CD-R and DVD-R Industry View from 2001
1. Industry Background

CD-R Duplication Defined
First and foremost, let's define "CD-R Duplication." In the simplest of terms, CD Duplication refers to the making of one or more copies of a disc by "burning" the content onto a CD-R using one or more recorders. For the purpose of this study, we will only focus on the professional CD Duplication business.

CD-R Duplication is a relatively new phenomena in the field of optical media manufacturing, being born from the process of duplicating floppy diskettes (in fact, most CD-R Duplication equipment suppliers originally made floppy diskette duplication equipment). The Compact Disc (CD) itself has only been around since the early 1980s. Recordable CDs (CD-R) have been available since the early 1990s, and even then, it was initially a very expensive product (the first CD-R "burner" cost approximately $40,000 each, and blank CD-R media was priced at more than $50 a piece).

There are two ways to make a CD with content on it. CD-R duplication -- again, using a CD-R drive to "burn" the information onto a CD-R -- is one way. The other way, and the way the vast majority of CDs are made, is to "replicate" a CD. CD replication is the process of creating a stamper disc with the content on it, and pressing discs from the stamper using an injection molding process. Once the stamper is made and the machine is set up, a disc can be produced in a matter of seconds. The advantage of CD replication is that it is much less expensive to make a disc in large quantities than CD-R duplication, particularly for more than 1,000 discs. Every time an injection molding machine is stopped in the replication process, materials and time are lost. Manufacturers obviously prefer to do large runs, so the unit cost for small runs will be higher. Some replicators will contract for a small number of discs, but actually charge for a minimum number and throw away the excess. However, when large numbers of discs are required, replication is certainly the most cost-effective solution, with unit costs as low as $0.40 (including mastering) for large quantities.


CHART 1 - Differences Between CD Replication and CD-R Duplication

Replication Duplication
Process pressing discs from a stamper burning (copying) info on a CD / DVD
Cost to Client* about 40-50 cents/disc in quantity about $2.00-$3.00/disc
Time to Produce typically 7-10 days typically 24 - 48 hours

*does not include packaging and distribution

Until the late 1990s, replication was virtually the only way discs with content on them would be made. Burning a CD-R was a method only used when just a handful of discs were needed because the price of a CD-R burner and CD-R media was so prohibitive.

The price of CD-R media began to plummet around 1997 due to an over capacity of CD media manufacturing capacity (see Chart 2). As prices declined, blank CD-Rs could be purchased by consumers for as low as $0.80 per disc, and less than $0.60 per disc in bulk, depending on the quality of the media.


The opportunity for duplicating CD-Rs rather than replicating CDs has exploded. The primary advantage of CD-R duplication over traditional replication is that it takes much less time to copy content onto a CD-R rather than replicating a disc, and in some cases, it can also be more cost-effective. CD-R duplication can normally be done in a day, while many replicators will quote periods of a couple weeks, if not more, for a replication run.

CHART 2 - Consumer CD-R Media Trade Pricing - U.S.(per blank CD-R disc)

YEAR PRICE
1997 $2.45
1998 $1.30
1999 $1.00
2000 $0.82
2001 $0.72
2002 $0.68


How CD-R Duplication Systems Work

In the simplest of terms, CD-R duplication is essentially CD photocopying, much like "Xeroxing" a page from a book. The more detailed explanation is that CD-R duplicators usually require a separate premastering station to create the source file, which can be a CD, CD-R, a tape (DAT or U-matic, depending upon the system's configuration), or an image file transferred directly to the duplicator's hard disk drive. The image file is generally stored on an internal hard disk, and the system's dedicated CPU and proprietary software sends the image across a SCSI bus or multiplexor board to an array of recorders, which will then make simultaneous copies.

Types Of CD-R Duplication Equipment
The CD-R duplication equipment field is becoming crowded, particularly at the lower end of the business, where every manufacturer has something slightly, or even radically different to offer. There are three basic classes of equipment:

1. Copiers

The most economical way to create one or more copies of a disc is to use a system with a reader and a writer (or even use the writer as a reader, and copy the disc first to another storage device such as an integrated hard disk). These may be configured either as a computer peripheral, requiring an external processor, or as a stand-alone device that operates at the push of a button.

Copiers are primarily used by consumers. Many PCs come with CD-R drives these days, to copy a single disc, such as a compilation of songs. As it is primarily a consumer function, we will not address CD-R copiers.


2. Towers

We are defining "towers" as systems which have multiple recorders in one enclosure that must be hand-loaded rather than using a robot to move the discs from a spindle ( towers are sometimes referred to as "manual" systems). These may include a processor for creating a new disc, or they may simply be used to make multiple copies of a disc that has already been encoded.

Towers were the first true professional CD-R duplication systems, preceding autoloaders. Towers would typically be used for companies:

• requiring a small quantity of CD-Rs;
• that have access to an inexpensive labor force to change CDs; and
• looking for a less-expensive entry into CD-R duplication (tower systems typically cost in the $5,000-range). Towers have a good throughput-to-cost ratio.


3. Autoloaders

Using an automated system for moving blank and recorded media for unattended duplication (and possibly labeling or testing) doesn't really affect the recording process. There are enough machines available that do include robotics, referred to as autoloaders. Automation and robotics have always been important in the CD manufacturing process, and now they have moved into the recording arena as well. Most CD-R duplication autoloaders have a way to add a disc printer of some kind to the system, for true hands-off publishing.

Autoloaders are more expensive than Towers. Autoloaders are typically used for companies:

• that want to cut down on potential human error; and
• that want to duplicate a large number of CD-Rs without attending to the system (i.e. an Autoloader system could be run overnight).

Stand-alone Vs. Networkable
Aside from the three categories of CD-R duplication equipment, either a stand-alone or networkable system can be chosen (i.e. you can have a stand-alone tower or autoloader, just as you could have a networkable tower or autoloader). Networkable systems allow many people to send jobs to a single CD-R duplication system. Work sent through a networked system can allow for multiple jobs to be sent at once, and those jobs can be prioritized (i.e. if the President of the company sent a job, it would have priority).

Networked systems are seen as one of CD-R duplication's primary growth areas (see Chart 3). Applications include a telephone company that is sending bills to customers on CD, a retail music kiosk, or one of the many Internet music companies sprouting up that send compilation discs to customers -- typically, applications where every CD-R is different, or customized.

CHART 3 - Networkable Industry Percentage/Revenue

Year Networkable
1998 30%
1999 37%
2000 40%
2001 43%
2002 47%


Printing CD-RsTypically, the duplicated CD-R would then be printed, particularly in the case of commercial titles. Just as the art of CD-R duplication has come a long way in the last few years, so too has CD printing. For a few thousand dollars, there is printing equipment available that can make discs that are virtually indistinguishable from replicated CDs.


Who Is Using CD-R Duplication?

The commercial applications for which CD-R duplication is being used is growing at a fast rate. We estimate that more than 60 million CD-Rs were professionally duplicated in 1999, and that number will grow to about 100 million in 2000. In general, anyone who needs to store computer or audio data, for whatever reason, is potentially a CD-R duplication customer. Customers range from the likes of Microsoft, IBM or Dell, to smaller companies that perhaps want to put a sales presentation on physical media for its salesmen to use, or simply need to store data. In some cases, consumer discs (i.e. CD audio titles or computer software) are being created using CD duplication. As an example of the many applications for CD duplication, one industry executive even noted that a funeral home customer bought a CD-R duplication system so he could create CDs for family members/friends of the deceased at funerals -- he copied the funeral music, homily and other related things onto CD-Rs.

There's even more potential for CD-R duplication, particularly with the imminent arrival of DVD-R duplication. The much greater capacity of a DVD-R (more than 7-times the capacity of a CD-R) allows for applications such as duplicating video-oriented discs.

There are also a variety of companies purchasing CD-R duplication equipment. Many CD-R duplication service bureaus have appeared in the last few years. In some cases, these were companies that were doing the same thing with floppy diskettes. Many traditional CD replicators are also offering CD-R duplication for their customers -- it keeps them from going elsewhere for smaller runs, and the profit margin on CD-R duplication is usually much higher than it is for CD replication. In some cases, chain stores such as Kinko's are starting to offer CD-R duplication services. Additionally, equipment prices have come down enough that some content owners with a lot of material to duplicate are cutting out the service provider and doing CD-R duplication in-house.


In Summary

For users requiring frequent small runs of CDs, especially with quick turn-arounds, CD-R duplication offers many benefits. Cost savings is one, but not the only reason for choosing duplication. It is possible to produce hundreds of discs in a single day with low labor costs using an in-house duplication system, and by keeping the entire process under one roof. Tighter security can then be maintained as well for sensitive material. For those with smaller quantity requirements or fewer time constraints, the automated single recorder market has expanded to include several new machines for unattended production. Still, replication remains the most viable and cost effective method for creating large quantities of the same disc. Each application should be evaluated on its own merits, and an appropriate solution chosen based on the full range of criteria, not solely on price.

The professional CD-R duplication industry has enjoyed tremendous growth over the last few years for a number of reasons, including:

• declining CD-R media prices, as indicated in Chart 2 -- it is now more affordable to duplicate larger quantities of CDs as opposed to replication;

• improving equipment -- the introduction of automated, high-speed duplication equipment has both attracted new customers as well as driven existing customers to replace older equipment; and

• the continued increase in the number of CD drives/players capable of reading duplicated CD-R media.

North America is by far the largest market for CD-R duplication equipment sales, with more than half (55 percent) of overall sales taking place in this region of the world. Europe represents 25 percent of the total industry, and is currently considered the fastest growing market. Asia comes in with 9 percent, South America 6 percent, and other regions of the world combined for an additional 5 percent.

DVD-R

DVD duplication equipment is just now beginning to enter the picture. While it's doubtful it will have much of an impact this year, and probably a limited impact in 2002 as well, any money generated from DVD-R duplication equipment would be a bonus to equipment providers. Additionally, DVD duplication equipment will carry an expensive price tag.

2001 and Beyond
We are predicting that the CD-R duplication industry will grow to $185 million in sales in 2001, and $225 million in 2002. Industry revenues for 2001 and 2002 will depend on a number of factors, including:

• the impact of DVD-R duplication, which will probably start to have a significant effect on industry revenues in 2002.

• CD-R blank media pricing, which is forecast to continue to fall, although at a much smaller rate than in the last few years;

• continued advances in CD-R duplication technology, such as the growth of networked CD-R duplication equipment and faster systems, which help drive replacement system sales; and

• the development of new businesses, including CD-R business cards, and the trend toward customized consumer titles (Internet music sites have begun to place large orders for CD-R duplication equipment in the last year).

Considering that the floppy diskette duplication equipment business was a $100+ million industry in its prime, and that floppy diskettes could only be used to store data, it is very likely that in time, the CD-R duplication equipment industry could be a $500 million or more business, considering the CD (and eventually DVD) allows for applications beyond data, including audio, storage and video.

If history has taught us anything, the CD-R duplication business is probably still early on in both its life cycle and growth. Formats such as CD-Audio, the floppy disk and the VCR have all been around for more than 20 years, and only in the last few years are achieving their respective sales peaks. They have succeeded through continued technological advancements and falling prices. Formats such as CD-Audio, CD-ROM and CD-R have bright futures because the next step in technology, DVD, is backwards compatible with these formats (i.e. all DVD drives/players can play existing CD media).

Related Statistics/Information
One can get a feel for the potential continued growth of the CD-R duplication business based on projected CD media demand in the International Recording Media Association's (IRMA) Worldwide Optical Media Market Intelligence Report (see Chart 4).


CHART 4 - CD Media Unit Demand - Worldwide, By Region
(millions of units)
REGION '99 '00 Growth '01 Growth '02 Growth '03 Growth CAGR
North America 440 710 61.3% 945 33.1% 1,230 30.2% 1,490 22.1% 35.7%
Europe 540 935 73.1% 1,250 33.7% 1,495 19.6% 1,745 16.7% 34.1%
Japan 100 175 75.0% 320 82.9% 400 25.0% 580 45.0% 55.2%
China 45 120 166.7% 200 66.7% 360 80.0% 450 25.0% 77.8%
Rest of the World 145 230 58.6% 380 27.6% 485 27.6% 580 19.6% 41.4%
TOTAL 1,270 2,059 62.1% 3,095 50.3% 3,970 28.3% 4,845 22.0% 39.8%

Source: IRMA

Among the reasons IRMA cites for CD media's success include:

• The dramatic increase in CD-R drives as average retail prices fall below $200 (Note: CD+RW drives average under $300).

• The low cost of CD-R Media, which ranges from $0.80 to $1.50 at retail depending on quality levels and rebates.

• The increasing use of CD-R duplication by organizations to duplicate under 1,000 CD-ROMs. The use by CD replicators who focus on large volumes (i.e., 2,500 to 100,000 copies of CD-R duplication equipment) is time consuming (often larger replication orders take priority over duplication orders, hence smaller runs must "wait" in line). In addition, small runs are charged at a premium rate and are usually not sufficiently protected from unauthorized access. As a result, many organizations have set up their own "in-house" CD-R duplication centers (costing less than $10,000 for equipment). In addition, replicators and video duplicators have installed CD duplication equipment to satisfy client's low volume, high speed turn-around requirements.



The diverse product offerings in the CD /DVD Duplication Industry include:

-stand-alone towers -automated print systems
-automated duplication systems -automated copy and printing
-networked based systems


Piracy
Piracy has become an unfortunate beneficiary of CD-R duplication's success because it is now so easy and inexpensive to copy CDs. It is a major issue among CD-R duplication equipment and services providers, as trade association's such as the Recording Industry Association of America (RIAA) and Business Software Alliance (BSA) have targeted the CD-R duplication industry in an effort to protect their members' intellectual property. A look at the RIAA's mid-year 1999 Anti-Piracy statistics (the latest statistics available) shows the concern over CD-R duplication piracy (see Chart 5)


CHART 5 - 1999 Mid-Year RIAA Anti-Piracy Statistics
Category 1998 1999 % Change
Counterfeit/Pirate Cassettes 249,865 61,420 -75.4%
Counterfeit/Pirate CDs 133,215 70,734 -46.9%
Counterfeit/Pirate CD-Rs 23,858 155,496 551.8%

Source: RIAA

While organizations such as the RIAA and BSA typically go after the CD-R duplication service provider, CD-R duplication equipment companies who implement anti-piracy measures in their equipment can win the support of content owners, such as Microsoft, IBM and Dell.

4. Technologically Speaking
One thing is for certain, technology improvements will continue to be a critical factor in the future of the CD duplication industry. Continued improvements in automation and copying speed are a given, as is the move to DVD duplication.

CD-R Duplication Advancements
In terms of increased automation and copying speed, there are not a lot of opportunities going forward for CD-R duplication equipment suppliers to one-up the competition technology-wise, according to industry executives. For the most part, all the companies will have access to this technology at relatively the same time. The opportunities that exist will be based on innovation.

There is a growing concern among content owners over how easy it is to duplicate CD-Rs, and there will likely be more legal action as time goes on. The Recording Industry Association of America (RIAA), a trade association comprised of the major music labels, has come down very hard on replicators making unauthorized CDs (collecting more than $30 million in settlements in the last two-plus years), and has let it be known that its next target is unauthorized CD-R duplication.

DVD-R Duplication: The Logical Next Step
DVD-R Duplication is the logical next step for the CD-R duplication market to take, as DVD-R is the high density equivalent of CD-R. The primary advantage of DVD duplication over its CD-R counterpart is that DVD-Rs have a much greater storage capacity -- seven-times that of a CD-R -- and allows for additional applications, such as high-quality video on a disc (see Chart 6). Whereas the primary application for CD duplication include audio and ROM, DVD-R duplication would allow for movies to be copied, too.


CHART 6 - Comparing CD And DVD Capacities

Format Capacity Typical Applications
CD-R 650 MB CD-Audio, games, software programs
DVD-R *4.7 GB Movies, better-than-CD-quality audio, data storage

*Future versions of DVD-R are also in development that would allow for even greater storage capacity.

But while DVD-R duplication has become a hot topic in the last year, it is not likely to have much of an impact on the CD-R duplication equipment industry for the next two years, until prices of DVD media and drives come down.

We spoke with an executive from Pioneer New Media Technologies, which developed the first DVD burner (and still the only DVD-R burner available on the market). He believes DVD-R duplication will not significantly impact CD duplication within the next couple years for the following reasons:

• the installed base of DVD readers (i.e. DVD-ROM drives and DVD-Video players) has to increase substantially -- for example, there are currently about 15 million DVD-Video players and DVD-ROM drives combined in the U.S., compared to more than 100 million CD-ROM drives and CD-Audio players combined;

• a significant reduction in the price of writers and media is necessary (DVD burners and media typically sell for about $6,000 and $35/disc, respectively, compared to CD burners and media, which sell for about $300 and less than $1/disc, respectively; and

• a widespread need for DVD-R's full 4.7 GB capacity must develop, as most of today's data storage applications are satisfied by CD-R's 650 MB capacity.

The number of DVD-R duplication units that will be actually sold over the next year-and-a-half will depend primarily on the prices of DVD burners (currently selling for about $6,000) and DVD-R media (currently selling for about $35 a disc). The equation is simple -- the faster these prices come down, the more systems that will be sold). The "magic" price points (i.e. where they begin to be attractive to the mass market of CD duplication customers) for DVD-R duplication would be $1,000 or less for a DVD-R drive, and $5 or less for a DVD-R disc. These price points will probably not be hit until mid-2001, if not even a little later for the media.


We predict DVD duplication equipment and media prices will have come down enough that starting in 2002, there will begin to be a significant demand for DVD-R duplication equipment for high-capacity applications. Some CD-R duplication equipment companies will start to help their customers make the transition to DVD-R by introducing "combination" systems, including both CD and DVD-R drives. While DVD-R duplication equipment unit sales will probably take over the market share lead from CD duplication equipment around 2005, there will always be applications that do not require DVD's higher capacity, and it will be more cost-effective to choose CD-R duplication for these applications because the CD-R equipment and media will be less expensive.




- posted by J @ 9:29 AM