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The Ignored-All-Too-Much Significance of Attach Rates November 13, 2007

Posted by hdanalysis in HD.
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So what is an “Attach Rate”?  In the case of players and movies, an attach rate is the number of software sold per one player sold.  People always say attach rates do not matter because it’s the quantity that count.  In this case, attach rate is really a factor to tell us how to forecast our business revenues.  It will help us with sales projection.  Before I start, let me clarify why I use the attach ratios I did. 

Say 2.5mil sold by end of Nov for PS3+standalone, and say 3.75M software sold by end of Nov (they were at 2.6 by end of Oct….so I’m overestimating for them.)

For HD DVD, say by end of Nov they sold 500k stand-alones and say 2M software are by then (I’m just taking 1.875:1 sales ratio, the “nearly” 2:1 ratio).  The attach rates are 4:1.5 HD DVD…so at least in N.A, the claims are valid.

So here’s my analysis of the HD DVD vs. Blu-ray attach rates and its effect (for North America only):

Assumptions:

-Based on my tracking of PS3 sales, N.A. sales are experiencing around a 7.15% monthly growth rate. Say I add in stand-alone Blu-ray players (which based on engadgethd back in July, growth is actually decreasing), but overall, I assume blu-ray hardware increases by 8% a month.

-Based on engadget, they reported Nielsen that HD DVD stand-alone saw growth of 37% for the quarter = around more than 12% a month. This does NOT include HD DVD 360 add-on drives. Based on first year and half of DVD hardware sales, growth rate were 23% per month in the first year and around 11.6% in the second year. I am assuming HD DVD Hardware (no 360 add-on) has a growth rate of 11% a month.  (http://www.engadgethd.com/2007/07/18/hd-dvd-touts-sales-growth-over-blu-rays-decline/)

-Based on current ratios of hardware and software, I assumed Blu-ray has an attach rate of 1.5 vs. HD DVD’s attach rate of 4. This is high for Blu-ray, but I’m basing it off of North America only. (Attach rate ratio of 4:1 HD DVD as of June 11, 2007 by http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/www/story/06-11-2007/0004605296&EDATE=)

Distributions used:
-Normal distribution for Blu-ray and HD DVD attach rates, and PS3/BD player growth rate.
-Log normal distribution for HD DVD hardware growth rate (seeing trend of lowering prices, there’s great potential for higher growth)

To summarize my parameters, here’s the comparison on “sales as of end of Sept. and industry average” vs. what I’m using:
-Blu-ray attach rates – 0.56 : 1.5 (Over estimate for BD)
-HD DVD attach rates – 4 : 4
-PS3/BD growth rate – 7% : 8% (Over estimate for BD)
-HD DVD growth rate – 12% : 11% (Under estimate for HD)

Analysis Starts Dec. 1st 2007. Stats used are:
500k HD DVD hardware
2.5M PS3/BD player hardware
2M HD DVD software
3.75M HD DVD software
Software ratio at start 1.875:1 (BD:HD)

By Dec 1st, 2009, point estimates projections are as follows:
6M HD DVD players (N.A only)
16M PS3s/BD players (N.A. only)
24.5M HD DVD software (N.A. only)
23.8M BD software (N.A. only)
Software ratio here 0.97:1 (BD:HD)

Based on the monte carlo Crystal Ball simulation, HD DVD has a 80/20 confidence level of (80% chance it not sell over) 38.6M copies.

For BD, there’s only 80% chance it may not sell over 29.8M copies only.

This just shows how much more potential in growth HD DVD has if it maintains that ratio of attach rate over BD.

And I did a point estimate for Dec. 1st 2010 assuming everything continues at the current assumed rate:
21M HD DVD players (N.A only)
40M PS3s/BD players (N.A. only)
85.6M HD DVD software (N.A. only)
59.9M BD software (N.A. only)
Software ratio here 0.70:1 (BD:HD)

Here are the Projection Chart, Frequency Chart and Cumulative S-Curve:

Frequency Chart

S-Curve Chart

So not everyone will understand the S-curve.  In this case, it’s basically saying for Blu-ray, there’s a 95% likelihood that software sales will not exceed 40M by Dec. 2009.  This is based on our assumption that current rate, growth and ratios do not deviate from our parameters.  Same for HD DVD, but there’s only a 80% likelihood that software sales will not exceed 40M by Dec. 2009.  Basically there’s more room for HD DVD’s potential in software sales based on the current state of things.

Please, do not mis-interpret the S-curve.  Do some research first before before claiming “Oh! It’s saying Blu-ray has 100% chance of reaching 45-80M in software sales!”  So for those who said attach ratios don’t matter…sorry, but it’s not true. Ratios mean everything for the future since it provides information on growth potential.  And a business who do not measure growth potential, will have a hard time succeeding.  Enjoy~

P.S.  I’m projecting December 2009 to be the tipping point for “format winner of software sales” to switch from Blu-ray to HD DVD, if not sooner.

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