Paramount and Dreamworks go HD-DVD: Sony’s curse continues

  • When you go back and look at the number of media formats Sony has tried to bring to market exclusively, the failures are daunting. They included BetaMax, Memory Stick, Universal Media Disc, Mini-Disk, Professional Disk for Data, HiFD, Music Clip and the Super Audio CD.  They had one success with the 3.5” floppy drive and negotiated out of the Multi-Media Disk to create the DVD with Toshiba and Phillips. But were this a sport, they would have one early win, seven losses and a tie. If you were a fan of a team with this record you’d be well advised to switch teams.  

    It is interesting to note, that in all losses, two things were consistently evident, they were more expensive and more restrictive than the other formats. Blu-ray is both more expensive (in terms of players) and more restrictive (you may recall that HP moved to support both formats because of the restrictions) than HD-DVD.

    Up until now, Blu-ray has enjoyed one clear advantage; they had more studios exclusively on their side.  With this announcement, that one advantage is now significantly offset.   One of the things that really makes this interesting it that 300 set HD disk sales records by being on both formats which would suggest Paramount and Dreamworks are foregoing short term gains to solve a strategic problem (that almost never happens).


    So why did Paramount and DreamWorks jump into the HD-DVD Camp?   All of the studios agree that there needs to be one standard.   They also know that the market for players is driven by price and that the two magic numbers are $200 and $100 for players - and if folks don’t have players they don’t buy disks.  

    This means the first player to get below $200 will be the most likely to sell enough to finally justify the switch from standard DVD to HD, HDTVs have been selling very well so the industry knows there is a pent of demand for HD content that is not being met until either Blu-ray or HD-DVD wins.  

    If you were to try to force Blu-ray, given its price/cost curve, you would likely see the ramp to HD content in the 2008/2009 time frame because that’s when the cost of the players will probably reach that critical $200 price point.  But HD-DVD is already close and Wal-Mart is expected to have a sub-$200 HD-DVD player in the critical fourth quarter (Amazon already has one under $240).

    A lot of us thought the PS3 would make a difference, but sales have been lagging for that player and recent studies have indicated many buyers don’t even know the players can play Blu-ray disks.  That’s an effective one-two punch that appears to have eliminated the PS3 advantage at least from Paramount’s and Dreamworks’s perspective.  

    The extra capacity that Blu-ray has doesn’t make any difference if folks won’t buy the players in sufficient volume to make the market and, I think, Paramount and Dreamworks have simply done the math and realize their revenues will be significantly enhanced if buyers see HD-DVD as the safest and least expensive choice during the critical fourth quarter.

    This doesn’t mean the market will play out this way, there is always risk and Sony is probably not going to go easy, but this appears to be the logic behind their decision.

    Sony’s response

    Sony has three likely responses:

    First, do nothing and bet Paramount, Dreamworks, and Universal are wrong.  They still have Disney (arguably the most powerful), their own Studio, and Time Warner and others that are in both camps. The market may not repeat history and move on the price, and if Sony can make enough Blu-ray noise they can, as they did for much of this year, simply assure neither wins.  

    Second, they can respond with their own sup $200 player themselves. That would mean losing in excess of $100 on every sale and, already bleeding from the PS3, they don’t appear to have the resources to make this work and sustain acceptable profitability, but it would prevent a HD-DVD route.  I doubt, however, the outcome would be much different than choice number one in the end except they would bleed red ink like a stuck pig.

    Third they could abandon Blu-ray, cycle the PS3 early to bring its price in line with the Wii (which is chewing up the market anyway) and gain a price advantage over the Xbox 360 which still has the largest installed base. Problem is you can’t cycle game systems this quickly and hope to hold onto developers and, unless they had already started this, they will take a huge hit in the fourth quarter if word gets out they are on this path with the PS3.   

    My guess is they will go with a blend of one and two, lowering the prices for the PS3 and players by $50 to $100 and hope that is enough to hold until they can get costs in line for something more competitive.   They will then go active on their successes with Movie sales and continue to muddy the water so that buyers do not conclude Blu-ray has lost and hold off buying either until Blu-Ray can be profitably sold at the target price.  

    Strangely enough, the success of this hinges on Disney, if Disney (who is in heavy competition with Dreamworks and Paramount) concludes as they did that HD-DVD is where the money is, they are likely to switch camps and many may not realize that Disney was actually one of the key architects for the HD-DVD platform and switched sides for political reasons.    I’m not convinced the why behind that move is going to survive close scrutiny once Disney’s board starts asking about the Paramount and Dreamworks move and I would love to be in the meeting when that is discussed.

    Wrapping up

    The consumer electronics market is a fourth quarter market, people will likely buy the player that hits their price point. Whether it is video game systems (and the Wii is an excellent example), or this already too old DVD format battle, folk’s need to realize that it’s not the technology that wins, but it is the price and content. You need both, neither are optional. Blu-ray lost on price and now they are losing content. That is not a good trend.

    Given Sony’s history here, I can’t figure out why people just don’t leave the room laughing every time Sony proposes a new storage standard. While I still think it is possible we could end up with both as we did with recordable DVD formats, with major studios recasting their votes, I think the odds just shifted back in favor of HD-DVD.   One interesting closing thought, since these studios compete with Sony’s studio, I wonder if the fact that this would drain Sony’s resources had anything to do with the decision?  

    In any case, whichever side you are on, I’ll bet you are hoping for the day when there is only one HD optical standard.

    Rob Enderle is one of the last Inquiry Analysts.  Inquiry Analysts are paid to stay up to date on current events and identify trends and either explain the trends or make suggestions, tactical and strategic, on how to best take advantage of them.  Currently he provides his services to most of the major technology and media companies. The editorial staff of TG Daily may not necessarily agree with his opinion stated in this article.