Tuesday, May 24, 2005

BARRON: HDTV: Who Wins, Who Loses

Over the next two years, HDTV will brighten the lives of couch potatoes and send a jolt through a range of industries.


AFTER MORE FITS THAN STARTS, high-definition television is finally showing up...just about everywhere. When a few over-the-air stations started sending HDTV signals in 1998, there were hardly any shows -- or TV sets -- available in the wide-screen, high-resolution format. Today, the transition to HDTV is in full swing. You can watch most prime-time shows in this crystal-clear format, you can get a set for under $1,000 and you can't find a sports bar without one.

The trend is affecting just about every business connected to television. New gaming consoles from Microsoft and Sony will power high-def displays. Movie studios will sell consumers yet another format of titles like Star Wars and Snow White. Production gear will be updated, from Avid Technology and Autodesk. Satellite networks like PanAmSat Holding and SES Global will fill transponders, as HDTV channels become competitive weapons among cable, satellite and -- soon enough -- telephone companies. The HDTV build-outs of those rivals, in turn, will benefit the suppliers of network infrastructure, like Scientific Atlanta and Motorola.

High-def is certainly good news for the TV sales of Sony and Matsushita's Panasonic, but they face fierce competition from Sharp, Samsung, LG Electronics, Philips, Thomson -- and now even Dell Computer and Hewlett Packard. All those big screens are a new market for graphics semiconductor makers like Texas Instruments, ATI Technologies, NVIDIA, and little specialists like Trident Microsystems and Zoran.

A high-def picture has six times the digital information of standard television, so computers and entertainment gear will need bigger hard drives from Seagate Technology and Western Digital.

The incoming tide of HDTV will lift most boats, but maybe not all of them. Programming originally shot on standard video -- like Home Improvement and other sitcoms from the 'Eighties and 'Nineties, or the old music videos shown on Viacom's VH-1 -- won't look great on high-def screens. Struggling video-rental businesses like Blockbuster will face another round of inventory investment. And the heavy bets on high-def programming by the DirecTV Group and British Sky Broadcasting will pressure rivals like EchoStar Communications.

HDTV HAS BEEN A LONG TIME COMING. It's been 10 years, in fact, since an FCC advisory committee chose a digital HDTV standard with up to 2.1 million pixels' worth of resolution in a picture that can be either 720 or 1080 lines tall. The last time American TV standards changed had been in 1954, when color sets first appeared with a picture of 480 lines and a few hundred thousand pixels in resolution.

America's move to HDTV began in the early 1980s, when most people still got their television over the air, instead of from cable and satellite. Engineers from networks like CBS alerted the Federal Communications Commission and Congress to the plans of Japanese broadcaster NHK for a satellite-based HDTV service.

The FCC adopted the digital standard in 1996 and then set out a 10-year timetable for broadcasters and television manufacturers to move from analog to high-definition digital. Just as the compact disc had improved on analog LPs, the digital HDTV transmission encoded the picture as a series of 0s and 1s, for better quality and efficiency.

The first NFL football games and live newscasts appeared in high-def the next year, and Panasonic sold a $5,499 56-inch display in August 1998. In 1999, CBS started sending out prime-time series like Everybody Loves Raymond in HDTV, while NBC started with The Tonight Show and ABC with Monday Night Football.

Over-the-air broadcasters, like Sinclair Broadcast Group (ticker: SBGI), got free spectrum from the government so they could simulcast in digital and analog formats. The FCC timetable called for all 1,300-odd stations to start some digital broadcasting by 2002. All programming was supposed to be simulcast digitally by April of this year. The satellite broadcasters DirecTV (DTV) and Echostar (DISH) offered their first HDTV channels in 1998 and 2000, respectively.

Table: HDTV

Consumer-electronics firms also got an FCC mandate, requiring them to include digital tuners in television receivers. The largest sets, of 36 inches and above, had to start going digital by July 2004. At least half of the most popular-selling sizes -- from 25 to 35 inches -- are supposed to have digital tuners by July of this year, with that size range having to go digital by July of 2006.

SO ARE WE THERE YET? There are now more than 5,000 hours in weekly high-def programming. Sports and most scripted series are now broadcast in HDTV form (even when they're still created on film cameras). Most multi-camera sit-coms now use high-def cameras. Reality shows like American Idol are just beginning to film in high-def, as are daytime soaps like The Young and the Restless.

News programs, by and large, still use standard-definition video. But one of the sensations of the recent National Association of Broadcasters show in Las Vegas was the new HDV camera from Sony (SNE), which brings the entry-level price of high-def down from about fifty grand to about $5,000. Sony sold 35,000 of the new, inexpensive model in the first month.

A comparably priced high-def camera will arrive in the fall from the Panasonic unit of Matsushita Electric Industry (MC), that records on flash-memory type cards instead of tape. These cheap high-def cameras will trigger the proliferation of HDTV material, in news and indie-program production. And they point the way toward high-def consumer camcorders.

Feature films and big-budget television commercials are still mostly using film cameras. The resolution and color subtlety of film will exceed high-def video for the foreseeable future. But some well-known films have been done on high-def video, including last week's finale of the Star Wars series.

High-def programming has been one side of HDTV's chicken-and-egg challenge. The TV set is the other side. There are now more than 800 models of HDTVs -- using plasma displays, liquid-crystal displays and projection technologies like the digital-light processor from Texas Instruments (TXN). Although still more expensive than analog sets, the average price of an HDTV has come down 75% in five years. Digital sets are now as cheap as $500, versus $3,500 back in 1998.

New video-gaming consoles from Sony and Microsoft (MSFT) won't hurt high-def demand, either. High-def displays will be supported by both the Microsoft Xbox 360, due out this fall, and Sony's PlayStation 3, due in spring of 2006.
Dollar sales of digital TVs rose 78% last year, to $10.7 billion in the U.S., according to the Consumer Electronics Association, accounting for more than half of the dollar sales in television sets. Unit sales rose 63%, to 7.3 million.

Some of those digital TVs had only standard-definition displays, but most were high-def. Most important to television programmers, the installed base is about 18 million HDTV sets in more than 12 million households. The CEA expects those numbers to pass 50 million next year, and 80 million in 2007.

WHEN HDTV WAS JUST STARTING in the late 'Nineties, some observers thought it was getting off to a slow start. But consumer adoption of HDTV has grown as fast, or faster, than previous technologies like color TV, satellite TV and the DVD. Color took decades to catch on. The satellite-television market took more than five years to reach 10 million customers. The relatively cheap DVD player took less than four years. HDTV passed a million users in two years, and 12 million in under six years.

Now, the government and broadcasters are debating the deadline for completing the transition to HDTV. Texas Republican Joe Barton, chairman of the House Energy and Commerce Committee, wants to iron out the final details of the switchover to digital TV, in a bill he hopes to introduce soon. Existing law calls for broadcasters to shut off analog broadcasts at the end of 2006, except in areas where fewer than 85% of households have digital sets. Barton favors a firm switchover date, but with digital receivers in only about 13% of households now, broadcasters and some in Congress want to push the cutoff date back a couple of years.

While America finishes its transition to HDTV, most of the world will be going high-def, too. Japan was first, of course, with its satellite service. Terrestrial stations in Japan and Korea have provided HDTV broadcasts for a few years. Canada's CBC started high-def broadcasts in March. The first pan-European high-def programming started in 2004. Free French service is beginning this year. Luxembourg-listed satellite operator SES Global (SESG.LX) will launch German-language HDTV service in November. China should get its first HDTV satellite service this year, too. Meanwhile, Rupert Murdoch's British Sky Broadcasting Group (BSY) will launch high-def service next year, and the BBC will send out all its programming in high-def by 2010.

As more of the world has high-def displays, film and television studios will want to distribute their programming in high-def form -- if they want to keep viewers' eyes from wandering off to high-def video games. That won't be a big deal for the majority of movies and classic TV shows, which were shot and archived on film. Studios have been rescanning their film libraries into HDTV form, and that's generated business for post-production houses and their equipment suppliers.

One of those suppliers is Autodesk, of San Rafael, Calif. While best known for its mechanical-design software, Autodesk (ADSK) has grown sales of its special-effects software at a fast clip in recent years. In the quarter ended April 2005, sales of video products rose 10%, to $41 million in sales -- contributing about 12% of the company's $355 million in sales.

Special effects have become a selling point for films, TV shows and video games, says the firm's head of media-product marketing, Martin Vann. He guesses that only about 30% of the post-production business has upgraded to high-def.

At a recent 36.56, Autodesk shares go for a handsome 32 times the consensus earnings estimate for the January 2006 fiscal year (as tallied by Thomson Financial). That may be a price worth paying. Reporting on its April '05 quarter Thursday, Autodesk said new products had helped lift sales about 20%. It suggested that analysts boost their estimates.

WHILE FILMED SHOWS CONVERTED to high-def look good, some programs could look terrible. Mark Cuban, owner of the Dallas Mavericks basketball team and co-founder of a couple of high-def channels called HDnet, shuns stuff that was originally shot on standard-def video. That's a problem for the long-term value of many sit-coms created in the 'Eighties and the 'Nineties, as well as the older music videos that fill channels like VH-1, which is owned by Viacom.

Barron's sought comment from Viacom (VIA), with no luck.

High-def DVDs aren't yet out. A Betamax-versus-VHS-type war has been threatened between rival formats: The Blu-ray format is backed by Sony, Panasonic and other consumer electronics firms, and HD-DVD format promoted by Toshiba and movie studios. After consumers and retailers like Best Buy complained, the two camps started trying to settle on a standard. In one format or another, high-def DVD recorders and players will reach the market next year. Then studios will get to sell you another copy of Home Alone, and another onerous round of inventory investment will burden the struggling rental businesses of Blockbuster (BBI), Movie Gallery (MOVI) and Netflix (NFLX).

Meanwhile, any producer who wants her product to have shelf life will have to consider editing it in high-def. That's modestly good news for Apple Computer (AAPL), whose Final Cut Pro software is fancied by indie movie-makers, but powerfully good news for Avid Technology (AVID), the leading vendor of video editing systems for show biz and TV news. The Tewksbury, Mass., firm's chief executive, David Krall, says that the desire to work in high-def seems to be accelerating the upgrade cycle among Avid's customers. The company only introduced a high-def version of it's bread-and-butter product, the Media Composer, in the December quarter and will sell hardware accelerator cards that speed up high-def work, later this year.

Reality shows like American Idol are only starting to work in high-def, and broadcast news is at the very beginning, leaving a big upgrade opportunity for Avid. Krall says HDTV will be a nice sales driver for the rest of the decade. At the recent price of 53.53, Avid shares go for 20 times the consensus estimate of this year's earnings, so the stock might not fully reflect its high-def upside.

Once programmers have high-def content, they'll need to get it to viewers.

PanAmSat (PA) chief Joe Wright can't wait. After an industry downturn that sent satellite operators -- including, for a time, PanAmSat -- into the arms of private-equity firms, demand for transponder capacity is perking up. Revenues for the Wilton, Conn., firm rose just 2% in the March quarter, to $209 million, but TV distribution revenues rose 8% over the prior year period.

With 23 satellites, PanAmSat covers 9,200 cable TV downlinks across North America-far more than rivals SES Global and Intelsat. So PanAmSat has gotten contracts for about 70% of all full-time HDTV channels from such programmers as Fox, the NFL, TNT, ESPN and HDnet. As cable firms, phone firms and satellite broadcasters battle for customers, Wright expects high-def to become a selling point, and sees it hogging satellite capacity.

"Demand in the U.S. is so strong that we're looking at additional capacity," says Wright. "And pricing is going to strengthen...I don't see how it doesn't." That would be welcome news for the private-equity firms KKR, Providence and Carlyle -- whose 58% stake in PanAmSat is worth $1.3 billion at the stock's 18.43 price and remains locked-up until September. Payouts have already reduced their $550 million investment to a basis of about $50 million, so public investors might rightly worry that the buyout firms will sell into HDTV's good news. But that control group also gets PanAmSat to pay $1.55 in annual dividends, so the 8.4% yield may soothe investors.

DirecTV is another big play on HDTV. The El Segundo, Calif., company just launched the first of four leading-edge satellites that will reach most of the U.S. with the high-def broadcasts of 1,500 local stations and 150 national channels, by 2007. Rival EchoStar hasn't yet matched those plans. That's not only a potential business problem, but a legal problem for EchoStar, which is scrambling for enough capacity to satisfy a government requirement that it carry local broadcasters' programming.

Consumer electronics gear will need better data-storage and graphics processing to handle HDTV. Happily for hard-drive suppliers like Seagate (STX) and Western Digital (WDC), an hour of uncompressed high-def would fill 500 gigabytes. Computer graphics chips are starting to show up in HDTV gear, courtesy of ATI Technologies (ATYT), Nvidia (NVDA) and smaller firms like Trident MicroSystems (TRID) and Zoran (ZRAN).

HDTV sets themselves will come from Sony, Sharp and from Matsushita, whose Panasonic unit is making the bold bet that for screen sizes above 36 inches, consumers will prefer bright plasma panels to LCDs, or the cheaper but bulkier projection technologies.

But the consumer-electronics business is getting ferociously competitive, with the Japanese battling traditional rivals like Samsung, LG Electronics and Philips, and new ones from China and the U.S., including computer firms like Dell and Hewlett-Packard. Says Panasonic's U.S. TV-marketing boss Andy Nelkin, "Virtually every technology company is trying to capture this market."

As the HDTV makers duke it out, consumers can only win.


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