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Glass Houses: When Replicators Consolidate: A Mixed Blessing
Posted Oct 1, 2002 Print Version     Page 1of 1

What was your perception when Waldbaum's merged with Shoprite? Personally, I figured the supermarkets weren't doing well enough on their own, and there wasn't enough room in the market for both. Maybe I guessed wrong, but sometimes perception is everything. That goes double for the replication and media manufacturing markets, which have struggled with overcapacity and consolidation despite the unprecedented growth of DVD. Not too long ago, Technicolor acquired Panasonic Disc Services and now comes the jarring news of two more major mergers: Deluxe/Ritek and Denon/ Maxell.

Admittedly, when Technicolor bought its way into DVD via the Nimbus acquisition, I viewed it as a positive. I knew the team at Nimbus from the many stories I'd written in the early days of DVD, and considered it a good move for Technicolor. Deluxe, on the other hand, was very well-regarded for its VHS duplication business but rarely seemed interested in DVD. While so many other replicators were jumping into DVD head first, Deluxe was cautious—perhaps too cautious. As Technicolor's main competitor in VHS, why didn't Deluxe jump in at the same time? Combined with Ritek, they now boast a 100 million-unit DVD capacity immediately, and up to 170 million-unit capacity by Q1 2003, according to Deluxe president Peter Pacitti. Competitors see the move as yet another curious one for Deluxe because most wonder how they ever will fill that much capacity.

But I see a big benefit for Deluxe in entering DVD under the leadership of Rick Marquardt, who will be president of the new joint venture, Deluxe Global Media Services. While many regard Warren Lieberfarb as the father of DVD, just as many regard Marquardt as the father of DVD manufacturing. When he left Warner Advanced Media Operations, he took a big part of his staff with him.

"Ritek has been in the optical business for a long time," Pacitti says. They produce CD-Rs as well. There is a lot of knowledge which will be a benefit all around." For Ritek, the biggest benefit is the cachet that comes with the Deluxe name. And Deluxe has a very good name in VHS. Ritek has not reaped the benefits of DVD up to now because they do not have a studio contract. What's more, American content providers have traditionally been leery about handing off their work to Taiwanese manufacturers.

Among the few Denon/Maxell details available at press-time, we know that services will be combined to form MD Digital Manufacturing LLC and manufacturing will be centered at Denon's facility in Madison, Georgia. All DVD manufacturing equipment previously operated by Maxell in San Diego will be transferred to that location. Denon will provide exclusive sales and marketing support. Maxell will own 60 percent of the joint venture company and Denon 40 percent. The new company will create a combined DVD manufacturing capacity of over 30 million discs/year.

What does all of this consolidation mean to the software industry? While I've never had to purchase CDs or DVDs from any manufacturer, I have had to purchase product from Home Depot and also from my local hardware store. I like the hardware store better. There's something to be said for a store owner who knows everything about his/her business and can usually place special orders. As the replication industry continues to consolidate, it seems that it is going the way of Home Depot. Tons of "extras" are being offered, but they never know their clients by name. When CD manufacturing first began, there were a handful of manufacturers who knew everything about the business. As it progressed, there were tons of manufacturers and all anyone cared about was price, and prices got so low, it really didn't matter if you went to Sony or a small independent. So as to differentiate their businesses, manufacturers began offering special services.

Now, we're getting down to fewer and fewer manufacturers again, but the climate is different because demand is so much higher than it was in the beginning. Most plants today say they offer soup to nuts. Pricing is rock-bottom no matter who you go to, so there's no cost benefit to choosing a larger player over a smaller one, or vice-versa. But what about the software manufacturer who is only making 1,000 copies? Will consolidation hurt them?

Consolidation benefits the replicator in that it can bring about greater efficiencies and cost, according to Chris Munro, president and CEO, Metatec International, Inc. But as in any merger, he says, "The real challenge is successfully blending customers and company cultures. A large percentage of mergers fail because customer relationships suffer and cultures clash."

"This is the proverbial concern," says Pacitti. "But we understand that every disc is just as important as the next. We focus on delivering every single order for every single customer on time."

Another manufacturer says, "If you are a smaller customer, you should be nervous about being pushed out. We've all played the game—‘Don't worry about it, we can handle the load, we have other sources to take care of you.' But in our business, plants are always loath to outsource quickly. The load is so fickle and volatile."

If there's any lesson content providers can learn from the strange dynamics of the replication industry, it's know the DVD replication market before you plunge. Larger replicators can offer you the experience, and that's important. But, if it's your first venture into DVD, a smaller replicator may be just what the doctor ordered. Plants not aligned with studios are desperate to fill capacity, and on their side, it's a buyer's market.

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