Analysis on the format war: So is that it?

One of Las Vegas' most epic battles may be drawing to a close, but the spectators in the high-definition format war are already moving on to the next big technology. Are the spoils for Blu-ray enough to sustain the industry going forward?

What was almost declared a stalemate that could leave the high-definition disc market's prospects unfulfilled, may end up a squeaker of a victory for Blu-ray after all, assuming no further bizarre shift of allegiances takes place between now and next Christmas. If Blu-ray has actually won, then what has it won? Can we all go pick up our Blu-ray Disc players and start buying any recently produced movie we possibly want, regardless of its studio? Or has the public's appetite for the thing waned, perhaps moved onto some other technology with less of a chance of getting bogged down in a years-long dispute?

We've taken the issue to one of our favorite deep thinkers on the subject, AR Communications Senior Vice President Carmi Levy.

SCOTT FULTON, BetaNews: At this time last year, everybody was talking about how great the LG dual-format player was going to be, and how that was going to cure all our ills...This year, unless my sensors are completely out of whack, it doesn't matter any more.

CARMI LEVY, Senior Vice President, AR Communications: No, it doesn't, because we reached the tipping point this week with the Warner decision to back Blu-ray. That decision now means that five out of seven Hollywood studios are firmly in the Blu-ray camp. And #6, Paramount, is rumored to be on the cusp of making a similar move as well, so clearly if you are the odd-man-out studio in this scenario, you risk marginalizing yourself if you don't also very quickly move to Blu-ray. So the format war, from my perspective, is virtually over. All that's left is to count the number of dead, pick up our injured, and move on.

But obviously, this is yesterday's conversation. The future of spinning media clearly lies in Blu-ray.

SCOTT FULTON: But is there a future in that spinning media, at least as much as there was?

CARMI LEVY: I think there is a future; the question is, what will that future look like? How long will it last, and what will ultimately eclipse it? I think it's an easy conclusion to make that the Blu-ray / HD DVD battle will probably represent the last major format war that we will see in technology, if not forever, then certainly for quite some time.

Because the market is obviously moving away from content distributed on printable, physical media, toward a network-delivered model. That doesn't necessarily mean that the market for DVDs and Blu-ray discs is going to evaporate tomorrow, but obviously it's going to be much more affected in the years to come by the growth of network-based distribution mechanisms and capability and capacity, than we have seen over the last ten years.

The network that sustains this kind of data transfer is finally reaching a point of maturity that it can reasonably distribute the large file formats that consumers demand, and the services that will run on top of these networks are starting to shake out and are starting to become tangible and real, and we are starting to see some early success in this regard.

No breakout successes just yet, and certainly we haven't seen the killer app in terms of the online service that makes us forget our DVDs and forget our CDs forever. But the market is inevitably moving in that direction; the only question is, when will we reach that tipping point, to the point where we can comfortably leave our disc-based media behind? And right now, there is no firm answer for that timeline.

SCOTT FULTON: Isn't the country of China really smart here, by having negotiated an agreement with the HD DVD people last year to, in effect, be able to produce a player with the HD DVD mechanics, but without HD DVD's intellectual property? Perhaps people have a limited amount of streaming ability, but they need burning capability to burn the movies that they do download to a high-definition drive. Now they could have one, it could cost sixty bucks...they don't then need either Blu-ray or HD DVD's intellectual property, and they still have their disc library.

CARMI LEVY: I think the problem there is that [CH-DVD] is HD DVD-based, and a lot of people were standing along the sidelines waiting to see the results of the Blu-ray vs. HD DVD battle before they started to buy in. And now that it's clear that HD DVD is not going to win the overall war, I don't really see a viable business case for any HD DVD-based solution, even if it does serve an appropriate role in allowing for some kind of burning capability that addresses that network performance gap that we've been talking about.

SCOTT FULTON: But if consumers are getting the source of their media from the pipeline rather than through the channel, then why does the difference between HD DVD and Blu-ray even matter? They've still got the movie!

CARMI LEVY: Because consumers still don't want to back the wrong horse. They don't want to be buying a piece of hardware that they perceive to be obsolete almost before they get it home and get it installed.

When it was clear that VHS had won the VCR war over Beta, people who had bought Beta VCRs could still use them to tape shows. The fact that you couldn't find a movie out there didn't mean that you couldn't use it for your own personal use, disconnected from anything that the studios might put out. The devices themselves were still usable, and in fact, were technically superior at the time to anything that VHS could muster. It was better picture quality, better sound quality, the cassettes themselves were a little bit smaller and easier to store. That didn't matter. The market for Beta dropped out at that point because nobody wanted them. They had the Scarlet Letter written on them, and that was the end of that as far as consumers were concerned.

It's very difficult to sell the technical benefits of a technology once the market has already perceived and concluded that that technology is at a dead end. And right now, that's where HD DVD finds itself. Whatever the technical benefits of using HD DVD in this capacity are, consumers don't care. They see it as yesterday's news and they don't want it in their house, and they don't want to be spending any money on it because they worry that it will be money that's just literally tossed out the window.

SCOTT FULTON: Okay, so project us out then to the holiday season. Assuming that things go rosily from here on out for Blu-ray, probably by that time, Warner will have stopped its production lines on HD DVD. I would imagine by that time Paramount will have followed. Universal, meanwhile, will have its own brand of HD DVD player, only able to show programs from Universal and NBC.

CARMI LEVY: I think Universal needs to be scratching its head now, as it evaluates its long-term business model. Going it alone has never been an option in this industry, and I think Universal needs to do an about-face, if it hopes to be relevant around this time next year.

SCOTT FULTON: For the Blu-ray manufacturers -- Sony, Panasonic, Pioneer -- does their market look anything close at this point to how they'd dreamed it might look two years ago? Can they salvage enough to be able to make this a worthwhile investment again?

CARMI LEVY: Well, they'll be able to make money at it, that's for sure, but it'll be less money than they could have foreseen or envisioned around this time two years ago, because we're that much closer to the end of the disc-based era. Network delivery of multimedia content has advanced tremendously over the last two years, and most importantly, consumers are much more aware of the alternatives today than they were two years ago.

So there's opportunity, and it's profitable opportunity and it's worthwhile profitable opportunity, for the hardware vendors as well as for the content providers and the studios. But it's not as great as it once was, and that window continues to close, obviously, as time moves on. So they need to move very quickly; they need to consolidate their position now that it seems that HD DVD's death knell has been sounded, they need to aggressively bring consumer-grade, mainstream hardware to market, they need to move very quickly to evolving Blu-ray hardware from a perceived premium product to a perceived mainstream product, so that instead of buying a basic DVD player, by default, you go out and buy a Blu-ray.

And then at the same time, they need to winnow that price differential between conventional DVDs and Blu-ray, so that again when you're at the movie store, out actually buying discs, it becomes a no-brainer. You buy the Blu-ray instead of the DVD because either the DVD isn't available or the price differential between the two is so small that it's not worth going with the cheaper alternative.

So over the next year, everyone needs to really get their game on to shift very, very quickly, both from a hardware and a content perspective, from the DVD economy to the Blu-ray economy, and that's going to involve shifts in pricing models for content as well as rapid migration of the player hardware as well. They need to move fast, because that window will not stay open forever.

SCOTT FULTON: Sony and Panasonic like to think in terms of pricing tiers. They have what they hope will become a mainstream tier, and a premium product. But does that premium product price point now fall below $500 US?

CARMI LEVY: Yea, I think that reasoning, where there is a premium product tier, begins to erode in this day and age. You're not selling consumer products any more, you're selling services, and you're selling experiences. And that appreciation, where you used to sell low-end stereos to everyday folks for their paneled rec rooms, and then you would sell high-end stereos to the audiophiles who would go without food to buy the absolute best of everything for that 10 MHz increase in signal-to-noise ratio, or whatever, those days are over.

The low-end buyer still expects similar levels of performance to the high-end buyer, and certainly you can't build a market until you get that mainstream market behind you. So obviously, there's always going to be room for higher-end offerings from the hardware vendors, but the size of that niche is going to be smaller than it was before because, frankly, consumers are much savvier now than they were 15, 20 years ago. They expect more from their hardware even if they're only spending $150 for the player.

So the first tier is going to be up to and including $200, which is the basic price of a fairly decent DVD player today. You can get a cheapie for $50, I don't think anyone expects that at this point. But certainly at some point, we will expect to see $100 and sub-$100 Blu-ray players as well. And then as you add features onto them, it's not inconceivable that consumers would be willing to pay $300 to $400 for a higher end device, but really that will continue to be a niche.

You've got to move the [majority segment] of the market as fast as possible under that $200 price point, before you and I and everyone else reach the point when we are willing to simply go out and buy one. Most consumers won't even blink. They won't consider replacing their existing DVDs, which they perceive as good enough, until a Blu-ray Disc player comes under $200.

We saw that with HD DVDs, as soon as there were increases in demand, as soon as prices hit the $200 mark or whenever there's a screaming sale for $99, consumers jumped in. They almost didn't care about the format war, they didn't care that HD DVD was losing the format war, they simply saw it as an opportunity to replace their old DVD player for something just as cheap. And let's face it, everybody wants a screaming deal, and Blu-ray's going to have to learn that lesson quickly.