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Warner Dropped The Bomb

Jan 7th, 2008
We begin to measure the fallout


The industry and those who monitor it all reacted quickly to Warner Home Video’s announcement on Friday, January 4th, that it was dropping support for HD DVD and, as of the end of May, will only support Blu-ray Disc. In this column, I’ll pass along industry reactions and then offer a bit of analysis of my own, including a new top-one hundred format distribution.

HD DVD Promotional Group

The HD DVD Promotional Group, Toshiba, and Microsoft cancelled Sunday’s press event at CES during which they were going to tout the format’s successes. Warner was expected to participate, but instead declared for Blu-ray Disc the Friday before.

An email was sent to invitees, “Based on the timing of the Warner Home Video announcement today, we have decided to postpone our CES 2008 press conference scheduled for Sunday, January 6th at 8:30 p.m. in the Wynn Hotel. We apologize for any inconvenience this may cause.

“We are currently discussing the potential impact of this announcement with the other HD DVD partner companies and evaluating next steps. We believe the consumer continues to benefit from HD DVD's commitment to quality and affordability -- a bar that is critical for the mainstream success of any format. We’ll continue to keep you updated on new developments around HD DVD.”

I fully expect further statements from the HD DVD Promotional Group during CES.

Toshiba

Toshiba didn’t take long to respond to Warner’s apparently surprise announcement that it will be abandoning the HD DVD format in the spring. Toshiba issued a press release Friday night, hours after Warner’s announcement.

“Toshiba is quite surprised by Warner Bros.' decision to abandon HD DVD in favor of Blu-ray, despite the fact that there are various contracts in place between our companies concerning the support of HD DVD. As central members of the DVD Forum, we have long maintained a close partnership with Warner Bros. We worked closely together to help standardize the first-generation DVD format as well as to define and shape HD DVD as its next-generation successor.

“We were particularly disappointed that this decision was made in spite of the significant momentum HD DVD has gained in the US market as well as other regions in 2007. HD DVD players and PCs have outsold Blu-ray in the US market in 2007.

“We will assess the potential impact of this announcement with the other HD DVD partner companies and evaluate potential next steps. We remain firm in our belief that HD DVD is the format best suited to the wants and needs of the consumer."

Toshiba then held a CES press conference on Sunday night, but the emphasis was shifted to its new line of displays. Fewer than five minutes were spent on the subject of HD DVD. Toshiba vice president of marketing for digital audio and video Jodi Sally said, “As you can imagine, this is a tough day for me. The events of the last few days have shifted the focus on my comments. It is difficult for me to read all the pundits declaring HD DVD dead. But, we have been declared dead before. We firmly believe HD DVD is the best format for consumers.”

New Line

The original Warner announcement did not cover either New Line or HBO, two studios distributed by Warner Home Video. But both Variety and Video Business has reported that New Line will join Warner in its exclusive allegiance to Blu-ray Disc. And the Video Business article also asserts that HBO will now be Blu-ray-exclusive as well.

That defines the future high definition disc releases of the Lord of the Rings trilogy and 2010’s The Hobbit.

Buena Vista and Panasonic

Panasonic CEO Joseph Taylor: “The decision by Warner will finally resolve the issue. The war is over, and this will speed things up. A lot of people have been standing on the sidelines and now it is clear where the future lies."

On a related note, Panasonic and Disney have been so pleased by consumers’ reception for its Disney's Magical Blu-ray Tour (and possibly buoyed by Warner’s announcement), that they extended and expanded the tour to include eight additional North American cities: Toronto, Canada; Nashville; Denver; Dallas; Raleigh-Durham; Hartford; and Chicago at Unity in July.

This will continue the effort to educate mainstream consumers about high definition and its delivery on Blu-ray Disc. I suspect that the Warner announcement has the tour sponsors scrambling to reprint literature and banners, and possibly change the content of the presentation. (I can’t be sure; I haven’t experienced the tour’s demo.)

Sony

Sony held its own press conference, and while clearly pleased, did not seem to gloat. CEO Sir Howard Stringer: "As you can guess, all of us at Sony are feeling blu today. But, that's a good thing. We thank Warner for their decision."

Senior vice president of home products Randy Waynick: “Blu-Ray has made incredible strides this past year. The Warner announcement is in response to consumer demand. We believe this decision will further strengthen and accelerate the adoption of the Blu-Ray format."

Michael Bay

As previously reported, the director was angered by Paramount’s decision to deny his Transformers a Blu-ray Disc release. The outspoken director voiced his reaction to the Warner development on his forum.

“Well another studio down. Maybe I was right? Blu ray is just better. HD will die a slow death. It's what I predicted a year ago. Now with Warner's down for the count with Blu Ray. That makes it easier for Wal-Mart to push Blu Ray. And whatever Wal-Mart pushes - wins. Hd better start giving out those $120 million dollars checks to stay alive. Maybe they can give me some so I can give it to my Make-A-Wish charity, just to shut me up. Have faith people Transformers will come out in Blu-ray one day!”

Come on Michael; tell us how you really feel.

Market Researchers

And how can we have such a major event without a few comments from professional pundits. These are the types of comments that Toshiba VP Jodi Sally must have been referring to in her prepared comments.

Coughlin Associates analyst Thomas Coughlin: The Warner announcement “may be the pivotal event that resolves the format war. It certainly changes the rules and the playing field. I think everyone is trying to reassess what this means - including the HD DVD guys.”

Envisioneering Group research director Richard Doherty: “The overwhelming industry opinion is that this decides the format battle in favor of Blu-ray.”

NPD Group’s DisplaySearch analyst Paul Erickson: “This doesn’t necessarily kill the HD DVD format, but it definitely deals it a severe blow. When a consumer asks a store clerk which format to buy, that clerk is now going to have a hard time arguing for HD DVD.”

Diffusion Group president and principal analyst Michael Greeson: “With Warner neutral, both camps had a reason to sustain the battle throughout 2008. With Warner going Blu-ray only, HD DVD's lifetime is now numbered in days, weeks at the most. Blu-ray will spin this announcement in such a way that consumers will have a very hard time rationalizing a HD DVD purchase.”

Pali Capital analyst Rich Greenfield: "We expect HD DVD to die a quick death, versus a prolonged format war.”

Data Mobility Group analyst Robin Harris: "I think the war is over. HD DVD has lost. It really is game-over for Toshiba and the other vendors. The basic issue is not technology. It's about distribution, it's about marketing, it's about content and Blu-ray has been winning the content war for some time. I don't know why [Toshiba] keeps pouring money into it, it's time to stop."

Some pretty strong words.

HD DVD Player Owners

I’ve already heard from several HD DVD player owners and it’s very clear that they're upset with Warner's decision. There have been expressions of betrayal, objections to timing, and reports of a rumor that financial incentives were involved (more about that in the next section).

To those upset with the prospect that the HD DVD format may fail, please consider that your players still work and your HD DVDs still play. If my recollection of consumer law is correct, Toshiba is obligated to support your player for six years after it’s discontinued, so you're safe for quite some time. Your investment is not in jeopardy. If you're forced ultimately to invest in BD, the player will cost less than $300, possibly close to $200. Disc costs average essentially the same for both formats. And you may even discover that BD offers a better presentation.

Warner's timing could have been worse. They could have participated in the HD DVD Promotional Group press event and then, one to four days later, announced for Blu-ray Disc. That would likely have been perceived as very hypocritical. There is no good time to make such an announcement. Millions may have been spent on Warner HD DVD titles for the holidays, and some correspondents believe that Warner’s timing took advantage of end-of-year shoppers. But the HD DVDs still play and they still entertain. I suspect that HD DVD owners would have been even more upset if the Blade Runner and Harry Potter collections (just to name two titles) were withdrawn and denied to those enthusiasts.

Paramount's much more abrupt decision and actions denied BD player owners its content (I seem to remember that Paramount may have even recalled BDs and may have destroyed BDs that had yet to ship). BD player owners were upset that they would not be able to buy Transformers or Shrek The Third. Warner, on the other hand, announced five months before it intends to stop producing HD DVDs, giving player owners the chance to continue purchasing Warner films on HD DVD while they consider whether or not to invest in a BD player. So I feel that Warner's approach is a lot more gracious than Paramount's.

As for this HD DVD owner, if the format fails, I'll have no immediate plans to replace my approximately 150 HD DVDs with BDs. I'll continue to enjoy those HD DVDs until both of my two Toshiba players fail and can no longer be repaired. Only then will I begin to replace my favorite films on HD DVD with their BD counterparts.

The Economics of Financial Incentives

As I previously reported, Warner had been approached repeatedly by representatives from both formats’ camps. Toshiba’s Yoshihide Fujii, the executive responsible for HD DVD business, was reported to have visited Warner Home Video three times in the fall. But his efforts were likely trumped by Sony CEO Howard Stringer’s appealing directly to Time Warner CEO Jeffrey Bewkes.

It was reported by Deadline Hollywood Daily that anonymous sources (which creates some doubt as to the report’s authenticity) revealed that Warner may have been offered as much as $250 million as a financial incentive to go HD DVD-exclusive. That doesn’t seem unreasonable in light of the undisputed reports that Paramount and DreamWorks Animation were given a combined $150 million by the HD DVD camp for their exclusive support.

Warner Brothers Home Entertainment Group President Kevin Tsujihara would not comment on whether any incentives were offered by the Blu-ray camp. But with a worldwide home entertainment content market worth $42 billion, Mr. Tsujihara would seem to prefer basing decisions on long-term considerations, “This market is absolutely critical to our future growth. You couldn’t put a number on that.”

Warner Bros. Chairman and CEO Barry Meyer added, “We’re not in this for a short-term financial hit. We’ve been monitoring the situation with consumers for a while now and they have clearly made their choice. We followed.”

But now there are rumors flashing across the Web that Warner accepted $500 million dollars and Fox accepted an undisclosed amount as financial incentives to go BD-exclusive. This may have been what set off the rumor frenzy, “According to a trusted source that was close to the negotiations, Warner and FOX were working on a deal to go Exclusive to HD DVD as recent as last week. Our source tells us that Warner was only willing to go to HD DVD if FOX would go with them. Their thinking was if they just went to HD DVD by themselves, it would not end the format war. Early this week FOX was paid an undisclosed amount to remain exclusive to Blu-ray. With the FOX deal falling through, Warner had no choice but to accept the BDA’s $500 Million offer to go Blu-ray exclusive. We do wonder if FOX was just playing the HD DVD side, while having no intentions of ever switching.”

So let me get this straight. Fox is the studio that held out for the added layer of protection that BD+ provides. Fox is the studio that withdrew from the HD disc market when BD encryption was broken and only came back after the BD+ layer became available. And it’s claimed that Fox was considering switching its support from BD to HD DVD, a format that does not offer the BD+ layer. Sorry, I’m not convinced. It’s not consistent with the studio’s actions in the past. Until this is confirmed or proven to be true, I’m forced to conclude that this is a rumor started by a bitter HD DVD proponent.

I’m also amused and dazzled by the reaction of a highly determined HD DVD proponent website. They were shocked … shocked at the possibility that money may have changed hands. And yet, they expressed no such indignation when Paramount and DreamWorks (sans Spielberg’s films) were bought off for a reported $150 million. Sigh. Talk about filtering reality…

Studio Snapshots

So, just how big is the Warner announcement? Before high definition product was delivered to stores in March of 2006, I examined how the top one hundred grossing films of all time would be distributed among the two formats’ supporters. Since content drives the market, this is a reasonable metric for predicting a format’s success. I updated my data after the Warner announcement and here’s what I found.

Blu-ray Disc Exclusive Titles from the Top 100 Grossing Films of All Time:

Studio
Number of Titles
Worldwide Gross in Millions
Buena Vista
18
$11,296.1
DreamWorks (Spielberg)
1
$481.8
Fox
22
$12,250.4
Lionsgate
1
$519.8
New Line
3
$2,917.0
Paramount (Spielberg)
3
$1,450.0
Sony
7
$4,880.0
Warner
22
$12,202.8
Totals
77
$45,997.9

HD DVD Exclusive Titles from the Top 100 Grossing Films of All Time:

Studio
Number of Titles
Worldwide Gross in Millions
DreamWorks
4
$2,394.5
DreamWorks/Paramount
2
$1,504.2
Paramount
7
$4,824.7
Universal*
10
$5,639.1
Totals
23
$14,362.5

*Universal’s numbers include four top-hundred Spielberg titles that grossed $2,796.9 million; it’s unlikely that Spielberg would have restricted the release of his Universal-distributed films on either format at the time Universal’s HD DVD-exclusivity deal was struck, long before product hit the street. But if he now manages to prevent Universal from releasing his films on HD DVD, or insists that they are released on Blu-ray Disc after Universal’s HD DVD contract expires, that will further move the numbers in Blu-ray Disc’s favor and push Universal (at the very least) to format agnosticism. Keep in mind that it’s been widely reported that DreamWorks is not happy with its relationship with Paramount and there have been tentative negotiations for DreamWorks’ return to the Universal fold at the end of 2008’s existing contract period. If Spielberg returns to Universal, this would open all kinds of interesting Blu possibilities. The man has influence.

A title ratio of 77 to 23 is 3.4:1, advantage Blu-ray Disc. Or, to put it another way, Blu-ray Disc now has captured 77% of the top one hundred grossing films of all time. Examining the films’ grosses yields very similar results. $45,997.9 million compared to $14,362.5 million yields a ratio of 3.2:1, advantage Blu-ray Disc. In other words, Blu-ray has captured 76.2% of the titles based on worldwide box office. And since Warner Bros. will be releasing some big titles in 2008 (The Dark Knight, Harry Potter And The Half-Blood Prince, Speed Racer(?) ) and in 2009 (Terminator Salvation: The Future Begins and Superman: Man of Steel), the balance should be maintained or perhaps tilt a little more toward Blu-ray Disc.

Putting aside popular back catalog titles and successful 2007 titles that have not been released on HD disc yet, let’s look at potentially interesting genre films scheduled to be released theatrically in 2008 that might do well at the box office:

Blu-ray Titles

10,000 B.C. (Roland Emmerick, Warner)
The Chronicles of Narnia: Prince Caspian (Buena Vista)
Indiana Jones and the Kingdom of the Crystal Skull (Spielberg, Paramount)
The Happening (M. Night Shyamalan, Fox)
Get Smart (Warner)
Wall-E (Buena Vista)
Hancock (Sony)
The X-Files 2 (Fox)
James Bond 22 (Sony)
The Day The Earth Stood Still (remake, Fox - hmmm, Keanu Reeves as Klaatu)

HD DVD Titles

Iron Man (Paramount)
The Incredible Hulk (Universal)
Wanted (Universal)
Hellboy II (Universal)
The Mummy: Tomb of the Dragon Emperor (Universal)
Star Trek (Paramount)

Content is king.

Parting Thoughts

LG Electronics vice president of marketing Allan Jason said the company will continue to market Blu-ray/HD DVD combo players for as long as Universal and Paramount continue to release their films in that format. And, clearly, there is no indication that Toshiba is withdrawing from the fight. The format war continues.

But I would be dishonest with you if I didn’t admit that I’m pleased with Warner’s decision. As I previously wrote, my investment in each format is at risk, so that’s not a factor. With the cost differences between the formats becoming more trivial with each passing day, and the savings of scale and post-amortization yet to kick in, expense is not an issue. My primary concern is that the format winner be capable of delivering the best possible presentation, both visually and aurally. Warner’s decision takes us one step closer to that potential outcome.

Thank you, Warner.

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