HD DVD: “Why Sony & Blu-ray ultimately can’t win” (Part 1)

I should have entitled this post "Becoming one with the Force".  I originally wrote a post that proposed that the Media & Entertainment industry folks that supported Blu-ray would ultimately get their just desserts and if Blu-ray does in fact succeed, I believe that there would be some dramatic ramifications.

And what would those ramifications be?

History 101:  Microsoft & HDi in HD DVD
Newsflash:  Microsoft doesn’t really care about formats.  From a software perspective, HD DVD or Blu-ray… it doesn’t really matter that much.  Both formats required video processing and programming which requires both  software.

What does matter is that Microsoft is interested selling Windows & Windows-based software.  Microsoft’s contribution to HD DVD was HDi, the Dynamic HTML-based interface development specification that enables overlays & menu interfaces for HD DVD movies.  It’s HDi that enables the picture-in-picture functionality, the telestrator markup that director’s do on movies during director’s commentary tracks, the split screen that one sees when two streams play at the same time, the floating pictures and text that shows on the screen like pop ups.

HDi is also what makes it so easy to make sure that one HD DVD disc plays in all players.  Complete cross compatibility from day one.

Sony & it’s Partners just accelerated On-Demand
It’s been said several times:  Is the high definition media format discussion moot?  Does anyone really care any more?  With the movie & television market quickly moving to an on-demand model, do people really need HD DVD or Blu-ray?

On-Demand requires 3 things:

  1. Networking
  2. Customers
  3. Distribution

From a networking perspective, right now, typical Internet speeds to DSL-wired households deliver 1.5Mb-6Mbps.  On cable networks, you can see up to 12Mb, and on Fiber-connected networks (AT&T UVerse, Verizon FiOS) the sky’s the limit.

From a customer perspective, any cable customer, any satellite customer, and any Xbox 360 customer are connected to on-demand networks so there’s a very rich set of available customers for on-demand content.

From a distribution perspective, this is usually the most difficult hurdle:  The networks generally have to negotiate contracts (legally) to distribute content on their networks assuming they have the datacenter facilities to send the content to people.

QUESTION:  Who’s got the #1 on-demand video distribution network in the world?
Lo-and-behold, the largest on-demand content network is owned by none other than Microsoft.  The Xbox 360 Marketplace for Videos has TWICE as much content as any other on-demand service on the planet… and it’s cross-publisher meaning it has content from Fox, Disney, Universal, ABC, NBC, CBS, Dreamworks, Paramount, Warner, MTV, Comedy Central, and virtually every major broadcaster out there.  This is more on-demand content than any network including Comcast, DirecTV, and the telcos.

In fact, HD content that is being broadcast on the Xbox Marketplace is already encoded in VC-1.  This begs the question:  If the HD content is already encoded and distributed to Xbox 360’s in VC-1, how hard would it be to send the entire HD DVD experience?

In other words, why couldn’t people get HDi menus, HDi interactivity, HD overlays, etc. all on-demand?

Why would on-demand HDi-enabled movies impact Media & Entertainment?
Look at it this way:  If you’ve built your entire HD media experience around Blu-ray, you’ve written it all in Java, and you’ve frankly locked your content into a specific JavaVM revision.  Good luck getting that onto other platforms – like cable/satellite on-demand video services or Xbox 360.

But if you built your HD media experience around HD DVD, all your existing HDi menuing, your HD interactivity, all that good stuff that you spent extra investment on will port over to an Internet-connected experience.  Why?  Because it’s all Dynamic HTML, right?  Any Xbox 360 will have the software to play back the whole HDi experience as well any moderately intelligent receiver.

Getting the picture now?

DVD Discs… losing money every month
The question will be, how will studios transcend the money-losing hard media formats of today? (i.e. DVD) One of the most inevitable factors of the future is that on-demand will be the next-gen delivery mechanism of video & audio content.  Even today, DVD sales – both TV & Motion Picture – are plummeting. 

High definition had the opportunity to potentially stave off some of these losses assuming that players were available cheaply, and media costs were low.  HD DVD provided this opportunity with players going for as low as $99 (right now they’re $139 at Amazon.com) and movie selling for $14.99 each.

But if Blu-ray becomes dominant, we’re looking at expensive $429 players & $39.99 movies – not to mention legendary incompatibilities between players, terrible load times souring people on the experience, and lousy interactive experiences due to platform limitations.  But that’s the path that the studios are apparently taking.

What’s the silver lining for HD DVD Supporters
HD DVD supporters today may be glum as the spectre of Darth Sony comes down upon them with a light saber worth $500M, but the fact is the very media companies that are pushing this direction are the ones that have doomed themselves by pushing an expensive, DRM/media-company-centric format.

Meanwhile HD DVD supporters may find that they will take a hit in the interim with potentially declining HD DVD sales if things remain status quo, however their investment in HD DVD development and content creation will blossom as they move into the on-demand market.  And most importantly, the movies already created for HD DVD will find new life as on-demand purchases on various networks – not just XBox 360, and will include interactivity – not just video content.

Wait a sec.  Don’t the Media Companies win anyway with On-Demand?
Sure they’re gonna make money on on-demand purchases, and rightly so.  If people rent movies on-demand at $3.99, there’s very little cost-of-goods and a lot of licensing resulting in pretty good profit margins on that $3.99.

But remember that that’s in trade of a $19 HD DVD disc.  And while there are costs associated with production and distribution of HD DVD or Blu-ray discs, reducing that $19 take to sub $10, it’s still more than the ~$3 that would have been had from a disc purchase.

No, the media companies have essentially pushed themselves into the on-demand world whether they like it or not.  And that means lower operating costs, but lower margins as well.

And that means less money is coming in from the buying public.

That’s it?  That’s the reason the Media Companies should have chosen HD DVD?
But the most important point is…  I’m not done yet.  There are still 2 other ways in my view that media companies will find their lunch eaten into as a result of pushing Blu-ray over the less expensive and more easily accessible HD DVD.

And I’ll get to those in parts 2 & 3 of this post.

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