Something There Is That Doesn't Love a Format War

It seems like everybody's writing stories about the upcoming HD disc format war between HD-DVD and Blu-Ray (BD).  The technical specs are reasonably locked down, but everything else is up in the air - perfect fodder for journalism/rampant speculation.  Gizmodo had prematurely called HD-DVD the winner based on studio support (I called them on it here).  More recently, DVDFile.com posted a follow up of sorts - also trying to predict a winner based on the various studios and where they're currently lined up on the issue. This is pretty hard to do because the studios are about evenly split, and will likely move to whichever format appears to be winning.

A couple of key points that tend to get overlooked:

HD-DVD is cheaper/easier to replicate.  OK, this isn't overlooked, everyone points this out.  But the implications go well beyond speed to market and Warner's willingness to flood the market with titles.  Plain old DVD penetration is now approaching 75% in the U.S. market. With cheap players, cheap software, a huge installed base, and no need for an expensive high definition TV, regular DVD looks likely to remain a mainstream format indefinitely.  No HD format is going to kill off regular DVD any time in the next decade; killing the golden DVD goose would be suicide for the studios.  If Hollywood is going to make any additional money over and above regular DVD revenue, there are just two ways to do it:

·        One way is to sell high definition discs as a higher priced separate SKU in addition to regular DVDs. Never mind retailers' reluctance to stock even more SKUs of each title, nobody wants to reinvent the limited laserdisc market.  However, I should point out the videophile market is considerably larger now than it was: Joe and Jane Q. Public has gotten used to director's commentaries, proper film aspect ratios, and are beginning to gain exposure to HDTV.

·        The other way is to sell HD-DVD as part of every "collector's edition" SKU along with regular DVDs. If HD-DVD replication costs are essentially the same as regular DVDs, that would enable studios to continue with a business model that seems to be working already: a basic movie-only SKU, and a deluxe, 2 or 3 disc collector's edition -- only one of those discs has the movie on HD-DVD, adding value, and keeping the pricing of the collector's editions from slipping down DVD's brutal price curve. This strategy may also negate BD's space advantage -- just keep all the supplements on the regular DVD disc - most of them don't have to be in high def anyway.

So HD-DVD is a winner, right?  Not necessarily.  At least initially, prices for the decks will be in the $1,000 range.  CE vendors will be reluctant to push prices too low, too quickly, as there's no margin left in regular DVD players, and they'll want to make back their R&D.  Still, prices will have to fall fast because a pricey HD-DVD player is going to be a tough sell with a full blown format war on -- consumers will simply wait on the sidelines.  Even with reasonably priced players, DVD may be considered "good enough" and consumers may direct their attention elsewhere in CE-land (it's shocking, but if you look at the numbers, apparently everyone has not bought an iPod and a cameraphone yet). And then you have a classic chicken and egg problem -- just how much will studios push a format for an installed base that doesn't exist? 

It's here that BD has a secret weapon: the Sony Playstation 3.  If Sony's next gaming console is a hit, that will put millions of subsidized BD players in homes, neatly solving the player/software chicken/egg problem. If the software is difficult to master and costly to replicate, you still may end up with a more limited, laserdisc-like audience.  But if HD-DVD players don't sell in volume, a limited videophile market may be all we get from this group of HD disc formats, until the next new thing rolls along, or the whole industry goes hard drive or on-demand.

Aren't format wars great?

-avi

Comments

[Mark]

I suspect that ~all~ of the HD-DVD formats will fail as everything goes to hard drive and on-demand, as you speculate.