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Odd Sony Rumblings

Nov 21st, 2007
Is the game afoot?

Sony’s CEO Suggests A Stalemate

A widely reported story quotes Sony CEO Howard Stringer as saying that the format war has reached a “stalemate.”  His comments were made at Manhattan’s 92nd Street Y cultural center, but I’m not clear about the context.  Stringer continued, “It's a difficult fight.  We were trying to win on the merits, which we were doing for a while, until Paramount changed sides.”  This refers, of course, to the acceptance by Paramount and DreamWorks of a substantial financial incentive to go HD DVD-exclusive for eighteen months.

But his most bizarre comment relates to a suggestion that winning the format war is mostly a matter of prestige.  “It doesn't mean as much as all that,” Stringer said.  I find this remarkably inconsistent with how conventional wisdom views the war.  The waning DVD market still represents billions of dollars of annual sales.  And HD disc sales are expected to exceed DVD sales by no later than 2012.  Consequently, the income for the HD disc format war winner from patent licensing and fees will amount to vast sums over the economic lifetime of the successful format.   So why would Stringer downplay the importance of winning the war?

When he voiced the sentiment that he believed it had been possible to negotiate a single format before he became Sony’s CEO and that he wishes he could travel back in time to make that happen, I began to ponder the potential for a hidden meaning.  If I reject the overt meaning of his words based on the huge economic consequences for the victor, his comments suggest a couple of possibilities.

First, he could believe so strongly in the ultimate dominance of Blu-ray Disc, he was simply being a good winner.  Rather than gloat over the deep discounts and fire sales of HD DVD hardware, and the sales ratio advantage of Blu-ray Disc, perhaps he’s trying to mend fences and put the other side at ease, possibly making them more comfortable with the concept of yielding and producing BD players.  After all, Sony did eventually break down and produced VHS machines after its Betamax format was soundly trounced in the marketplace.

A second possibility is that it’s a subtle peace offering, a means to allow the HD DVD camp to save face, a significant imperative in the culture.  His comments might be an overture to reopening negotiations that could potentially end the war.  But with so many players already in the hands of consumers, I’m having trouble envisioning a compromise that would satisfy existing owners.

Each side would insist on reaping some financial benefit from licensing.  That might suggest, for example, capturing many of the interactive features of HD DVD and incorporating them into the larger capacity Blu-ray Disc to take advantage of the latter’s higher bit rate that produces better images.  But any settlement would have to protect existing owners, and that’s where my imagination fails me.  I can’t conceive of a way that existing BD players, even with firmware updates, could accommodate such changes.  Perhaps advanced profile players might, but certainly not profile 1 BD players.  So BD player owners (with the possible exception of PS3 owners) would lose, and if the optical system and physical media became BD’s, exiting HD DVD player owners also would lose.  It would become the quintessential lose-lose situation. 

I had expected the war to end by the end of 2007, one side falling victim to fourth quarter holiday sales, but I hadn’t anticipated the Paramount and DreamWorks deal.  (Who did?)  I now feel it’s more likely that the format war will end by April 2009.  (Feel free to write me if this new prediction proves wrong.)  If it does end then, the installed base for each format will have grown substantially.  When one side or the other wins, the defeated format will withdraw from the marketplace, and the loser’s discs will no longer be issued.  It’s not unreasonable to suggest that even more owners will be unhappy when their defeated players become obsolete in 2009 than would be unhappy if a negotiated settlement could be worked out a year earlier.  Alas, based on the design and production cycles in the consumer electronics industry, as soon as a settlement is reached, it could be over a year before the camps’ negotiated solution could be manufactured.  The whole transition to high definition on disc could stall and fail.

Sigh.  Chaos reigns. 

Fourth Quarter Progress

We’re in the fourth quarter and big titles are being released on both Blu-ray Disc and HD DVD: Transformers, Ratatouille, Spider-Man 3, Shrek The Third . . . But there are so few HD discs being released that for any given week, sales ratios swing significantly based on a format’s sales surge due to an individual title.  In my last column, I mentioned that the BD to HD DVD sales ratio had eroded considerably for that week.  But for very next week (ending November 4th), BD came back with a vengeance.  The BD to HD DVD sales ratio jumped to 71%:29%, or 2.45:1.  Such volatility makes weekly tracking unreliable at best.  I’m putting a moratorium on reporting weekly sales ratios; at the end of the year we’ll take a look at 2007 as a whole.  That should be more meaningful.

Disc Sales And The Studios’ Bottom Lines

Who could have possibly predicted in 1997, when DVD was introduced to an initially unenthusiastic marketplace, that disc sales would become a larger profit center for the motion picture studios than box office receipts?  We certainly didn’t.  DVDfile and our sister sites were created by people who loved film and home theater and simply wanted to share our enthusiasms.  Ten years later, the studios have come to rely on disc sales to support the remarkable escalation of film production costs.

But perhaps due to consumer anticipation of a new high definition format and the reluctance to buy discs in a form that is becoming obsolete, or perhaps because the desirable films in studios’ back catalogs have already been issued on DVD, standard definition disc sales are no longer providing a financial safety net for the motion picture industry. 

A recent analysis by research firm Global Media Intelligent paints a bleak picture.  They’ve determined that the one hundred thirty-two studio films released in 2006 generated losses of $1.9 billion; this is in contrast to studios’ profits of $2.2 billion in 2004.  From 1999 to 2004, the DVD format grew 75%, providing significant income growth.  But as I reported in previous columns, DVD sales are in decline; they dropped 12.5% during the first ten months of 2007 compared to the same period one year before.  2005 marked DVD’s highest release rate; by comparison, 2007 will see about 17% fewer DVD releases.

Seemingly out of control are the salaries of first tier actors, directors, and producers.  Those costs have significantly outstripped inflation; they’ve doubled over the course of five years to a staggering aggregate of three billion dollars in 2006.  Without the assurance that disc sales will bolster the bottom line, it’s unlikely that the huge budgets expended today will remain viable.  Is it any wonder that the studios are anxious to sell their new films and back catalog titles all over again in high definition?

The sad reality is that unless the format war is resolved and consumers embrace the winner as enthusiastically as they did DVD, the age of the vast motion picture budget and spectacular films might have to come to an end.  Studios may have to cut back production budgets considerably.  As a film lover, I watch these developments with growing unease.  I can only hope that costs can be controlled without compromising creativity and that high definition discs provide the financial means for the studios to keep us entertained.  But what happens ten or fifteen years from now when the back catalogs have been issued in high definition and disc sales once again begin to decline.  Will we look back on the previous thirty years and long for the spectacle and visual opulence of mega-budget productions?

Parting Thoughts

With each passing month, the format war seems to become more destructive.  As I’ve discovered through the vehemence of some of the emails I’ve received from format proponents and the sentiments expressed by You Tube posters reacting to the lighthearted BD promos I mentioned in our latest contest announcement, the polarization is becoming extreme.  We’re now locked in a format battle that has people taking sides, casting barbs, and resenting those who disagree with their views.  This taints a cultural hobby that can touch the heart and the mind. 

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