Strategic Computing and Communications Technology
High-Definition DVD Format War
vs.
March 14, 2007
Group A:
Saud Al Shamsi
Vikas Bhargava
Karen Hsu
Josh Palmer
Mark Schelbert
Edmung Wong
HD DVD vs. Blu-ray
“DVD is, by some measurements, the greatest success in consumer electronics history. Following its 1997 debut, it took the format just a few years to completely conquer the home-video market previously ruled by VHS tapes.”[1]Not even 10 years later, two formats have appeared in the market both claiming to be the rightful successor to the DVD throne: HD DVD (developed by Toshiba) and Blu-ray (developed by Sony/Phillips).
The battle for dominance between the Sony and Toshiba camps is not something completely novel in the industry. Parallels can easily be drawn between the present situation and a very similar “format war” between Sony’s Betamax and JVC’s VHS, two competing videotape standards, that began 20 years earlier. Betamax was released in 1975, followed a year later by VHS. The JVC camp was finally declared victorious when Sony announced that it was going to start production of VHS players and cassettes in 1988, over 10 years after the talks between both camps failed to generate any resolution or compromise.[2]
A few lessons can be learned from the VHS-Betamax experience. First, format wars can last a very long time. For example, during the VHS-Betamax war, consumers were bombarded with propaganda and marketing campaigns that tried to entice potential buyers into choosing one side over the other for 10 years. Ultimately, however, the consumers were left in a state of confusion over which format was “better,” and choices became more haphazard then as a result of good decision making. Second, better technology does not necessarily guarantee success. For example, Sony’s Betamax offered consumers superior technology compared to VHS. However, as history shows, that fact was not enough to give Sony a strong foothold in the market. Lastly, better marketing does not necessarily guarantee success. For example, Sony’s marketing expertise and impressive advertising to promote Betamax were not enough to win the format war.
The VHS-Betamax war illustrated that success was neither marketing-driven nor technology-driven, but instead achieved through a network effect. JVC’s VHS format had the support and backing by a large network of key manufacturers and important content providers. The VHS network ensured its success. In contrast, Sony lacked these networks during the VHS-Betamax war, which proved a more significant determinant than both technology and marketing combined.
While the VHS-Betamax comparison is widely used when discussing the current, and potential future, situation in the High Definition optical disc format struggle, the story behind the creation of the popular DVD format is usually left untold. In the early 90’s, the Sony camp and the Toshiba camp were both working on a novel optical disc format. In order to avoid a repeat of the VHS-Betamax war, both camps decided to convene and discuss a potential compromise that would generate a single format. The president of IBM at the time took the position of mediator, and out of those talks, the DVD format was born. It is important to note, however, that the Sony camp was unhappy with the share of royalties that it was receiving from DVDin relation to the higher amount paid to Toshiba and co., and thus started working on what is now known as Blu-ray. Not to be outdone, the Toshiba camp also started working on the next generation of optical disks, and out of that development came the HD DVD.[3]
This time, however, the initial peace talks were unable to generate a resolution and the two sides will have to let the market decide a la VHS/Betamax from two decades earlier. As many would say, history does have a tendency to repeat itself. The question that is on everyone’s mind now is, of course, “Who is going to win this battle? Blu-ray or HDDVD?”
Other Standards Wars
There have been many format wars since VHS-Betamax, including some that produced a clear winner. Windows beat out Mac OS because Microsoft decided to license their software to hardware vendors. Apple saw themselves as a hardware company, refusing to license the operating system to 3rd party vendors in order to protect their hardware sales. As a result, consumers found Apple’s package to be more expensive than PC-based systems, leading to wide-scale PC, and subsequently Windows, adoption.[4]DVD and DIVX discs were released around the same time, both touted as the next-generation in video content technology. DIVX was released by CircuitCity as a rental variation of the DVD, and allowed for an unlimited viewing within 48 hours of it first being played. After that, users were charged an additional fee for extra views. Many retail chains were against selling DIVX discs, as it benefited their competitor CircuitCity, and many video rental chains refused to offer DIVX since it was direct competition. Consumers found the lack of special features in DIVX to be a deterrent, as well as the fact they had to connect their player to a phone line in order to facilitate the pap-per-view like system, and DVD quickly won the war.[5]
Other wars, though, have not ended with any clear winner. DVD+R discs were released five years after DVD-R discs, both used as blank discs on which consumers burned content. Early DVD players only supported DVD-R, however multi-format players were released soon after the introduction of DVD+R. Nearly all players are now multi-format, and both types of discs are prevalent in the market.[6] GSM and CDMA are two types of mobile phone standards, with the differences lying in how each standard communicates with nearby towers. Regionally, one standard has beaten the other, but globally there has been no winner. The main reason is because the end users do not see a difference between the two. There is interoperability between the two standards in that a GSM user can seamlessly communicate with a CDMA user.[7] And finally, there are over 50 different types of flash memory available in the market for phones, digital cameras, and computers. No single type has won since there is a plethora of all-in-one readers available, and many hardware manufacturers base their decision of which memory to use on form factor and cost.[8]
It is best to keep these wars in mind as we explore the issues surrounding each high definition disc, for they may give a hint as to what lies ahead.
Technology Comparison
Storage capacity
A single layer HD DVD disc can store 15GB of data, while a dual layer disc can store 30GB of data, which is about 5 hours of HD videos. On the other side, the capacity of a single layer Blu-ray disc is 25GB, while a dual layer disc is 50GB, which is about 9 hours of HD videos or 23 hours of standard videos.
Blu-ray is more practical for HD movies due to the larger storage capacity. One high-definition movie (about 20GB) fits on just a single Blu-ray layer (25GB); while a HDDVD requires dual layers (2 x 15GB).
Production cost
At a production of 25,000 single layer discs, the cost/disc for HD DVD is around $1.45, while the cost/disc for Blu-ray is around $1.59.[9] At a first glance, HD DVD looks to be cheaper to produce. However, when we consider the replication cost in terms of cost/GB, a single layer HD DVD disc ($0.097/GB) actually costs more than a Blu-ray disc ($0.064/GB).[10] These calculations do not take into considerations of authoring, setup, Advanced Access Content System (AACS) protection, packaging and other costs. Notice that the final cost of replicating a HD DVD or Blu-ray disc will be higher.
Protective Hard coating
This is required for Blu-ray discs, because its data recording layer is very close to the surface of the disc (0.1mm). In order for the Blu-ray disc to store more data, the laser is bent into a cone shape. And with a higher aperture of 0.85 (compared to 0.6 and 0.65 for DVD and HD DVD, respectively), the disc is more prone to error.[11]Without the protective layer, if the surface of the disc is scratched, data will be easily destroyed. For HD DVD and DVD, this protection mechanism is optional, because the data is recorded at 0.6mm below the surface.
Digital Rights Management (DRM)
Both formats are using a standard called Advanced Access Content System (AACS), which is intended to restrictattempts to copy HD discs. Moreover, both formats are considering using digital watermark protection for additional security. Under this protection scheme, all HD DVD and Blu-ray disc players will include a sensor to listen for inaudible audio watermarks in the soundtrack of movies. If the players do not detect the watermarks, the players will not play the discs. This method is considered to be an effective way to prevent illegal camcording.
When DVDs came out in 1995, it used a static encryption model, so once the keys were cracked, all DVDs were subjected to unauthorized decryption. In order to prevent the same problem from happening in the HD disc format, Blu-ray is adopting a DRM feature called BD+, which is a security platform that uses dynamic encryption. In case the current keys were cracked, manufacturers could update the keys and build them into all subsequent discs to prevent unauthorized copy.
Region Coding
Region codes denote the areas of the world in which distribution and playback of the discs are intended. These codes allow studios to control various aspects of a release, such as date and price, by different regions. HD DVD does not have region code in the technical specifications, and most supporting studios of HD DVD are against adding such a code. For Blu-ray, there are regional codes, but they are different from the DVD region codes.
Network Comparison
Both disc formats are supported by various companies and consortiums. We can divide these groups into four main categories as shown below in Table 1:
HD DVD / Blu-rayElectronics / Toshiba, NEC, Sanyo / Sony, Hitachi, LG, TDK, Panasonic, Philips, Samsung
Information Technology / HP, Microsoft, Intel / Apple, Dell, HP
Studios / Universal, Paramount, Warner Bros. / Sony Pictures, Walt Disney Studios, Fox Movies, Paramount, Warner Bros.
Music and Games / - / Sony BMG, Universal Music Group, Electronic Arts
Table 1: Format Supporters
While both formats have support from various large companies, Blu-ray has greater support from content providers, which are critical to achieving positive network effects. The three biggest box-office winners in 2006: Sony Pictures, Walt Disney Studios, Fox Movies, all support Blu-ray. When one considers that these three studios will be delivering last year’s hit movies to the home this year, that’s an enormous advantage for Blu-ray.
Current Sales and Analysis
Figure 1: Blu-ray and HD DVD sales
In the first half of 2006, HD DVD was the dominant player in the market. However, since the end of 2006, growth of Blu-ray sales has been steady. Figure 1 gives a better idea of the recent trends in HD disc sales, showing that by the first month of 2007, Blu-ray has amassed over 60% of the market share. And in terms of total sales since inception of both formats (April 2006), Blu-ray has now surpassed HD DVD: 100 units of Blu-ray to every 98.7 units of HD DVD.[12]
One of the driving factors behind the growth in Blu-ray sales is the launch of PS3 inNovember 2006. Since then, Blu-ray sales are up 700%. According to a recent survey[13] of more than 10,000 PS3 owners, 80% indicated they will purchase Blu-ray movies and 75% said they will use PS3 as the major device for playing HD movies. These figures are reasonable due to the fact that owners of the PS3 might as well take advantage of the built-in Blu-ray playback functionality. Also notice that the PS3 is still the cheapest Blu-ray player at $499.[14]
The content advantage that Blu-ray enjoys is another major factor that should become more noticeable in the future, when studios that exclusively support Blu-ray, including Sony, Disney, Fox, MGM and Lions Gate, start to release more movie titles in the Blu-ray format. When looking at the top 20 home movie titles of 2006, 19 are available in Blu-ray, 4 are available in HD DVD, and only one movie, King Kong, is exclusively in the HD DVD format. In addition, the content advantage is very likely to further shift in Blu-ray’s favor, as studios that support both formats, including Warner Bros. and Paramount, increase their Blu-ray catalog to match their HD DVD line.
More analysis on the future trends of sales will be provided in later sections.
Business Model
Figure 2: Business Model
As can be seen in Figure 2, there are several players in determining a dominant network: the customers, the competitors, the complementors, and the suppliers. For both HD optical disc formats, revenue is generated from consumers, retailers and distributors, and licensees who wish to mass-produce media in HD formatted discs. Competitors of the formats include the Internet, VHS, TV, and Video On-Demand (VOD). Suppliers of the format include disc replicators, machinery providers, and the entertainment industry, who supply content, which is certainly a key factor in determining who wins this war. And lastly, complementors include HDTV, media players, and game consoles.
Current Marketing Strategies
Some of the key players with relevant market influence include the film industry, the adult film industry, and also the game industry. Their format of choice will undoubtedly play a large role in the outcome of this standards war, and their importance is reflected in the marketing strategies of both sides.
In terms of advertising, both sides have taken different approaches. HD DVD has launched a $150 million multimedia campaign pushing the slogan “The Look and Sound of Perfect,” in efforts to raise awareness of their format.[15]On the other hand, Blu-ray has launched a pre-emptive strike by already declaring itself as the winner of this standards battle in their “The War is Over” campaign.[16] Clearly, the key is to not only raise awareness of the format, but to give consumers the confidence for investment.
The gaming industry is roughly a $20 billion industry worldwide and is expected to grow to about $26 billion by 2010[17] – numbers that clearly should not be taken lightly. While the Microsoft Xbox 360 plays dual layer DVDs, it now supports an (optional) external HD DVD player. However, with the Sony Playstation 3, the Blu-ray player is internal and is used for the actual gameplay. This strategy of two-in-one was largely successful with the Playstation 2. Although sales of the PS3 have not skyrocketed, studies show that 80% of those who purchase the PS3 also purchase Blu-ray movies to accompany their new player, as mentioned before.[18]
The adult film industry also carries a lot of weight, as it makes up at least 10% of the traditional market for DVDs.[19]In an effort to win them over, HD DVD provided training and unofficially connected the pornography studios to replicators. Comparatively, Blu-ray replicators are fewer in total overall, and of those, many refused to replicate pornography discs.[20]Further, while Digital Playgrounds announced last year commitment to Blu-ray, they appear to have changed their mind as they have announced four HD DVD titles in the U.S.[21]Though HD DVD appears to be the format of choice by the adult film industry, Vivid Entertainment Group has released the first U.S. adult film to be on Blu-ray disc format for a trial run.[22]
Other efforts by Blu-ray supporters include Panasonic’s plans for Blu-ray car players[23], and Sony’s cutting of player prices to better compete with the generally cheaper HD DVD players. Sony has announced that the Blu-ray disc player (BDP) S300 will cost $400 less than the BDP-S1 with the same capabilities in early summer. Note that the $600 player is the same price as the Playstation 3.[24] Sony also projects that come Christmas, players will be less than $500.
Furthermore, Geoffrey A. Moore offers a chasm theory that may help predict the victor of the format war. As shown in Figure 3, Moore distinguishes between five groups of adopters in the technology adoption lifecycle: innovators, early adapters, early majority, late majority, and laggards. The most significant of the time gaps, called the Chasm, falls between the early adopters of a product and the early majority pragmatists.[25] As seen in the HD optical disc format war, both sides are vying to cross the Chasm first by appealing to the solid citizens, the non-risk takers. Examples of efforts on both sides to gain consumer confidence include Blu-ray’s “The War is Over” campaign and the ongoing competition between Blu-ray and HD DVD for content providers (i.e., the adult film industry). Nevertheless, current Blu-ray sales trends (with the aid of the PS3) illustrating their market share dominance over HD DVD suggest that Blu-ray will be the first to cross.