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High Definition DVD Dilemmas

Jan 2nd, 2005
We live in interesting times

In my last two year-in-review columns, I tried to keep you abreast of the status of high definition DVD. Regular readers know that I’m very concerned about proposed draconian "copy protection" measures that could obsolete billions of dollars worth of HD-ready displays. Since my last column, I’ve twice contacted most HD-DVD and Blu-ray Disc manufacturing firms to ask about this critical issue, but before I describe their responses, let me bring you up to date on some background material.

As I’m sure you’re already aware, our first dilemma is that the consumer electronic industry is poised for another format war. Warner Home Video, Universal Studios Home Entertainment, and Paramount Home Entertainment have announced their support HD-DVD, giving that format access to about 50% of available content. Sony Pictures Home Entertainment, MGM Home Entertainment, and Walt Disney Co. will release on Blu-ray Disc. 20th Century Fox Home Entertainment has yet to announce. If Fox chooses to support Blu-ray Disc, the content race will be a dead heat. Both camps refuse to back down or compromise, so in 2005 we’re facing a format battle similar to the DVD-A vs. SACD nonsense that’s caused the high resolution audio market to falter. But the most serious high definition DVD dilemma facing us today remains the growing threat of obsolescing most of the existing HD-ready displays found in the installed base.

I’ve reported that the MPAA has called for the closing of the "analog hole" by forcing the consumer electronics industry to either remove component video outputs from high definition DVD players or, if those analog outputs are included, impose image constraint that would reduce high definition video resolution to no better than current DVD. This would make existing HD-ready displays that only have component analog video or RGB-HV inputs for external sources useless for viewing high definition content stored on either of the two new disc formats. This unconscionable measure would negate over sixteen billion dollars of aggregate investments made by consumers. (See note 1, below.) This is immoral, shameful, and frustrating, especially in light of an examination of both history and current business data that contradicts the motion picture studios’ rationale, making these extreme measures irrational and unjustifiable.

The encryption imposed to protect standard definition DVD was broken years ago. Tools to copy commercial DVD releases soon became readily available. Whether current tools are legitimate or not is not relevant; people have the software required to copy DVDs or share the VOB files that contain disc content. So we have the means.

On June 9, 2004, the FCC announced that the "number of homes and small businesses connected to the Internet via high-speed service climbed to 28.2 million." This number does not include college students, networked into their campus systems, and who are likely file swappers. Technically oriented people with such high-speed access are the most likely to own computers equipped with DVD writers, so we have the means and the opportunity.

If the MPAA’s fears were founded, between the millions of high-speed Internet subscribers and the hundreds of thousands (millions?) of college students who have ready access to high-speed Internet connections, the DVD was poised to collapse under the weight of wholesale piracy. It hasn’t happened. Apparently, we may have the means and the opportunity, but we don’t have the motive.

As we look back on 2004, the statistics for box office and DVD sales are beginning to immerge. Video Business and Variety reported that consumers had spent more on purchasing DVDs than at the box office. This is an escalation of a trend that has been obvious for some time.

 20002001200220032004
Domestic Box Office in $billions   7.58.19.39.29.4
DVD Sales in $billions   4.05.09.012.013.6*
Total in $billions   11.513.118.321.223.0
* As of 11/20/04, reported by Video Business; excludes December holiday sales.

Notice that DVD is not cannibalizing box office. Where’s the wholesale piracy? Where’s the financial harm to the film industry? All I can see are windfall profits. When DVD was first introduced in 1997, many studios balked; some embraced Divx, the limited lifetime optical disk that died a well-deserved and painful death. Just as during the infamous Betamax suit of years before, the studios overreacted (asserting that videotape will destroy the film industry) and then, after coming to their senses, reaped vast profits from the media they so irrationally feared.

The film industry fears the illegal copying of films and insists that it wants to avoid the kind of sales decimation we’ve seen in the music CD market. But is dreaded peer-to-peer file sharing the probable cause of the CD sales downturn? Very likely not. I attended the Consumer Electronics Show for over a decade. I watched as the industry shifted dramatically from two-channel audio to home theater. The dominant form of entertainment media in the home today is film on DVD, not music on CD.

The RIAA reported that "CD sales... dropped 6.4% in 2001 and almost 9% in 2002." But DVD sales rose 25% in 2001 and 80% in 2002. People have a finite amount of disposable income, and DVDs’ hours of video and audio entertainment are apparently far more appealing than 30 to 75 minutes of music. So music file sharing didn’t cannibalize CD sales; DVD sales did. And during this "frightful" downturn in CD sales, Sound and Vision magazine reported that "the labels raised CD prices during a down economy, and... they slashed the number of new releases by almost 25% during the past three years." (I won’t try to quantify consumer resentment over having to buy an album full of sub par tracks simply to own the CD’s one hit song.) Undoubtedly, music label practices also took a toll on the CD market.

It may be tempting for the MPAA to claim that the cited DVD sales figures are suspect because DVD sales cannibalized VHS sales, but according to the VSDA’s 2004 Annual Report, "Sales of VHS cassettes and DVDs totaled $14 billion [in 2003]. This is a 16% increase over the $12.1 consumers spent in 2002." In other words, after subtracting the DVD sales shown in my table form VSDA’s numbers, $3.1 was spent on VHS in 2002 and $2 billion in 2003. So consumers spent $1.9 billion more on DVD than the $1.1 billion VHS sales drop. That doesn’t sound like cannibalization to me. Where did that $1.9 billion in discretionary spending come from? Could it be, at least in part, from the CD market? According to the International Federation of the Phonographic Industry as reported on April 9, 2003, "some consumers may have shifted their discretionary, entertainment-oriented spending toward buying DVDs rather than CDs." I think the IFPI may be on to something here. MPAA, are you paying attention?

Years after DVD encryption was broken, despite a burgeoning high-speed Internet market and the proliferation of DVD burners (now with double layer capability), DVD sales are still red hot, providing a vast windfall to the film studios. So, is the motion picture industry’s rationale for "closing the analog hole" wholly justified? Clearly not.

To seek the consumer electronics manufacturers’ position on the question of including unconstrained analog component video outputs on Blu-ray Disc and HD-DVD players, I contacted representatives for ten of the most prominent companies. I composed a courteous e-mail message explaining my concern and asked whether they would provide the video signals that over six million of my fellow early adopters and I must have. Every single manufacturer that responded said that the decision to include unconstrained analog component video outputs had not yet been made. Some cited the need to wait until the encryption and copy protection standard had been finalized. A very few refused to respond. The results for two rounds of such exchanges spaced about five months apart were identical. And earlier this year, an April letter to Mr. Ben Feingold, President of Columbia TriStar Home Entertainment (now Sony Pictures Home Entertainment), was sent to ask about this issue. It was mailed shortly after his announcement that the studio’s film library will be released on Blu-ray Disc starting in the fourth quarter of 2005. Neither he nor any of his representatives ever responded.

So there you have it, ladies and gentlemen. Some of us may be in trouble. What to do? I have two suggestions for the film industry’s consideration and yours. My first is perhaps unrealistically optimistic, but sometimes the obvious must be stated. The MPAA should reassess its position and realize that it’s inappropriate to punish millions of consumers because of the actions of a few miscreants. It has been reported recently that the MPAA has brought lawsuits against those who illegally distribute movies online over peer-to-peer networks, server operators and individuals alike. I applaud that effort. It is far more rational to make those who violate copyright law accountable rather than to punish law-abiding home theater enthusiasts who’ve invested in expensive, high quality equipment prior to the creation of encrypted digital interfaces. But since expecting the MPAA to allow unconstrained analog component video outputs may be beyond any reasonable hope, let’s move onto suggestion two.

Perhaps digital rights management (DRM) is the solution. When the Terminator 2 Extreme Edition DVD was released, a supplement disc was included with a high definition transfer of the film encoded in the Microsoft Windows Media format. To enjoy this version of the film, your computer had to make a connection via the Internet to obtain a license to play. This is an integral mechanism within the DRM process. So if that protection had been good enough for Artisan, perhaps it would suffice for the rest of the motion picture industry. I would be willing to run a network connection or a telephone line to my home theater. And I would be willing to pay the DVD player’s extra cost of $30 to $60 for a local area network port (preferred) or a modem to make the connection to acquire a license to play the high definition discs I buy. So my second suggestion is for the studios to permit the marketing of high definition DVD players that are equipped with unconstrained analog component video outputs and assure appropriate use of the studios’ intellectual property by requiring that the players include the hardware and firmware needed to obtain a DRM license to play.

I don’t want to lose a very substantial investment in my front projector due to historically unjustified film industry fears. And I’m sure I share the feelings of millions of early adopters and home theater enthusiasts who find themselves in a similar situation. The MPAA and the motion picture industry should come to its senses and treat fairly and responsibly the early adopters who own analog input HD-ready displays and who helped build the standard definition DVD market both with their wallets and through their enthusiastic proselytizing of the DVD format.

The 2005 Consumer Electronics Show opens in Las Vegas on January 6th and runs for four days. I expect quite a few high definition DVD player announcements and demonstrations of pre-production or production prototypes. As show reports are published, perhaps we’ll discover what the studios and the player manufacturers have in mind to protect intellectual property. I can only hope that rationality prevails.


Note 1: Based on a press release by the Consumer Electronics Association on July 21, 2004, over eleven million DTV products have been sold since their introduction. Nine point four million were purchased prior to 2004. From that same source, the average cost per unit was $1,336 YTD in 2004. Considering that early HD-ready models cost between $5,000 and $10,000, and that CEA statistics do not include high-end home theater front projectors that cost between $10,000 and $40,000, it’s safe to assume that the average cost of an HD-ready display in the installed base is no less than $2,500 (that figure is likely to be very conservative; I suspect that the average will prove to easily exceed $5,000). So the aggregate consumer investment is no less than $27.5 billion. Within the installed base, approximately 60% of the displays do not have digital inputs; they only have analog component video inputs or RGB-HV inputs. So 6.6 million units valued at $16.5 billion are at risk. These estimates maybe refined at a later date, but I don’t think I’m too far off.

Note 2: As I write this article, HDCP atop of DVI seems to be the layered, protected interface preferred currently by the entertainment industry. DVI (Digital Visual Interface) is a hardware standard. There is another, related digital hardware interface called HDMI (High Definition Multimedia Interface), which carries video and audio. For digital video, passive adaptors or appropriate cables permit driving one type of digital port from the other type. To protect the digital data from piracy, HDCP (High Definition Content Protection) key-based encryption is applied to the bit stream; this may be thought of as an encrypted software layer. If your HD-ready display device does not support DVI/HDCP or HDMI/HDCP, you may be facing a serious problem.

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