September 07, 2005

Sony vs. Toshiba in DVD Format Wars: Samsung Positions for Ultimate Victory with Dual-Format Device

DVD Format Wars between Sony and ToshibaEven as Sony renews its determination that its new DVD format Blu-Ray will not to relive the painful Betamax experience of losing to VHS, Samsung seems to be positioning itself as a quiet arbiter of standards cross-compliance for consumer electronics customers as Toshiba's HD-DVD wages a pitched battle with Sony for DVD dominance.

At the core of both formats are blue lasers, which have a shorter wavelength than red lasers used in current DVD equipment, allowing discs to store data at higher densities needed for high-definition movies and television. However, the coating used in the Blu-Ray format requires a retooling of DVD manufacturing equipment not necessary for HD-DVD, despite the advantages of higher storage capacity.

Now that HD-DVD has suffered the setback of pushing its U.S. launch back from late 2005 to early 2006, it'll have a MUCH tougher time competing with Blu-Ray, when Sony hits the street with the PS3 game console:

The next-generation DVD format known as HD-DVD won’t be launched in the United States until early next year, setting the stage for much tougher competition with the competing Blu-ray standard.

DVD Format Wars between Sony and ToshibaThe consumer electronics company (Toshiba), which is the major backer of the HD-DVD format said, however, that technology will be launched in Japan before the end of 2005 as planned.

The delay in the U.S. all but eliminates the only advantage that the HD-DVD camp enjoyed over the Blu-ray format: time to market. Initially the HD-DVD camp had planned to launch products in the U.S. before the 2005 holiday season. HD-DVD has been waging a three-year format war with the Sony-backed Blu-ray format. The Blu-ray products are planned to reach stores in the spring.

Although the delay will not greatly affect the volume of HD-DVD sales, it will hurt the group’s image, Ms. Levitas said. “In terms of any momentum [HD-DVD was] going to build this year, they are shooting themselves in the foot,” she said. “They are giving a chance to Blu-ray to catch up.”

Another reason for the delay could be Hollywood studios losing confidence. “Maybe the studios are getting cold feet that you can succeed in [acquiring] consumers to move to blue lasers without a standard,” Ms. Levitas said.

It appears so far that Sony's winning and seems to be tipping the scales it's direction - had an analysis and rave reviews for Blu-Ray:

If history is any guide, changes in technology that make entertainment more convenient make a difference in the way it is experienced. The advent of mass television, for example, came very close to killing the movie business, cutting the average weekly moviegoing audience from 90 million in 1948 to 20 million in 1966. Once Americans had color TVs, some 70 million people a week stopped going to movie theaters, forcing Hollywood to revive the movie audience with massively expensive television advertising. Videos and DVDs—and the ability to churn out pirated copies of them—have wiped out most of the movie theaters in large parts of Asia and Eastern Europe. So, what effect does Sony expect that its new Blu-Ray DVD will have on what remains of the moviegoing audience? To find out, I proceeded from the ground-floor showroom to the 34th-floor executive suite and put the question to Sir Howard Stringer, the British-born—and first non-Japanese—chairman of Sony.

Sony's fabled success story began more than half a century ago, in 1946, in a bombed-out basement in Tokyo. Akio Morita and Masaru Ibuka started the company (originally named Tokyo Tsushin) with the intention of manufacturing necessities, such as rice cookers and space heaters, for the war-ravaged population of Japan, but they quickly found an export market in America for consumer electronics. They went on to introduce a string of remarkably inventive entertainment products—including the CD. Along the way, Sony also bought a number of American companies to get content for these products, including CBS Records (now Sony Music), the Columbia TriStar studio (now Sony Pictures Entertainment), and, most recently, MGM.

Even though Sony helped bring about the digital revolution, the company has failed to adapt to it. The standardization required to manufacture consumer digital products undercut the value of Sony's branded products. For example, the Chinese and other low-labor-cost manufacturers, using the same computer chips, could make the same DVD players and digital TV sets as Sony for a fraction of the cost. The result was a commoditized rat race that became unprofitable for Sony. When it became clear that Sony had to "revolutionize itself," as Sony's previous chairman Nobuyuki Idei termed it, the revolution involved transforming Sony from a company that had focused on engineering proprietary products, such as the Trinitron color television set, the Betamax VCR, and the Walkman, into one that could capitalize on—and protect from piracy—the streams of digital data that would include games, movies, music, and other intellectual property. When Sir Howard assumed the leadership of Sony this year, part of his mandate was to move the company, as he put it, "from an analog culture to a digital culture."

The Blu-Ray DVD is a critical piece of this strategy. As I learned in Tokyo, its multiple layers not only can store vast amounts of digital data, they can also be used to record data downloaded from the Internet. For example, after buying the Blu-Ray DVD for Spider-Man 3, a consumer could then add on a game, music video, or a prior sequel from Sony's Web site. When I asked Sir Howard if there was concern that the Blu-Ray DVD would result in a further eroding of the world moviegoing audience, he answered that it was "a chicken-and-egg problem." The "chicken" was theatrical movies; the "egg" the DVD (plus television and licensing rights). Sir Howard, who is also chairman of the American Film Institute, pointed out that it would be difficult to conceive of great movies, such as Lawrence of Arabia, being made without a movie theater audience to establish them; the dilemma is that it's the "egg" not the "chicken" upon which the studios increasingly depend for their money.

So, even while trying to avoid fatally injuring the chicken—movies—Sir Howard said that studios are under increasing pressure to "optimize" their profits from the proverbial golden egg, the home audience. Indeed, the Blu-Ray DVD make this balancing act more difficult: With its interactive features, it appeals to the very teenage audiences on whom the multiplexes now so heavily depend. It's also a vital part of Sony's latest version of its PlayStation, due to be released next year. The prior versions of PlayStation have sold more than 100 million units and have provided the Sony Corporation with up to 40 percent of its profits. PlayStation 3, while it may sound like a child's toy, is in fact an incredibly powerful computer, exceeding in its processing power IBM's famed Deep Blue. The Playstation 3 can play high-definition movies and super-realistic interactive games and surf the Internet, providing a gateway for further digital consumption. In addition, the Blu-Ray will allow Sony to reissue its movie titles in high definition. In fact, part of the stated justification for acquiring MGM was the profits to be realized from reissuing the 4,100 films in MGM's library in the Blu-Ray format.

At some point, Sony has to overcome a competing high-definition format, HD-DVD, sponsored by its traditional rival, Toshiba. HD-DVD, like the Blu-Ray, uses a blue laser optical reader and renders an equivalent high-definition picture. The principal difference is that Toshiba designed the HD-DVD so that discs can be stamped out by existing DVD manufacturing equipment (which unfortunately is also owned by video pirates). That design makes it less expensive to implement, but the HD-DVD lacks the recordable multilayers or massive storage space for interactive features of the Blu-Ray.

While Sir Howard preferred not to speculate on the outcome of this potential format war, I predict that the Blu-Ray will prevail for three reasons. First, Sony has a critical mass of movies that it can release on Blu-Ray. Aside from its own titles, Disney, 20th Century Fox, and Lions Gate have agreed to release their titles on Blu-Ray. Next, almost all of the leading computer manufacturers, including Dell, Hewlett-Packard, and Apple, are committed to using Blu-Ray. So, if a studio wants its high-definition DVDs to be playable on personal computers—or for that matter on PlayStation 3—it will have to issue them in the Blu-Ray format. Finally, the situations of Sony and Toshiba are not symmetrical. For Sony, the Blu-Ray is an integral part of its overall strategy. For Toshiba, the HD-DVD is just another product they manufacture. If the company reached an accommodating deal on licensing fees, it could also make money by manufacturing the Blu-Ray DVDs. One way or another, however, the moviegoing public will soon have one more diversion from movie theaters.

Meanwhile, Samsung says it goes both ways:

Samsung Electronics Co. will bring out a DVD machine next year capable of playing both Blu-ray and HD DVD if backers of the rival standards fail to agree on a unified format, a newspaper said.

Competition between the two camps has hampered the launch of the next generation of optical disks, which will have greater capacity and higher definition, as movie studios hesitate to commit to printing disks on either standard.

Samsung's head of consumer electronics, Choi Gee-sung, told the Financial Times Deutschland: "We would welcome a unified standard but if this doesn't come, which looks likely, we'll bring a unified solution to market."

"It won't be simple but you'll see our solution in the coming year. Consumers will be too confused otherwise," he added in the interview published on Tuesday.

Samsung is a backer of Blu-ray, which promises higher capacity than HD DVD and better interactivity and security.

But supporting all standards—as Samsung has done with cellphones and mobile video—could give it an advantage in the multibillion-dollar market for DVD players, PC drivers and optical disks.

In the end, it might all come down to porn - which is what happened with VHS.

My instincts tell me we won't still be wondering who'll win this thing when Sony's PS3 hits the market. Now that HD-DVD has been pushed back, execs from Sony are claiming the Blu-Ray will "overwhelm" HD-DVD, citing its bundling with the PS3 and the fact it holds more data as trump cards. However, Toshiba has countered the argument, saying HD-DVD is cheaper to produce, which will ultimately draw the porn industry to it, and where porn goes, industry follows. Score one for Toshiba.

Plus, Toshiba says, "We're also not convinced that consumers would need to store so much data on disks, especially now that internal hard drives are more popular," which just goes to show you business analysts aren't the only ones completely out of touch with what consumers want.

Regardless, it's about now when consumers either go with Samsung's dual-format solution (Samsung could be the biggest winner in all of this) or simply throw up their hands and wait a year or two to see how things really turn out and go with the victor. One way or another, the stalemate is bad for BOTH Sony's and Toshiba's competing camps.

Seen another way, with Blu-Ray so critical to Sony's overall strategy, and HD-DVD not for Toshiba, Samsung also had little choice but to support both.

Still, one of the big factors in all this will be who the content providers - meaning Hollywood - will go for. And that, my friends, will boil down to who has the best copy protection. Sony scored a big one there too, with assurances that Blu-Ray equipment will Internet-connected to report any hacks to Big Brother's central command and the device can then be disabled. As in all things, vested-interest politics shares much of the blame. This speaks to the long-time, silly "regional code" that prevents DVDs made on one continent from playing on another.

For anyone who's ever bought a DVD in Australia, South Africa or China and brought it home to the U.S., this is often a rude awakening, as it was for me. This regional code can be removed in the players - as I have done myself to enable them to play - but in a Blu-Ray world, mods like that will not only be taboo, they'll earn you a dead DVD player.

- Arik

Posted by Arik Johnson at September 7, 2005 03:10 PM