Top 12 Film Industry Stories of 2008:
#2: HD-DVD Loses, Why Hasn't Blu Ray Won?
By David Mumpower
January 15, 2009
BoxOfficeProphets.com
How did we get to this point? The key was a series of private negotiations between all the major players in the movie industry oligopoly. As a reminder for those of you who didn't spend endless hours arguing who would the format war on various Internet forums, at the start of 2008, the scorecard read like this. MGM, Warner Bros. and New Line Cinema were fence sitters, all choosing to release their major titles on both formats. This trio hedged their bets and, not coincidentally, they experienced the best overall sales relative to expectations. Meanwhile, the two biggest studios in the industry, Sony and Disney, both supported Blu Ray. They were joined by MGM, Fox and Lionsgate. Having the support of three of the largest media conglomerates in the world appeared to give Blu Ray the winning hand in the battle for next-gen DVD supremacy. Universal, Paramount and The Weinstein Corporation, however, refused to go along with their larger peers, instead agreeing with Toshiba that the key to next-generation technology was affordability for consumers. While the Blu Ray side tried to negotiate from a position of power, the HD-DVD group tried to sneak their way to victory by being cheaper to consumers. The end result was that at the end of 2007, the cheapest Blu Ray player was $299 while the cheapest HD-DVD player was $99.
All along, the expected rationale for Sony's Blu Ray technology to win out was the Trojan Horse tactic of installing the technology in the Playstation 3. Over 100 million Playstation 2 videogame systems had been sold by this time, and there was no reason to believe that the new, powerful hardware device would be any less successful. We all know how that turned out. Due to almost inexplicably arrogant pricing, Sony hemorrhaged the body of their market share in the videogame industry to first Microsoft and later Nintendo. As I type this, the Playstation 3 is not only losing the battle for videogame supremacy, but they're also not even competitive for second place. This much had became clear through holiday sales in late 2007, making all involved on the Blu Ray side very nervous about the coming year. The expectation all along had been that once the Playstation 3 had been released, its success would carry Blu Ray to next-generation DVD victory. Once such a scenario failed to materialize, a reboot was needed by all involved.
In point of fact, HD-DVD was beginning to hold many of the cards late in 2007. Thanks to the aforementioned pricing that included $99 hardware sales, HD-DVD had become a popular holiday selection for many budget-conscious consumers. An incentive plan that gave away five free HD-DVDs for every new hardware purchase meant that a frugal customer looking to get their feet wet with HDTV could buy a new HD-DVD player and five free discs for just over $100 including sales tax. Such a purchase on Blu Ray would have cost a minimum of $450. The pricing gap between the two products was readily apparent to all consumers and it was the source of much frustration for Sony. No less than CEO Howard Stringer made a statement in early November of 2007 that the next-generation DVD was "at a stalemate" and he expressed frustration that an expected quick victory in this new landscape had never unfolded. New tactics were needed to end this battle once and for all.
Like every other business industry, this fight was eventually settled by money. The odd quirk here is that Sony's success in winning the battle stemmed from what may only be defined as bribery. Painfully aware that the tide had turned to HD-DVD's side in the format war, Sony had gone to one of the fence sitters, Warner Bros. and made a cash offer. A financial stipend was given in exchange for Warner Bros. to switch exclusively to Blu Ray. Savvy business people that they were, the decision makers at Warner Bros. took this offer back to Toshiba and the other HD-DVD people and asked them to match. There was one other unusual aspect of WB's request. They wanted HD-DVD to lure one of the current Blu Ray exclusive studios to swap, thereby swinging the balance to the HD-DVD side, presumably once and for all. Just before the Consumer Electronics Show last January, the perception existed that any major change in the lineup of next-generation DVD support would end the battle once and for all.
Once Sony became aware of these negotiations, they offered further financial incentives for their current supporters to remain loyal. Simultaneously, Toshiba made what proved to be a regrettable decision for their HD-DVD technology by refusing to pay so much money just to buy the loyalty of a studio. Warner Bros., perhaps the only studio who behaved logically and rationally in this entire chain of events, recognized that another year of split sales between HD-DVD and Blu Ray would hurt the industry. They were willing to take less money from HD-DVD in order to become exclusive to that side since they had sussed out that it was better positioned to win the next-generation DVD war. They were not, however, willing to take significantly less money in exchange for no guarantee that the war would end. Less than 48 hours before the beginning of CES, the biggest trade show of the year, Warner Bros. accepted a reported $520 million, signed an exclusive licensing agreement for Blu Ray and effectively ended the format war. After months of ceaseless stalemate, the deathblow for HD-DVD had come in startlingly quick fashion. On February 19, 2008, barely five weeks after Warner Bros. made their decision, Toshiba announced that HD-DVD was dead.
The fallout from this turn of events has been as unexpected as all of the twists and turns of the format war itself. For the next six months after HD-DVD's abandonment, Blu Ray saw almost no bump in sales. Industry statistics tracking next-generation sales relative to DVD sales indicated that the dial was stuck for Blu Ray at 6% to 7%. For a period of 18 consecutive weeks, there was no fluctuation beyond those levels for Blu Ray. Oddly, even though HD-DVD had clearly lost, Blu Ray had not won as of yet.
The release of Iron Man, the second most popular release of 2008, aided Blu Ray sales immediately. As was discussed in a previous Film Industry Story, Iron Man became the fledgling technology's best selling software within two days of its release. A few weeks later, The Dark Knight further aided the forward momentum of Blu Ray. The biggest selling title of 2008 as well as the second most popular movie of all time (not adjusting for inflation) had the type of splashy graphics and sound that would justify a next-generation high definition system, giving consumers an excuse to splurge, even in a shaky national economic situation. Over 20% of The Dark Knight's first week disc sales were on Blu Ray, and it has already seen purchases of almost two million after only a month of availability. Putting this in perspective, Blu Ray sales relative to DVD have roughly doubled in the past quarter, bumping up to the 12-16% range on a weekly basis. The body of those sales comes from two titles, Iron Man and The Dark Knight. Their combined sales approximately match the entirety of Blu Ray sales for the first half of 2008.
The above raises as many questions as were answered by Warner Bros.' switch to Blu Ray. Why wasn't a monopolistic format doing any better over the course of the year? Are the spectacular successes of Iron Man and The Dark Knight an indication that consumers are ready to flock to the new technology in 2009? Alternately, does this prove that only certain rare titles, in this case the two biggest releases of the year, justify the price mark-up that exists for Blu Ray as opposed to DVD?
When DVD first arrived, one of its primary advantages over videocassettes was that it was cheaper to manufacture, which is why the format exploded. Previously, there had been a waiting period for new movie releases on home video. First, there was a "priced to rent" phase and then there was a "priced to own" phase. The time frame in which DVD cost more due to the novelty of its technology was short lived. Discs wound up in the under-$20 range in a very short period of time. Blu Ray, on the other hand, is designed with an explicit understanding from the movie studios that there will be a steeper cost for the "luxury version" of a disc. Consumers are expected to swallow the expense of the creation of the research and development of this hardware through that luxury tax on manufacturer suggested retail price. Given the current economic climate, there is cause for concern about how willing people are to do so. Will they pay $10 more for the same product simply because there is a perception that Blu Ray is better than DVD?
Disney has hedged their bet on this philosophy in recent days. Accepting that consumers are gun shy about paying more for a product that is only marginally superior in nature, the corporate giant has announced an intention to include a DVD version in the purchase of the majority of their Blu Ray titles. They have stated that they are "aiming to improve the utility of the high-definition format". Similarly, several recent Blu Ray releases have had a digital copy included in order to allow consumers to increase the portability of their software purchase. It's this aspect that is particularly noteworthy moving forward.
Digital license has been the bogeyman of the movie and music industries over the past ten years. While the Motion Picture Association of America was using Manny the Stuntman to make their customers feel guilty, the ubiquity of the iPod was bringing down the music industry. Back in 2004, I noted this behavior in a Film Industry Story, and I pointed out that the movie studios would be in trouble if the iPod ever started playing movies. That day has come and with the expected domination of the iPhone in coming years, physical media's future is cloudy at best.
Before you disagree with me on the point, I simply ask you to consider how often you play compact discs these days. For a shocking percentage of people, the answer is that the only time they do is in the car (if they haven't added MP3 functionality there yet) or when they rip a CD to their MP3 player. Otherwise, CDs sit on the shelf and collect dust. With the growing popularity of services such as Amazon Unbox, TiVo direct download, Netflix Watch It Now (also available through the Microsoft 360) and several others, consumers have a lot more flexibility in how they can purchase and watch a movie.
The changing nature of ownership of such movie licenses creates a headache for the very corporations who capitalize on the revenue created by the new medium of download sales. After so much time, energy and (particularly) money was spent on the development of competing next-generation DVD formats, Blu Ray's triumph over HD-DVD may yet ring hollow. One battle is over, but now Blu Ray must show that it is not just a shiny, new version of Laser Disc. In order to do so, it will have to become the primary purchasing option for movie sales, and it will also have to maintain disc sales market share in a new sales environment wherein physical copies are slipping in popularity. Will it accomplish these tasks? That's probably going to be a topic for Top 12 Film Industry Stories of 2009.