Grab Your Goggles: Will 3-D Be the Next Wave in Home Entertainment?

James Cameron’s three-dimensional (3-D) film Avatar — now the highest-grossing film of all time — is helping to set the stage for what could be the next wave in home entertainment: 3-D televisions and other electronics that aim to bring an immersive experience to mainstream living rooms.

The parade of 3-D technology began in January at the Consumer Electronics Show (CES) in Las Vegas. During the show, Sony outlined an entire 3-D “ecosystem,” saying it plans to leverage “all its diverse business assets to create a 3-D world [from] electronics and games to movie content.” The company plans to offer “a comprehensive range of 3-D home entertainment” this year, including 3-D LCD TVs, 3-D compatible PCs, and PlayStation 3 systems primed for 3-D games. On February 10, Sony announced it would also launch 3-D Blu-ray players this summer ranging from $180 to $250. Samsung, LG Electronics and Panasonic also plan to introduce televisions with 3-D capability this year. Meanwhile, 3-D content is already under development, including at television networks like ESPN and Discovery Communications.

News Corp., which owns 20th Century Fox, has seen Avatar rake in more than $2.3 billion in gross box office receipts through February 15, according to press reports. New 3-D films — including Alice in Wonderland, How to Train Your Dragon and Toy Story 3 — are already in the works. During an earnings conference call with analysts, News Corp. CEO Rupert Murdoch said he was convinced that “Avatar will be a harbinger of fundamental change in the industry and herald an exciting new era of 3-D entertainment…. Asian manufacturers are well advanced in developing the technology that will transform the home viewing experience. Of course, you’ll see more 3-D films, but more fundamentally, there will be exponential growth in 3-D programming in the next couple of years.”

According to Wharton faculty and other experts, however, it’s unclear whether consumers, who have spent recent years upgrading to high-definition television, will reach for their 3-D goggles just yet. “This is marketing in the wrong direction,” says Wharton marketing professor Peter Fader. “There’s no demonstrated need for 3-D in the home and little likelihood consumers will stick with it.”

“This move into 3-D TV does seem aggressive,” notes Kendall Whitehouse, director of new media at Wharton. “[3-D offerings in movie theaters] haven’t shown that 3-D is more than just a niche. There’s a market there, but it’s going to be slow to grow.”

Upgrade Fatigue

Experts at Wharton say consumer electronics companies seem to have a “build-it-and-consumers-will-come” strategy regarding their 3-D offerings. In an interview with BusinessWeek, Sony CEO Howard Stringer said his company was “going to swamp the marketplace” with 3-D technology because it has more assets — games, TVs, Blu-ray players and cameras that are used to make movies — than anyone else. Stringer also predicted that 3-D will migrate to multiple devices.

However, Stringer didn’t talk about how the company planned to convince consumers that the time for 3-D has arrived. “I expect the adoption process to be very slow,” says Wharton marketing professor Jehoshua Eliashberg. “I see the potential for 3-D to emerge, but it requires an investment from consumers. Think about [those] who just upgraded to HDTV during a recession. Who’s going to upgrade again?”

Certainly, 3-D TVs won’t be cheap. Although most companies didn’t detail price ranges at the CES, the first 3-D TVs from Samsung are available for pre-order on Amazon.com and will be shipped on March 8. The prices range from $1,999 for a 40-inch screen to $3,299.99 for a 55-inch version.

According to Forrester Research analyst James McQuivey, consumers bought more than 40 million HDTVs between 2007 and 2009, most of them selling for about $1,000 or less. In 2008, the best-selling HDTV sets were 40 inches or more. In 2009, smaller screens, which were headed for bedrooms and dens, were the hot sellers.

McQuivey argues that the consumers most likely to care about the latest TV technology already spent money upgrading their TVs. “People who really love sports, movies and gaming already have a massive flat screen in their living rooms,” he noted in a blog post. “Now we’re going to ask those same people to spend between $2000 and $4000 to get a good 3-D TV set with two sets of active [3-D]glasses? Sorry, the credit card is going to stay in the wallet for this one.”

Bernstein Research analyst Craig Moffett also panned the 3-D TV concept largely based on the same upgrade fatigue logic. “A dose of reality would be welcome in the hype about 3-D TV,” Moffett wrote in a research report. Companies are betting on the unlikely scenario that “the public will dutifully buy [3-D sets] to replace their aging six-month-old LCD flat panel TVs.”

In other words, consumer electronics companies may be facing a case of bad timing. “Weariness may be setting in for consumers,” says Whitehouse. “Consumers moved quickly from cathode ray televisions to flat screens, but 3-D TV is going to be on a slow growth path. This isn’t a ‘must have’ upgrade, like going from black-and-white to color or VHS to DVD.”

How consumers react to 3-D TV remains to be seen. McQuivey expects about one million 3-D TVs to be sold in 2010, while the Consumer Electronics Association places the figure at four million.

David Hsu, a management professor at Wharton, acknowledges the potential for upgrade fatigue, but also adds that it is imperative that consumer electronics manufacturers keep coming up with new technologies to spur consumer purchases. “It’s in the best interest of Sony, Samsung and the others to create new technologies so people don’t hold onto their television sets for 12 years,” he notes. “The message is that your television does become obsolete in three years — to get consumers used to replacing [them].”

The problem: Consumers aren’t rewarded for being early adopters. “The average consumer will ask, ‘Why do I need this?’” says Hsu. For instance, those who bought HDTVs when they were first available paid substantially more than they would have if they waited. “On the frontier, you’re paying so much more. If you’re far from the frontier, you get a lot more bang for your buck.” The challenge for 3-D TV, Hsu and others point out, will be delivering a unique viewing experience that will entice consumers to pay a premium.

Too Immersive?

One potential hurdle for 3-D technology, experts say, is that the viewing experience may be too unique. Indeed, 3-D TV could be too immersive and occupy too much time, according to Eric Clemons, an operations and information management professor at Wharton. He notes that consumers typically watch television while doing other things — eating, talking or working on a laptop — and it would be hard to do those things while wearing 3-D goggles and engaged in a cutting-edge entertainment experience.

“3-D TV is almost too engaging,” says Clemons. “It is total immersion. Are we willing to get that engaged with most of the current TV content? I doubt it.” He predicts that consumer engagement with 3-D TV will be limited to certain content types — like sporting events and movies.

Fader adds that 3-D TV will likely require too big a change in some heavily ingrained viewer habits. For instance, consumers rarely watch one show or movie; instead, they scroll through channels on the remote control. “Not only are viewers doing 10 things at once, they flip around to be entertained in medium-sized chunks,” he says. “What happens when you flip away and there’s no 3-D content? You will have to take off your glasses. Then you flip back to 3-D and put your glasses back on.” He adds that 3-D works in the theater because viewers are totally immersed without the option of doing other things.

Hsu acknowledges that “changing viewer behavior is a big deal,” but there is usually a market of people who will pay a premium for a differentiated experience. The larger question is what kind of experience will 3-D TV provide? Adds Eliashberg: “We don’t know how similar 3-D TV will be to the experience in the theater. There’s a big difference between the big screen and small screen. Even on 50- and 60-inch TV screens, it’s not same experience.”

Content Matters

How big the market for 3-D technology becomes will largely depend on the content available and the investment required to produce it, say experts at Wharton. Companies with a stake in the success of 3-D are lining up to produce content that will entice consumers to upgrade their television sets. Sony, Discovery Communications and IMAX, which makes movie theater systems with outsized screens, have announced plans to launch a 24-hour 3-D network in 2011. ESPN will kick off its own 3-D network this year; it will feature at least 85 sporting events in the first year, beginning with the 2010 FIFA World Cup on June 11. The college football national championship will also be broadcast in 3-D by ESPN in January 2011.

Will that be enough to lure consumers? Hsu says the amount of 3-D content will depend on production costs and technology standards behind the scenes. “Content companies will have to invest with a good bit of uncertainty. For 3-D TV to go mainstream, content will have to move beyond mere novelty to things that keep people subscribing.”

Another question surrounds the technology standards that will emerge for 3-D TV, and whether distributors will have to significantly upgrade their networks to support 3-D content. In fact, Murdoch said on News Corp.’s earnings conference call that Avatar would not be released to the home in 3-D initially. “We certainly plan to release the DVD as soon as possible,” said Murdoch, adding that it will stay in the movie theater as long as it keeps generating revenues. “[But on DVD] it won’t be 3-D. At this stage, the science [does not support] 3-D DVDs.”

“Recall that it took almost 20 years for the concept of HDTV to wind its way through the labyrinth of technology development and standards setting to reach mass adoption,” Bernstein’s Moffett said in his research note.

Meanwhile, content providers and distributors like cable companies will have to decide what shows get the 3-D treatment. Will 3-D be limited to movies? Sporting events? Or will all shows — including newscasts — go 3-D? Moffett said he expects the 3-D experience to be confined to movies for the foreseeable future. Video games could be a content winner for 3-D systems, however — especially with Sony’s plans to develop 3-D games for its PlayStation.

On the part of electronics companies, “there’s a desperate need for the next ‘new thing,’ and the industry is trying to jump the gun,” says Whitehouse. “There will be a 3-D immersive niche — it’s just a question how big that niche will be. For now, it’s going to be small — certainly when it comes to broadcast content.”

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