The disc is dead, long live the disc

by Peter Nowak
CBC News

Vinyl albums, VCR tapes and camera film may soon have company in the graveyard of obsolete media: compact discs and DVDs.

With the internet, flash memory and digitalization dramatically transforming how music, video, games and computer data are delivered and stored, the future of the disc -- and the optical disc drive that reads it -- looks bleak. Sales of disc-bound media were flat or down virtually across the board in 2007, with only video games bucking the trend, and technology analysts are predicting the demise of discs will accelerate this year.

"We're seeing the beginning of the end," says California-based technology analyst Rob Enderle of the Enderle Group. "The reality is the market is moving to downloads. In every aspect, it looks like we're stepping away from optical drives."

The decline started with music in 1999, when Napster became a global phenomenon by allowing users to easily share their digital MP3 files over the internet through peer-to-peer file-sharing technology.

The recording industry largely shut down that iteration of Napster, but the damage had been done -- people's appetites had been whetted for digitally downloaded music. Legal digital downloads through outlets such as Apple's iTunes have taken off since and continue to grow, while physical CD sales are heading in the opposite direction.

In Canada, digital album sales rose 93 per cent in 2007 to 1.98 million units, according to Nielsen Soundscan. Digital albums growth, however, could not offset the large decline in physical discs, with overall album sales falling 6.9 per cent to 41.8 million.

Worldwide, digital music is ramping up just as quickly, accounting for about 15 per cent of all music sold in 2007, up from one per cent in 2003, according to the International Federation of the Phonographic Industry. Sales are expected to accelerate even more now that record labels have largely dropped the digital rights management previously placed on tracks to restrict their copying.

The trend is similar in home video. DVD sales in Canada for the first 11 months of 2007 were down 17 per cent from a year earlier to 2.5 million units, according to electronics tracking firm NPD Group.

Consumers are starting to take to downloadable video services, many of which are still nascent -- including iTunes, which Apple says has sold more than 15 million television episodes and movies. Research group ABI expects 215 million video downloads to be sold in 2008, climbing to 2.4 billion by 2012.

Hollywood is hoping the DVD market will bounce back through high-definition next-generation disc sales, which so far have languished because of the format war between Toshiba's HD DVD and Sony's Blu-ray. The battle has been a replay of the VHS-Betamax VCR showdown of the early 1980s, and consumers last year resisted buying into one disc format or the other for fear of being stuck with the losing format. As a result, both formats sold a paltry 31,500 discs combined in Canada in the first 11 months of 2007, NPD says.

Warner Bros., however, struck a decisive blow in favour of Blu-ray in early January when it announced it was dropping support for HD DVD, leaving that format with only a few remaining adherents. Blu-ray sales have already picked up, with the format accounting for about 90 per cent of next-generation DVD players sold during the week of Jan. 12, NPD says.

Blu-ray seen as the last disc

Still, with downloadable video services exploding, analysts are saying that Blu-ray will likely be the last disc format for movies.

"It won't be long before you're popping in a [memory] chip or downloading it off the web," says David Senf, director of security and software research for technology analyst firm IDC Canada. "It doesn't make sense to have a disc that needs to rotate in order to get bits into your machine. This will be the last iteration."

The same holds true for the software market, where discs have been on the way out for years. In the retail space, vendors are selling customers an initial disc that is then updated with later versions through an internet download. Sales of software on disc are flattening as a result, with 6.6 million units sold through the first 11 months of 2007, about the same as last year, according to NPD.

On the enterprise side, many businesses did away with much of their disc-based software years ago, instead buying a single disc that comes with a number of user licenses. Moreover, businesses are increasingly moving toward software as a service, where the application is accessed over the internet from a central server hosted by its maker. Discs don't even enter the picture.

Software as a service accounts for only a small portion of the market, but "it is growing like wildfire," says Nigel Wallis, IDC's research manager for applications services. Software on demand will grow to five per cent of the market by 2011 from two per cent in 2005, which is a bigger increase than it seems considering that new licenses account for about 50 per cent of the market, Wallis says.

"It will spread in certain areas very fast, like it did in sales force automation," he says, adding that web conferencing, system management and storage software are likely candidates. Software on demand will also grow quickly in consumer areas, such as photo-handling applications and office productivity suites. Google Apps, which is a free online alternative to Microsoft Office, is already a "viable play," Wallis says, despite having only a minuscule share of the market.

The disc does seem to have a bright future in video games, with sales of discs for consoles in Canada up 18 per cent to 8.7 million for the first 11 months of 2007, according to NPD. But moves against the format are afoot in that industry as well, with the console makers paying increasing attention to downloadable games.

Microsoft's original Xbox in 2001 introduced an internet connection and hard drive storage to the video game console, paving the way for the company to sell owners additional content for their games via download. The follow-up Xbox 360 console, as well as Sony's PlayStation 3, now allow users to download complete games onto their hard drives, with discs nowhere to be found.

Electronic Arts, the biggest game publisher in the world, also last week took an experimental step toward eliminating the disc altogether by announcing Battlefield Heroes, a free downloadable game that will be supported by in-game ads and transactions.

DVD income too valuable

Still, the disc won't disappear overnight. Rick Anderson, president of Canadian online movie rental service Zip.ca, says the medium will eventually become obsolete, but it won't happen -- at least as far as films are concerned -- for many years, since there is still too much money wrapped up in DVDs. About 70 per cent of all movie revenues come from the discs, a fact that has made movie studios wary of offering significant downloadable content.

"It's the golden goose phenomenon. DVDs have been so, so good to the studios," he says. "If you're trying to figure out how to protect the multi-billion-dollar business of Hollywood, you don't just walk away from the DVD established base of business in favour of something new and untested."

The studios are more likely to add downloads to their distribution schedule -- sandwiching them somewhere between theatrical releases, pay per view and television broadcasts -- rather than phase out the DVD entirely, he says.

The same holds true for video games, according to DFC Intelligence analyst David Cole. The movie industry really took off when it established its many different distribution methods -- a move the video game business is looking to replicate.

"You want as many distribution channels to get in front of the consumer as possible," he says. "There's going to be a similar kind of phenomenon occurring with games."

The disc's ultimate destiny, analysts say, will depend on the drives that read them -- and these too are being phased out in favour of the sort of flash memory found in iPods. These so-called solid-state drives don't use a disc and subsequently have fewer moving parts, which makes them more slim, power efficient and rugged, according to proponents. Computer makers including Apple and Dell are already starting to replace hard discs in their laptops with solid-state drives, but their costs are still prohibitive. Apple's new Macbook Air with a 64-gigabyte solid state drive, for example, sells for more than $3,200.

Flash memory makers say prices on solid state drives are coming down quickly and they should start seeing mainstream acceptance around 2010.

"We're making inroads," says Rich Heye, senior vice-president and general manager of the solid-state drive division for Sandisk, who predicts SSDs will have 20 per cent of the laptop market by 2011.

Ultimately, cost is the reason the disc has endured -- the CD made its debut in 1982 -- and will continue to do so for many years, DFC's Cole says. "It's not the ideal medium, but it is the cheapest one out there."