of the box on to a charged screen. Existing standards in American broadcasting deliver a screen resolution (based on electrons hitting the screen) of 525 lines. In Europe, the standard is a superior 625 lines.

In high definition, there are either 720 or 1,080 lines per screen - delivered at speeds of up to 60 frames a second - that create an image that HDTV manufacturers claim is at least five times clearer than old analogue signals. "It's a completely different quality," Mr Murdoch says. "A cinematic experience is what people want at home. You just have to look at DVD sales to see what the potential could be."

But while sales of high definition TV sets and programming are gaining momentum, the move towards HD-DVD is moving at glacial speed. Its roll out has been delayed by an industry duel: pitting Sony's Blu-Ray technology against a rival standard championed by Toshiba and NEC of Japan.

Some of the world's leading media executives are monitoring the outcome closely. They hope a single standard will give renewed impetus to the DVD industry, which already generates more revenue for Hollywood than traditional cinema box office receipts.

Just as consumers replaced ageing video tapes with DVDs, industry chief executives believe HD-DVDs could underpin further demand.

Dick Parsons, chairman and chief executive of Time Warner, says: "I believe high definition TV will deliver the next level of growth if, and when, the current demand for DVD plateaus. There are more high definition sets being sold than ever before, and the technology could give us a handle on piracy because encryption will be renewable." Mr Parsons is urging colleagues at Sony, Toshiba and NEC to avoid a format war, adding: "If there is agreement, 24 months from now you will see the focus shift from DVD to HD-DVD demand."

Failure could deal a blow to widespread consumer appetite for HD sets, consigning the technology to relatively few richer households.

Recent analysis from the Leichtman Research Group in the US suggests that high definition remains a luxury few can afford. In the US, they found that just two per cent of households with incomes of less than $75,000 had HDTV, compared with 12 percent in wealthier households. Even if demand does reach the anticipated 40 million or so sets in the US by the end of the decade, it will remain a fraction of the 275 million TV sets in the country's households.

That penetration could be constrained by the capacity demands of HDTV. The amount of data required to transmit HD images soaks up vital space on cable and satellite networks.

That is good news for the companies selling that capacity. But there is a potential bottleneck, that could delay the availability of HD.

Romain Bausch, chief executive of SES Global, the world's largest satellite operator, sees that as an opportunity. "With digital compression our customers are fitting six to 10 TV channels on one satellite transponder. With HDTV you can only fit two channels on to one transponder. That means potentially huge demand for HDTV capacity."

SES is preparing to launch three satellites for EchoStar, the US satellite TV operator, and Mr. Bausch sees further demand in Europe and China. "Our partners in Asia are telling us that by 2005 China would like to have major penetration of HDTV, which will require additional capacity ... the Olympic games in China in 2008 will be the first games to be offered worldwide in HD."

In order to justify the investment in such technology and capacity, the world's TV broadcasters must be able to see a payback in terms of ratings. Public service broadcasters believe the change is inevitable. The BBC, the world's largest publicly-funded broadcaster, plans to move its entire production output to high definition within six years. John Varney, the BBC's chief technology officer, says the corporation has to embrace HD to meet consumer demand and the competitive challenge posed by commercial rivals.

All four broadcast networks in the US - NBC, CBS, ABC and Fox - are following suit. They are programming in HD even though take-up is far from certain. The rationale is that cable and satellite providers are demanding it, and it is sufficiently superior to analogue transmissions that it can boost ratings. Executives at channels including HBO, ESPN, Discovery and TNT are already moving the majority of their output to the new format.

George Bodenheimer, president of ESPN, claims his network "is a leading catalyst of both sales of HD sets and subscriptions to tiers that include HD programming."

Film producers are using HD technology for new releases from the latest episodes of the Star Wars series to Michael Moore's controversial documentary, Fahrenheit 9/11. Sony, which manufactures HD cameras, claims more than 300 films have now been produced using its camera technology as well as 42 TV shows in the US.

Taken together, industry executives and investment analysts believe these trends point to a long-awaited jump in HD demand: from TV production, set availability, satellite capacity and, potentially, to a standard for HD-DVD.

At BSkyB, where shareholders have taken fright at some of the investment plans required to promote HD and other services, Mr Murdoch is unapologetic about the decision to embrace the technology. "Acceptance of HD is going to start in earnest now," he says.

Bryan Burns never tires of watching the University of Wisconsin clash with Ohio State. The vice-president of strategic business planning at ESPN, the dominant United States sports network, plays and replays crunching tackles and touchdowns from the college football game.

Burns -- standing in a Manhattan television studio -- scans the action on two screens that stand side by side. On one, the ball sails out of sight, barely visible with the fuzzy picture quality familiar to millions of TV viewers. On the other, wider screen, the pass and scoring are captured in perfect detail. Every blemish on the players' faces, even the sweat dripping from their visors, is caught by high-definition cameras.

"We really think sport is the thing to drive this (high definition TV)," says Burns, who spent 16 years working in major league baseball before joining ESPN. "We broke through one million high-def subscribers in the summer and the football season will be a great plus for us."

ESPN, the hugely profitable sports arm of Walt Disney's media networks division, has emerged as one of the leading proponents of high definition TV.

After several false dawns, the network believes consumer demand for high-definition is finally taking off. ESPN is planning to broadcast more than 2,000 programs next year in high definition, equivalent to 6,000 hours of television.

Burns says the viewing audience is embracing high-definition systems following the decision by set manufacturers to move to wide-screen TVs, most of them HD.

He adds: "There are 9-10 million homes with wide-screen sets and 1.5 million of them are currently HD. In the early 1990s people were getting digital cable and satellite services and saying to themselves: 'How could it get better than this?' Now we've shown them it can."

ESPN has invested millions of dollars in the country's first HD studio complex in Connecticut from where it plans to cover 300 sporting events with the technology.

For a typical college football game, that effort involves the use of more than 20 cameras - some of them suspended above the playing field on wires. Unlike existing football coverage, the so-called "sky cams" track the ball around the pitch. Such technology, developed by broadcasters that include the BBC, is employed to ensure no piece of action is missed.

"We're waiting for something to happen that will change the course of a game, or a whole championship, which would not be seen on ordinary TV but will be shown in high definition. That will drive consumer take-up," says Burns. He cites "an unassisted triple-play" in a game last year between the Braves and the Cardinals as an important sporting moment caught in high definition that had never been seen on TV.

While that might appeal to sports fans, leading pay-TV distributors are now vying to offer more HD channels. Comcast and DirecTV - the largest cable and satellite TV groups respectively - both see HD channels as a new way to win subscribers. Other pay-TV groups, including Charter, Cox, EchoStar and Adelphia, have signed deals with ESPN to carry HD programming.

At ESPN, Burns argues that programs produced in high definition will be sufficiently superior - even viewed on an aging analogue TV set - to persuade sceptical viewers of the benefits.

"We have unlocked the door," he says. "It's not open very far, but we've pushed it open."