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Are Alliances The Key?

Aug 3rd, 2007
Format dominance gains momentum

Playing By The Numbers

No sooner did I observe that the HD DVD release rate is greater than Blu-ray Disc’s release rate and that the weekly ratio of BD to HD DVD sales had dropped, the short-term sales growth trend reversed.  For the week ending July 22nd as reported by Nielsen VideoScan, BDs outsold HD DVDs by 74% to 26%; that’s a ratio of over 2.8:1.  Such sales volatility is why I also remarked that it’s imprudent to leap to any conclusions based on a limited data set. 

HD DVDs are still being released at a brisker pace that BDs.  The current 13-week average continues to give HD DVD a significant numerical advantage despite the larger number of BD-exclusive studios.  This may be attributed almost exclusively to Universal’s very aggressive HD DVD release schedule.  Regardless, Universal’s release rate hasn’t turned the sales ratio around.  And it now seems clear that the Blu-ray camp is holding back for a serious blitz during the fall and the holiday buying season. 

As we reported in our last Disc News feature, Steven Spielberg’s first high definition disc will be Close Encounters of the Third Kind, an exclusive BD release.  Spider-Man 3 is also a Sony title, so it too will be exclusive to BD for the holidays.  Pirates of the Caribbean: At World’s End has been announced by Buena Vista for early December, another exclusive BD.  Other big, exciting titles, like Harry Potter, Blade Runner, and several films by Stanley Kubrick will not be released exclusive to HD DVD, but will be available in both formats.  If Universal hopes to counter first tier BD releases, it’s going to have to pull out some real hits.  How about E.T., Jurassic Park and The Lost World, Jaws, the Back to the Future trilogy, or War of the Worlds?

The DVD release rate has reached its lowest point in the last two years.  The ten week moving average is down 47% from October 2005 and down almost 30% since March of 2007.  So both studios and retailers are anxious to see the high definition format war resolved.  That will facilitate consumer education, reduce consumer confusion, and allow everyone to get on with the pleasurable task of the transition from standard definition to high definition.  Perhaps that’s why Sony was able to broker some new retail alliances.

The Friend Of My Friend Is My Friend

Within a month of Blockbuster’s announcement that it will not expand high definition support of HD DVD in 1,450 of its stores, but instead will support exclusively Blu-ray Disc, comes word of two more retail deals.  For the critical holiday buying season, retail giant Target - the second largest retailer in the United States - has agreed to sell dedicated Sony BD players exclusively.  The focus will be on Sony’s $499 BDP-S300, which will arrive at Target in October.  Sony’s PlayStation3 video game consoles, which as you know play Blu-ray Discs, also will be offered.  (If you want to buy an HD DVD player at Target, it will have to be Microsoft’s Xbox 360 with an external drive.)  Target is committed to expand its assortment of Blu-ray Disc movies, selling critical isle end cap space to Sony for players and titles. 

Target spokeswoman Brie Heath issued an interesting statement that would appear to hedge the company’s bets, “We are not proclaiming one format vs. the other as the preferred consumer technology, and software will continue to be available to our guests in both the Blu-ray and HD DVD formats. We are simply merchandising Blu-ray hardware as the initial foray into this exciting category. As with all of our merchandise, we will track guest feedback and adjust as necessary.”

Sony Pictures Home Entertainment president David Bishop spins the news in a substantially more positive manner, “Target’s decision to promote Blu-ray Disc players in the fourth quarter sends an important message to those who may still be sitting the high-definition fence.  Their guests rely on Target to merchandise solutions that enhance their lives and they rely on Sony as one of the most trusted electronics brands to offer the best technologies.  This promotion from Target and Sony will lend further credibility to the benefits associated with Blu-ray Disc technology.”

DVD Promotional Group co-president Ken Graffeo responds, “Target will continue to carry the Xbox 360 HD DVD drive as well as HD DVD titles so we don’t see much of a change in their plans to carry both formats. In fact, they continue to sell Toshiba HD DVD players on their web site.  Sony appears to have bought an end cap, just as HD DVD has in retail stores such as Best Buy and Circuit City.”

There is another . . . A first impression is that BJ's Wholesale Club, a large east coast big-box chain similar to Sam’s Club and Costco, is being more decisive by carrying Blu-ray Disc products exclusively in its one hundred and seventy stores.  But it, too, will continue to offer HD DVD as well as BD products through its website.

Regardless, these alliances will influence mainstream consumers.  They will see BD players and discs in trusted local stores and cannot help but be affected, bolstering their confidence in the BD format. 

What Has The Adult Entertainment Industry Done For The Format War Lately?

Very little, actually, but we do have news of another, very different kind of Blu-ray Disc alliance.  Reports indicate that Microsoft and Toshiba have been providing technical support to the American adult entertainment (AE) industry and, perhaps as a consequence, there are more HD DVD adult titles on the market than AE BDs.  Now word has arrived from Japan that Sony, long thought to be, shall we say, uncooperative with adult entertainment, has had a change of heart.  A report from the Adult Treasure Expo 2007 in Chiba, Japan indicates that Sony is now willing to offer technical support to the Japanese adult film industry.   Consequently, the issue of finding duplicators to produce adult titles also may be over . . . for Japan.

Sony’s support does come with a few stings attached.  Sony retains its policy of not permitting its disc replicating subsidiary, Sony DADC, to produce adult films.  But Sony is willing to sell replicators to manufacturers of AE titles.  The Japanese studio marketing the most AE Blu-ray Disc titles has partnered with a Taiwanese company to acquire pressing machines from Sony.  Mass production is expected to begin in August.

Sony’s home field approach does not affect one impediment in the American market to release adult material on BD.  The Walt Disney Co. has a policy that forbids its movies to be replicated by any company also replicating adult titles.  And that may continue to impede the growth of AE on BD in the U.S.

This writer still believes that the more revealing and intimate nature of AE in high definition will make a difference in the format war.  It certainly made a difference in the VHS versus Betamax format war, and I believe that it helped make the DVD format a success, both for its convenience and for its improved image quality over VHS. 

There are already ten AE titles available in Japan, and at least one studio is planning on releasing no less than one title per month for the rest of the year.  There has been only one AE HD DVD released in Japan to date.  And as I researched this item, I was surprised to read that in Japan, HD DVD is on average 23% more expensive than BD.  This is apparently due to every HD DVD being packaged with a DVD with the same content, presumably intended to ease the transition from SD to HD.

In the States, it’s clear that the AE industry doesn’t care about the format war.  It’s only interest is making a profit and I’m sure the AE industry is well aware of BD’s sales dominance.  So as BD replication issues are resolved in the States, expect to see more adult titles on BD.  Hmmm . . . I see a business opportunity for an aggressive replicator: buy BD pressing equipment to support the AE industry, and perhaps set up an independent but wholly owned subsidiary.

Will A Proper Dual-Format Player Prolong The War?

Samsung has announced the BD-UP5000 dual-format player; it’s to be available in the fall, in time for the holiday buying crunch.  But will an SRP of $1049 be tempting enough?  The player is expected to offer HQV processing, will scale DVD to the user’s HD output format of choice, have HDMI 1.3 connectivity, offer 1080p24 capability, and include audio support for Dolby Digital, Dolby Digital Plus, DTS, DTS HD, and Dolby TrueHD.  But most important, unlike the previous hybrid player, the LG BH100, the BD-UP5000 Duo fully supports BD-Java and HDi interactive features. 

When HD disc player prices were very high, a dual-format player seemed a very tasty solution.  But as dedicated player prices come down, I question the wisdom of that dual-format approach.  The Sony BDP-S300 BD player bought with any of the Toshiba HD DVD players (with the exception of Toshiba’s top of the line HD-XA2 at $800) will carry a combined SRP of less than the Samsung’s SRP. 

The Enthusiastic Consumer Wins

Despite the frustrations and uncertainty of a format war, for the early adopter, a format war frequently means a price war.  And in a price war, the consumer wins.  I’ve described various disc giveaway offers made by Toshiba, Panasonic, and Sony.  I’ve described the Amazon incentive of an additional 10% off its discounted prices for HD disc purchases until the end of 2007 after a simultaneous buy of three HD titles (although I don’t think that offer is current for new eligibility).

In my last format war article, I also described Disney’s road show, an aggressive marketing move to spur consumer knowledge and promote the BD format.  Disney also has decided to get aggressive on the retail level, at least with a handful of web vendors.  A substantial selection of Buena Vista Home Entertainment Blu-ray Discs is being offered at up to 45% off the SRP at Amazon.  DVDEmpire and Buy.com are also running BVHE BD promos. 

Amazon’s offer includes twenty-seven titles from the droll Hitchhikers Guide to the Galaxy to the tuneful Chicago to the melodramatic Pearl Harbor to the touching Finding Neverland to the tense Flightplan.

On the hardware side, Microsoft has cut the SRP of the external Xbox 360 HD DVD drive to $179, a $20 savings.  The offer apparently is scheduled to run until the end of September.  This may be in response to Sony’s $100 reduction of the 60 GB PS3, or it may be raw market aggressiveness (although I’m not sure how aggressive a $20 savings might be).

Parting Thoughts

I have no way of knowing if Universal and Toshiba are enjoying profitable runs as they exclusively support the HD DVD format.  The market’s HD disc sales statistics and the newly reported alliances would seem to give Blu-ray Disc an ever growing advantage.  But based on just how committed Universal and Toshiba are to the fight, it’s possible that the format war may extend beyond the upcoming holiday buying season regardless of sales performance. 

I previously wrote content is king.  Universal is the most prolific studio, currently producing HD DVDs faster than all the BD supporting studios combined.  (That may change if and when 20th Century Fox Home Entertainment rejoins the fray; there are hints of Fox’s imminent return in the fourth quarter, but nothing definitive).  And yet, Universal is holding back its biggest titles.  As for the BD camp, it might be a tactical mistake to reserve this year’s big BD titles until the fall and the holidays.  The risk is allowing the HD DVD camp to gain ground in disc sales.  But without a sales reversal as reported by Nielsen VideoScan, I suspect there is no motivation to spur the BD camp to hurry big titles out the door.

To date, the only real winners are the early adopters willing to buy into both formats and taking advantage of hardware price reductions, free disc incentives, and aggressive disc discounts. 

I might have less to write about when the war is over, but I’m looking forward to the time when we can simply concentrate on the merits of high definition and bring you news of continued price erosion spawned by technology advances and the savings of scale.

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