Media 2010 Final Paper - The HD Video Format War

Media 2010 Final Paper

The HD Video Format War With an Emphasis on the Role Video Game Consoles will Play

Chris Arnwine 298D/4: Media 2010

Professor Gigi Johnson 3/22/07

Arnwine | 298D/4 | Final Paper 2

Introduction

This paper seeks primarily to develop an understanding of how the high definition video

format war will play out, and as a secondary focus, will analyze how the $12.5 billion1 video

game industry will have an impact on the emergence of a clear winner (or lack thereof) in the

battle for dominance. The two main players are clearly the Sony Blu-ray and Toshiba/NEC HD-

DVD optical disc formats. Additionally, there are many online video on-demand options, some

with HD, either already on the market or planned for entrance into the market, including

Microsoft’s Xbox Live service available on the Xbox 360, that aim to encourage the transition

from a physical retail format to a direct download concept. Cable companies, of course, hope to

leverage their existing infrastructures to win out as the primary VOD option as well. I will

necessarily cover each of these areas in-depth, as it seems video game consoles may make less of

an impact that I originally hypothesized, and are only a small part of the vast HD landscape.

With specific regard to HD, I predict Blu-ray will emerge as the winner, albeit of a much

smaller market than the current DVD market, at least in the short term. I also predict HD VOD

will not emerge as the ultimate favored format for a good number of years due to the

fragmentation in that business and consumers’ clear unwillingness to part with physical media

formats just yet. As evidence of this, I point to the analogous MP3 versus CD sales data from

the first half of 2006. MP3s are far friendlier to download than video content due to small

bandwidth requirements, yet the demand for physical CDs still dwarfs the demand for (legal)

MP3s. 270.6 million albums were sold in the first half of 2006, while 280.9 million tracks were

downloaded2. It should be noted that MP3 downloads are still rapidly growing while CD sales

1 GameSpot.com. Jan. 11, 2007. “NPD: Game industry reaches $12.5 billion in '06.” < http://www.gamespot.com/news/6164101.html>, accessed Mar. 13, 2007. 2 USA Today. Jul. 13, 2006. “Without a superstar, album sales dip.” < http://www.usatoday.com/life/music/news/2006-07-12-music-sales_x.htm>, accessed Mar. 11, 2007.


are substantially slowing, however not enough for CD sales to come anywhere close to

disappearing in the next few years.

Lastly, I predict that the PlayStation 3 may end up being an expensive casualty of the

war. Its limited success up to now indicates to me that Sony may have sacrificed its entry into

the next generation of gaming for naught, given that Blu-ray looks to be in the strongest position

to come out as a winner due to reasons largely unrelated to the PlayStation 3.

Historical Background Applied to Today’s Issues

VHS versus Betamax…& Porn: Just as we spoke about in class, this previous format war

was decided on the grounds of content. Specifically, the pornographic industry is known as a

major reason, if not the major reason, for VHS beating out its arguably superior competitor,

Sony’s Betamax. As applied to the Blu-ray/HD-DVD argument, the porn industry seems to be

favoring Blu-ray over the alternative3. This level of influence seems reasonable, given the

relative size of the industry compared to traditional film or video games. ABC News puts the

porn industry at around $12 billion (another estimate at $12.96 billion), with mainstream cinema

(including rentals and cable revenue) at $9 billion4. As mentioned earlier, video games are

around $12.5 billion in annual sales, so while porn is often the least spoken-of, it is equally as

important as these other two industries.

The Macworld article seems to paint a picture of Blu-ray coming out on top as porn’s

choice format, yet the ABC piece puts HD-DVD as the current favorite (the more recent of the

two articles), with major studio, Wicked Pictures supporting it. Replication is also a major issue.

3 Macworld. May 2, 2006. “Porn industry may be decider in Blu-ray, HD-DVD battle.” <http://www.macworld.com/news/2006/05/02/pornhd/index.php?lsrc=mwrss>, accessed Mar. 17, 2007. 4 ABCNews. Jan. 19, 2007. “HD DVD or Blu-ray? Even the Porn Industry Won't Touch It.” <http://abcnews.go.com/Technology/ZDM/story?id=2807643>, accessed Mar. 17, 2007.


Sony refuses to use its factories to replicate pornographic Blu-ray discs, but others in the Blu-ray

alliance are not as opposed to doing so. Nevertheless, this looks like a check in the win column

for HD-DVD. In any case, Blu-ray is more of a closed standard than HD-DVD, and this

ultimately may have been a huge reason for VHS’ success.

Optical Video Game Formats: The transition from video game cartridges began with

add-on CD-ROM peripherals, like the Sega CD, in the 16-bit generation for the Sega Genesis

and TurboGraphix –16. The main benefit of the format is a far larger amount of storage that was

cheaper than physical memory. The optical discs also enable more full motion-like video than

cartridges allowed for. The Panasonic 3DO’s use of CDs in 1993, a system that was not well

received, was the first attempt at a system that used CDs as the primary medium, rather than an

add-on for a cartridge-based system.

CD-based consoles came into their own a couple of years after the 3DO in 1995 with the

Sega Saturn and original Sony PlayStation. While the Saturn fizzled out, the PlayStation went

on to dominate the industry, becoming one of the most successful consoles of all-time with over

102 million units sold5, handily beating out the cartridge-based Nintendo 64. The original

PlayStation made use of extensive pre-rendered video to enhance story telling and realism of

gameplay.

The next generation PlayStation 2 was even more successful for Sony, exceeding 115

million units worldwide as of the end of 20066. This generation also marked the first time that

the entire home console competitive set, including the GameCube and Xbox, moved to optical

disc formats (as did the Sega Dreamcast, which was released in 1999 with a proprietary format

5 PlayStation Global. 2007. “Cumulative Production Shipments of Hardware / PlayStation.” <http://www.playstation.com/business.html>, accessed Mar. 17, 2007. 6 Sony Computer Entertainment, Inc. 2007. “Cumulative Production Shipments of Hardware / PlayStation 2.” <http://www.scei.co.jp/corporate/data/bizdataps2_e.html>, accessed Mar. 17, 2007.


and left the market within a few years). The most relevant piece of video game history to the

Blu-ray/HD-DVD story was the inclusion of DVD playback in the PlayStation 2 and the Xbox.

The PS2 as a Driver of DVDs - An Analogy to the PS3 & Blu-ray: Interestingly, Sony

has a stated goal of using the PS3 to drive adoption of their Blu-ray format. In hindsight, Sony

would have you believe that the same thing happened with DVD back in late 2000 when the PS2

was released in North America (it was released earlier that year in Japan). Sony’s CEO, Howard

Stringer, stated, “The people who like Blu-ray are the people who play PlayStation 3, just as

people who play PS2s were the early proponents of the DVD format. It drove the DVD format.”7

There could be some truth to this, however historical DVD player sales show that the rapid

growth in adoption was already underway in 2000 before the PlayStation 2 was released. As a

point of illustration, see the following CEA chart of DVD player adoption in the U.S.8

DVD Player Sales History (since format introduction)

2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 JAN N/A 686,127 505,492 1,111,285 797,058 542,698 572,031 370,031 125,536 34,027 --

FEB N/A 770,132 590,128 919,295 743,488 736,118 555,856 401,035 109,399 34,236 --

MAR N/A 1,039,752 1,227,321 1,545,112 1,613,649 1,404,026 1,207,489 412,559 123,466 38,336 Format Launch

APR N/A 872,169 899,389 1,161,857 1,272,337 1,095,930 631,353 409,192 269,107 42,889 34,601

950,412

MAY N/A 1,441,570 1,184,490 1,369,035 1,332,897 begin inc. DVD/VCR 523,225 453,435 279,756 47,805 27,051

JUN N/A 2,074,938 1,288,518 1,388,971 2,100,432 1,632,032 920,839 654,687 326,668 79,044 29,037

JUL N/A 1,458,099 916,495 1,314,934 999,508 966,129 693,013 537,453 325,151 84,709 19,416

AUG N/A 1,451,303 1,245,027 1,231,961 1,436,878 884,288 673,926 557,617 260,225 81,170 34,021

SEP N/A 2,706,250 2,065,892 3,257,574 2,496,497 2,299,864 1,768,821 1,296,280 501,501 113,558 34,371

OCT N/A 2,427,125 2,371,190 2,322,691 2,491,871 1,704,148 1,516,211 1,236,658 603,048 163,074 56,407

NOV N/A 2,673,950 2,246,882 2,723,920 3,682,691 2,544,130 1,781,048 866,507 449,242 136,908 37,657

DEC N/A 2,186,864 1,606,999 1,653,278 3,027,083 2,330,048 1,862,772 1,303,091 646,290 233,505 42,575

Yearly Total N/A 19,788,279 16,147,823 19,999,913 21,994,389 17,089,823 12,706,584 8,498,545 4,019,389 1,089,261 315,136

121,649,142 U.S. Grand Total (3/97 to 12/29/06)

7 CNETnews.com. Jan. 17, 2007. “Sony's brave Sir Howard.” <http://news.com.com/Sonys+brave+Sir+Howard/2008-1041_3-6150661.html>, accessed Mar. 11, 2007. 8 The Digital Bits. Feb. 7, 2007. “CEA DVD Player Sales.” <http://www.thedigitalbits.com/articles/cemadvdsales.html>, accessed Feb. 21, 2007.


DVD-ROM drives and PlayStation 2 sales are not included in the data.

As seen throughout the early sales data, DVD was rapidly growing before 2000. The

format obviously sold very few players in its 1997 launch year, but more than tripled in sales in

1998, then nearly quadrupled in sales in 1999, and then doubled again in 2000 to almost 8.5

million sold in the U.S. In the earlier data I cited from Sony’s PlayStation 2 worldwide sales

figures6, by the end of 2000 (due to the late 2000 PS2 launch), only 1.46 million of Sony’s total

6.4 million PlayStation 2 unit sales came from the U.S., which would amount to only around

17% of the amount of standalone DVD player units sold that year, or only about 10.5% of the

cumulative amount of standalone players sold to that point. Anecdotally, I also remember most

of my friends being excited about the fact that the PlayStation 2 and Xbox platforms included

DVD playback as a feature. They were excited that they would not have to purchase a

standalone player separately, but had long been convinced that DVD was a “cool” format and did

not need convincing to adopt it. As further corroboration of this, an interview with Peter

Schaper, the VP of Technology and Development at Sonopress, one of, “the world’s biggest CD

and DVD replication firms,” had the following to say. “[Blu-ray in PS3 will have] pretty much

the same impact as the DVD for PS2—means not much.”9 This brings us today, in the midst of

the latest format war…

The Current State of High Definition

The Formats: As mentioned, while downloadable and on-demand HD content may

become a factor, this is really a battle between Blu-ray and HD-DVD in the short-term. In

regard to technical superiority, it is no secret that Blu-ray is the stronger format. At 25GB per

9 GameDailyBiz. Sept. 20, 2005. “Blu-ray vs. HD DVD: A Manufacturer's Perspective.” <http://biz.gamedaily.com/industry/interview/?id=10603>, accessed Mar. 11, 2007.


Feature HD-DVD Blu-ray

Maximum native

resolutions supported

via HDMI

HDTV (720p, 1080i,

1080p)

HDTV (720p, 1080i,

1080p)

15GB (single layer) 25GB (single layer)

30GB (dual layer) 50GB (dual layer)

45GB (prototype triple

layer)

100GB (prototype quad

layer)

Audio soundtracks

Dolby TrueHD, DTS-HD,

Dolby Digital Plus, Dolby

Digital, DTS-ES

Dolby TrueHD, DTS-HD,

Dolby Digital Plus, Dolby

Digital, DTS-ES

Manufacturer support

(home theater)Toshiba, LG, Thomson/RCA

Hitachi, Mitsubishi, LG,

Sharp, Sony, Panasonic,

Samsung, Philips,

Thomson/RCA

Manufacturer support

(PC storage)

Microsoft, Intel, HP, NEC,

Toshiba

Apple, Dell, Benq, HP, LG,

Panasonic, Philips, Pioneer,

Samsung, Sony, TDK

Studio support

Paramount, Studio Canal,

Universal, Warner, the

Weinstein Company

Sony Pictures (including

MGM/Columbia TriStar),

Disney (including

Touchstone, Miramax),

Fox, Paramount, Warner,

Lions Gate

Compatible video

game consoles

Xbox 360 (via forthcoming

external HD-DVD

accessory, sold separately)

PlayStation 3

Player prices $499 and more

$599 (PlayStation 3 with

HDMI port); $999 and

more (stand-alone players)

Movie prices $20 to $28 (retail) $20 to $28 (retail)

Number of titles

available by the end of

2006

Dozens to hundreds Dozens to hundreds

Players are backward

compatible with

existing DVD videos

Yes Yes

Disc capacity

layer (50 for a dual-layer disc) Blu-ray handily beats out HD-DVD, which clocks in at 15GB per

layer (30 for dual-layer). Each also has higher “theoretical” limits, but the above will no doubt

be sufficient for most purposes. In terms of computer peripherals, where each could be used for

data storage and backup, this advantage may become bigger for Blu-ray than in the gaming or

video markets. Regardless of storage capabilities, all standard HD resolutions are possible in

either format, up to 1080 progressive. Audio quality is a wash between the two, with both

offering the same capabilities (but both improving upon DVD), although audio quality was never

a big issue for DVDs anyway and the difference may not be noticeable to most.

Pricing has the potential to be a larger issue, as both formats are pricey. Nevertheless,

with Sony selling PlayStation 3

consoles at a loss, one can pick up a

Blu-ray player for nearly as cheap

as an HD-DVD standalone. Disc

manufacturing costs are currently

fractionally more expensive to

produce an HD-DVD compared to

a standard DVD, while Blu-ray is at

a disadvantage here due to

manufacturing hardware

requirements that do not allow the

discs to be created with current

factory equipment. This savings is

not being passed onto the consumer


currently, as both are pricing on par with each other, typically between $20 and $28. In contrast

to this, in the same interview with Peter Schaper, cited earlier9, he notes the premium for Blu-ray

that Toshiba has indicated could be exaggerated, and that the two may be closer to being even in

the near future. Additionally, neither currently has a huge advantage in terms of size of available

libraries, but both are backward compatible with standard DVDs. In regard to copyright

protection, both are on relatively equal footing, although both have already been cracked. See

the inset graphic above for excerpts I felt were most important from a CNET Blu-ray/HD-DVD

comparison10 (notably, the industry support, which I will discuss below).

The Players: I believe the technical specifications of each will be of far less importance

in determining the outcome of this battle than the hardware providers, and more importantly, the

content providers. As the old cliché goes, “content is king.” In terms of sheer volume, one can

see that Blu-ray is on top when it comes to the number of corporate supporters it has. On the

hardware side, of course Sony is the 800lb. gorilla, and Korean behemoth, Samsung, is on board

as well, in addition to various other huge names. Toshiba appears to be the one notable

exclusive company supporting HD-DVD on the home theater side of things, which makes sense,

as it was central in developing the format and promoting it. In the PC storage arena, things look

a bit more even. Blu-ray has the exclusive support of Dell and Apple, along with the already-

mentioned Sony and Samsung. However, Intel and Microsoft are exclusively backing HD-DVD,

and each could arguably be far more important here than any individual CE manufacturer, due to

their respective near-monopolistic dominance in the PC world. If Microsoft makes HD-DVD the

official format for Vista, then this could have some effect.

10 CNET Reviews. May 25, 2006. “Quick guide: HD-DVD vs. Blu-ray.” <http://reviews.cnet.com/4520-6463_7-6462511-1.html>, accessed Mar. 17, 2007.


However, going back to the content issue, Blu-ray has HD-DVD beat, hands-down.

Universal is the only major studio that has pledged exclusive support for HD-DVD, with others

straddling both camps. The Blu-ray exclusive camp includes heavyweights, such as Disney, that

could ultimately be the deciding factor in this war.

Sales to Date: Without regard to the argument over why one or the other is a better

format, fresh disc sales data paints an interesting story, although one that I would argue is still

quite baffling. Upon the

release of the PlayStation 3 in

November of last year, one can

clearly see an impact on sales

of Blu-ray software in the PC

Magazine chart11 to the left.

The Blu-ray format enjoyed

steady market share growth of

the burgeoning, but currently

small, market up through the

middle of January. However, at this point, Blu-ray’s sales share leveled off at around 65-68%,

while HD-DVD settled in at a third of the market. Movie release schedules for each format may

have played some part in this, however the PC Magazine article claims that top selling HD disc

formats have been trading back-and-forth, with Casino Royale taking the top spot recently on

Blu-ray, but with Warner’s Batman Begins on top before that, in the HD-DVD format. In terms

11 PC Magazine. Mar. 16, 2007. “Blu-ray Clearly Leading in Next-Gen DVD Sales.” <http://www.pcmag.com/article2/0,1895,2104850,00.asp>, accessed Mar. 17, 2007.


of absolute numbers sold, it does not appear there is a good yardstick available yet to measure

each against DVD sales.

HD VOD: In the near-term, HD VOD seems to be struggling with technical issues that

certainly don’t make it look like a slam-dunk in comparison to the physical disc formats.

However, it may be able to gain some traction as HD-DVD and Blu-ray still don’t have an

extensive enough library of titles available to make either a far superior option. The difference,

however, is that there is no limit to the size of the potential libraries for physical formats.

Bandwidth is hampering HD VOD.

As cable companies are still saddled by said bandwidth issues, it is not yet feasible to

offer a wide variety of HD VOD content. One site mentions, as a comparison, Comcast’s current

offering of 14 HD VOD movies contrasted with DirecTV’s plans to make 100 HD stations

available by the end of 200712. One would think that HD VOD would be difficult to implement

for DirecTV, considering it is a one-way technology, with no “return path”. This prevents

streaming as a method of VOD. However, the company, along with Dish Network, has cleverly

found a way to close the gap by combining its superior (to cable) bandwidth with DVR

functionality13. 100 HD stations will give both companies plenty of opportunity to at least

broadcast a wide array of popular programming and movies at some point during any given day

on one of their many channels, and therefore the opportunity for a DVR to record the content,

giving a similar experience to VOD provided by cable. These options are currently planned as a

rental service that gives viewers a window in which to watch recorded content.

12 TVPredictions.com. Mar. 7, 2007. “NBC Universal Jumps On HD VOD Express.” <http://www.tvpredictions.com/nbcu030707.htm>, accessed Mar. 17, 2007. 13 Motley Fool. Mar. 14, 2007. “Fool on the Street: DirecTV Is Flying Higher.” <http://www.fool.com/investing/general/2007/03/14/fool-on-the-street-directv-is-flying-higher.aspx>, accessed Mar. 17, 2007.


While VOD options provide an alternative for HD video over either disc format, there

still does not appear to be a satisfactory way of owning a movie in this fashion. Blu-ray and HD-

DVD certainly have an advantage for consumers that wish to build a library of movies, as many

have already done with DVDs.

IPTV/Internet TV: Internet video delivery is making great strides, but this arena falls flat

in regard to HD content and doesn’t look to pose a threat to HD discs anytime soon. While I

analyze some of the major players below, there are yet dozens more services in development.

None of the currently available options is anywhere near establishing dominance in this

arena, even with standard definition programming, though one would suspect that Apple TV has

the greatest potential to fill this role due to the company’s current image and the halo effect of its

line of iPods. Ironically, I feel I am justified in calling the Apple TV set-top box a somewhat

weak device. Yes, it integrates with iTunes, but major blogs like Engadget HD, have lamented

its HD capabilities14, noting that the only HD format it supports is 720p, which is a great format,

but short of the expected 1080p that most expect from new devices these days. Additionally, a

trip to Apple.com reveals a smallish 40GB hard drive is included, which also does not bode well

for HD content that, unless compressed, will eat up that space with two or three movies.

Sling Media’s Slingbox is another major player in internet TV, however it feels like a

device that may be rather short-lived in my opinion, and will never become a huge player in the

industry. My rationale for this is that other companies are working to develop services that offer,

if not HD content, programming directly through the internet. The Slingbox is reliant on existing

cable connections and DVRs, in essence, taking a step backward by requiring a cable provider as

a middle man instead of direct on-demand content through a website. Slingbox is also reliant on

14 Engadget HD. Jan. 9, 2007. “Apple TV; an HD perspective.” <http://www.engadgethd.com/2007/01/09/apple-tv-an-hd-perspective/>, accessed Mar. 11, 2007.


a strong upstream internet connection and has to compress video to make it viewable remotely.

This is not a feasible technical implementation for HD content with today’s infrastructure. Mark

up another win for the disc formats.

Akimbo is one more internet on-demand option available. Akimbo functions similarly to

a DVR, downloading content in advance for users to watch. In comparison to Slingbox, Akimbo

does not make remote viewing as convenient, yet on the other hand, it removes cable providers

as a source of content and uses the internet as its source of downloads. There is currently no HD

programming available, but a Google search did uncover an unreleased press release dated for

March 27, 2007 on Akimbo’s website announcing an upcoming partnership with HDNet in

which HD content will be available15. However, Akimbo still does not have an HD-capable set-

top box available, and the HD content will only be viewable through the downloadable software

version of Akimbo for Windows Media Center PCs. In terms of capabilities, Akimbo seems to

be a potentially strong contender in the future, but as of now, I feel it poses virtually no threat to

Blu-ray and HD-DVD.

The co-founders of Skype, which sold to eBay for $2.6 billion, have also thrown their hat

in the ring with an online on-demand offering called Joost, current in limited-release beta. Joost

uses peer-to-peer technology to deliver content. It is currently a PC-based service, which is

certainly a limiting factor if users cannot find a convenient way to display the content on their

televisions. Doing so, however, does not seem like a huge technical limitation and could be

possible in the future. Like the other formats I’ve mentioned, Joost again comes up short with

regard to HD content and certainly will not pose a threat for users demanding the highest picture

quality possible.

15 Akimbo.com. Mar. 27, 2007. “Akimbo and HDNet Team to Deliver High Definition Programming Via the Internet.” <http://www.akimbo.com/press_rel_032706-hdnet.html>, accessed Mar. 17, 2007.


Network television websites could also be considered competition, but I place them quite

far down the list. Most networks seem to be offering online video as a complement to their

broadcast fare (to catch up on missed episodes and to watch bonus content), and the quality

currently available is far short of even standard definition television. The independent,

decentralized nature of these sites also mean that the chances of any single network site, like

ABC.com, having any sort of impact in the format war is negligible.

Today’s Generation of Consoles

Video game consoles are playing a greater role than ever before when it comes to the

delivery of video content and each is taking a completely different approach, or in Nintendo’s

case, a lack of an approach (by choice).

Sony PlayStation 3: Sony chose to push a corporate agenda with a reach far beyond the

video game industry when it decided to include Blu-ray technology in its PlayStation 3 console.

Its rationale is that the original PlayStation and PlayStation 2 have enjoyed such incredible

success in their respective generations, that the brand cache and recognition will ensure the third-

generation PlayStation is a success, and the bundling of Blu-ray would ensure a massive install

base to push the Blu-ray video format, handily being able to beat out HD-DVD. If Blu-ray

became dominant, Sony would gladly collect licensing fees on each disc sold due to it being a

proprietary format. Many have criticized Blu-ray’s inclusion in the system due to the

significantly higher cost at retail. As is, the top model of an Xbox 360 is just short of $400, with

a unit that does not include a hard drive going for nearly $300. In contrast, the two PS3 versions

(hard drives are included with both) sell for just shy of $500 and $600. Nobody expects a price

drop anytime soon, considering some estimates put Sony’s loss on each version of the system at


$306 and $241 per console16 (the general consensus across various media outlets is that Sony

loses more on the cheaper version). In contrast, while Microsoft originally sold its Xbox 360 at a

loss, most estimate that its manufacturing costs have now dropped to $75 below MSRP.

Nevertheless, even if the PlayStation 3 underperforms its expectations, it still would have the

potential to supply a substantial install base for Blu-ray, right?

Xbox 360: Microsoft has taken a more non-committal approach to the high definition

formats. It chose not to include an HD format for its game medium. As an argument for the

PS3’s high price, some executives claimed before its launch that Blu-ray was required to

properly execute HD gaming. Microsoft has proved this to have been a weak argument, offering

all of its games in HD with the only potential downside being the minor inconvenience of having

to switch discs while progressing through some, but certainly not all, games. Head-to-head tests

have actually judged the 360 to be almost indistinguishable in its HD gaming capabilities,

although the PS3 is recognized as being superior from a hardware standpoint17.

In a show of Microsoft’s support for the HD-DVD format, it did release an add-on HD-

DVD drive for the 360, selling for $199. Combined with the system price, this would obviously

put the total price at the equivalent of a PS3, but the goal was to make the format optional and to

allow consumers interested primarily in HD gaming to be able to do so for substantially less. Of

course this has a negative impact on the adoption of HD-DVD as a format if Microsoft doesn’t

show a strong commitment. It does have other promotional activities planned to push the format,

but nothing earth shattering. The most recent promotion of note is the 360s second partnership

with Comedy Central and South Park. An HD version of the “Good Times with Weapons”

16 Playfuls.com. Feb. 26, 2007. “How Sony Killed the PlayStation 3, and NOT Just in Europe.” <http://www.playfuls.com/news_06339_How_Sony_Killed_the_PlayStation3_and_NOT_Just_in_Europe.html>, accessed Mar. 17, 2007. 17 GameSpot. Dec. 6, 2006. “Xbox 360 Versus PlayStation 3 Graphics Comparison.” <http://www.gamespot.com/features/6162742/>, accessed Mar. 11, 2007.


Xbox Live Marketplace

New release rentals

720p HD movies -- 480 MS Points ($6)

480p SD movies -- 320 MS Points ($4)

"Classic" feature film rentals

720p HD movies -- 360 MS Points ($4.50)

480p SD movies -- 240 MS Points ($3)

Television purchase

720p HD television -- 240 MS Points ($3)

480p SD television -- 160 MS Points ($2)

episode is available for download on the Xbox Live Marketplace (to be discussed below), and a

second promotion will begin March 20, running for two weeks, in which an exclusive HD-DVD

of the same episode will be released with the HD-DVD add-on peripheral18. I expect this to have

little to no impact whatsoever on the format.

Microsoft has also discovered a way to join the HD video battle without an optical disc of

any sort. Its Xbox Live service is generally regarded as the most well designed online gaming

platform among consoles and currently has a subscriber base of 2 million gamers19. The Xbox

Live Marketplace service offers users the opportunity to use their built-in hard drives (the

majority of Xbox 360s sold include the hard drive) to download movies for rent and television

shows for purchase by paying with the Microsoft

Points system. The pricing structure is shown in the

inset on the right, using MS Point to dollar

conversions from Joystiq.com20. A weakness of the

service is the 360’s 20GB hard drive, which is not

large enough to hold a good deal of HD content. However, a 100GB version is on the way,

which should provide more than enough space for rentals, but it still may not work well as a

storage hub for purchased HD content. It is, by most accounts, a smart idea in that it leverages

an existing user base and service to deliver HD video in a relatively risk free way that doesn’t

require an additional hardware investment. Content here still has a long way to go and needs to

be improved. CBS offers television programming of many of its popular shows, like its various

18 Hi-Def Digest. Mar. 6, 2007. “Microsoft, Comedy Central Team Up for 'South Park' Xbox 360 HD DVD Exclusive.” <http://hddvd.highdefdigest.com/news/show/Best_Buy/Comedy_Central/Microsoft/Xbox_360/High-Def_Retailing/High-Def_Disc_Marketing/High-Def_Gaming/Microsoft,_Comedy_Central_Team_Up_for_South_Park_Xbox_360_HD_DVD_Exclusive/502>, accessed Mar. 11, 2007. 19 Xbox Live Home. <http://www.xbox.com/en-US/live>, accessed Mar. 17, 2007. 20 Joystiq. Nov. 22, 2006. “Xbox Live Video Marketplace is live, $6 HD rentals.” <http://www.joystiq.com/2006/11/22/xbox-live-video-marketplace-is-live-6-hd-rentals/>, accessed Mar. 17, 2007.


CSI franchises, and Viacom offers South Park and Chappelle Show downloads. Other networks

are conspicuously absent, and movies are limited to somewhat current releases rather than brand

new releases.

Nintendo Wii: Nintendo has gone an entirely different direction with its latest console

and will decidedly have no impact on which HD format comes out on top. In fact, the lack of

HD capability in the system may actually have a negative effect, albeit a small one, on HDTV

adoption as the system gives one less reason to compel those who haven’t already upgraded to do

so. The drive included with the Wii is, indeed, a DVD drive. However, in an effort to deliver

the system to gamers at the lowest possible price, Nintendo decided that DVD is so wide in its

penetration that it wouldn’t even be worth paying licensing fees to the DVD Consortium (now

known as the DVD Forum) to include basic DVD playback. It will, at some point in 2007, offer

a “premium” version of the system to users who feel the feature is an absolute must21. The Wii

uses internal flash memory as storage and is expandable through common Secure Digital cards,

neither being a feasible solution for downloading any sort of video content through its online

service.

Attach Rate: As there is little reliable data available on how many standalone Blu-ray

and HD-DVD players have been sold to this point (and therefore how large sales of the PS3 have

been in relation to the numbers), I think the common “attach rate” metric for consoles might

provide some insight into what people are buying the PlayStation 3 for. This metric, based on

how many games have been sold and how many consoles have been sold, is a simple calculation

of the number of games sold per system. One would assume that if the PS3 were being

purchased with the intent of using it solely as a Blu-ray player, it would have a lower attach rate

21 Engadget. Nov. 14, 2006. “Nintendo confirms DVD-enabled Wii in '07.” <http://www.engadget.com/2006/11/14/nintendo-confirms-dvd-enabled-wii-in-07/>, accessed Mar. 17, 2007.


than the competition. Standalone players typically sell for anywhere from $600 to $1000

currently, making the PS3 an economical alternative.

February NPD data puts the attach rate for the Xbox 360 at 5.4 games purchased per 360

customer, the Wii at 2.8, and the PlayStation 3 at 2.322. The same article states, “At the same

point in the Xbox 360's lifespan, Microsoft said it had an attach rate of 3.8.” These numbers, of

course, do not imply anything conclusive about the PS3. However, I did a search of one large

online retailer to get a feel for the size of each

system’s game library to understand if game

availability is impacting attach rate. The Xbox 360

has 171 titles available, the PS3 has 96, and the Wii has only 83. These figures do include pre-

orders, but I feel they are still indicative of the relative library sizes. One would think, with a

larger library, that the PS3 would have an attach rate similar to that of the Wii. Also, the 360’s

larger rate is not surprising given a library of nearly twice the size of competitors. To make a

relative comparison of each, I created the figure above, which simply states that for the number

of games available on each system, what percentage of that total library are users purchasing.

The 360 and Wii are in the same ballpark, but the PlayStation has a substantially lower number

than both, and is also substantially lower than the 360’s 3.8 attach rate at the same time last year.

What does this all mean? One could argue that there are simply, on average, more “must

have” games for the 360 and Wii, but I suspect it also says something about the PS3’s Blu-ray

functionality. Though not conclusively, I do feel the significantly lower attach rate for the PS3

leads one to believe that there are a great deal of people purchasing the system solely as a movie

player. Considering the heavy losses incurred on each system, this would essentially mean that

22 GameSpot. Mar. 16, 2007. “Console-makers spin February NPD figures.” <http://www.gamespot.com/news/6167580.html>, accessed Mar. 17, 2007.

360 Wii PS3

Attach Rate 5.4 2.8 2.3Available Games 171 83 96% of Titles Purched

Per Gamer3.16% 3.37% 2.40%


Sony is not only subsidizing its console market, but it is also, in a roundabout way, subsidizing

sales of the system as a standalone Blu-ray player. This is certainly a plus for those that would

like to see Blu-ray succeed, as I would guess most of the HD-DVD units available are sold at a

profit. Even so, Blu-ray units are still pricier than the HD-DVD counterparts. In regard to the

predicted winner between the two formats, I would speculate that the PS3 might simply be

cannibalizing sales of standalone players by tempting consumers who otherwise would have

purchased one.

Who Will Win?: Much like the HD disc formats, it is still far too early to tell which

console will emerge victorious. NPD released console sales data for February, and things are not

looking at all promising for the latest PlayStation. The Wii was the winner of the month, selling

335,000 units, the 360 was second at 228,000, and the PS3 was dead last at 127,00023. This is

even more meaningful when you take into account that Nintendo is producing Wii consoles at

capacity and could easily have sold more if it had been able to produce them, yet PlayStation 3s

are readily available in most stores (I have been to an LA Best Buy twice in the last three weeks,

and both times there were at least ten PS3 units in-stock and no Wiis). Even more damaging, the

PS3 is a year newer than the 360 and should theoretically be more novel and exciting, yet the

year-old system still managed to outsell the PS3 by 100,000 units. This is certainly a huge blow

to the Blu-ray format as Sony was probably counting on being the dominant player in the console

business for a third time, yet is a weak third. This is not to say Blu-ray won’t win the war, but

the PS3 won’t have the impact previously anticipated and rather than having the sales strength to

knock out HD-DVD quickly and decisively, the two formats may be in for a bit longer of a

battle.

23 Gamasutra. Mar. 16, 2007. “NPD February Up 28% as Wii, DS Dominate Hardware Sales.” <http://www.gamasutra.com/php-bin/news_index.php?story=13163>, accessed Mar. 17, 2007.


Market Size

HDTV Adoption: A crucial distinction between the adoption of the DVD format and new

HD formats is the potential market size for each. DVD players worked with any type of

television set, save for extremely old ones with only an RF connection (adapters were still

available for these TVs anyway), and the benefits of the DVD format were clear and obvious to

consumers. Gone would be the hassles of rewinding a tape, having a tape eaten by your VCR, or

renting a poor quality copy that had degraded over dozens of uses. People could also instantly

skip to any scene on a disc, enjoy far improved picture quality (even on cheap TVs), and make

full use of the home theater surround systems that had been gaining traction as Hi-Fi VCRs

became more widespread. The worst thing HD format proponents could hope for would be to

have a repeat of the DVD-Audio and SACD formats, which are superior to CDs, but one could

argue the amount of added value of these technologies was far less than that for video discs.

An issue facing HD disc formats (as well as VOD alternatives) is the current penetration

of HDTVs. As of year-end 2006, 34.5 million HDTV sets had been sold in the U.S., and there

were 31 million households capable of watching HDTV24. The Digital Entertainment Group, in

the same source, puts the estimate of HDTV owners (not total households) with more than one

HDTV set at 11%. In contrast, census data puts the number of televisions in the U.S. at 248

million as of 200425. Census data also states the average televisions per home was 2.4 in 2001.

This gave DVD player manufacturers a potential total market of 248 million, assuming the

maximum the CE industry could ever dream of consumers buying would be one for every TV in

existence.

24 DEG: The Digital Entertainment Group. Jan. 8, 2007, “DEG YEAR-END 2006 HOME ENTERTAINMENT SALES UPDATE.” <http://www.dvdinformation.com/News/press/CES010807.htm>, accessed Mar. 11, 2007. 25 U.S. Census Bureau. March 11, 2004. “50th Anniversary of ‘Wonderful World of Color’ TV.” <http://www.census.gov/Press-Release/www/releases/archives/facts_for_features/001702.html>, accessed Mar. 11, 2007.


Using the above numbers, the potential total market size for high definition disc formats

is currently just shy of 14% of that for DVD players (the ratio of HDTVs to traditional

televisions). True, HDTV sales are still growing, however, one (somewhat dated) source

predicts in 2010 63% of households will own an HDTV set26. So even in three years time, 37%

of households may not even care about an HD disc format, and 30% of television purchases will

still be for traditional, standard definition TVs. Additionally, many people seem to feel that

standard definition DVDs still look “pretty good”, and it is asking quite a lot for people to

replace their current collections.

Lastly, HD disc formats may not be perceived as the quantum leap over their predecessor

as DVDs were over VHS. Most of the same features are in place, with picture quality being the

one major improvement, and storage capacity will likely prevent the need for disc changing in

the middle of some films (like The Godfather), a feature debatable in value.

Console Sales To Date: Cumulative (U.S.) sales to date for the three consoles (citing the

same article with the NPD data) are 5.1 million for the 360, 1.9 million for the Wii, and 1.1

million for the PS3 according to Wedbush Morgan23. Based on the February data I mentioned

earlier, the Wii outsold the PS3 by over a 2.5 multiple, so it looks like the PS3 is losing

momentum. I would also be surprised if standalone Blu-ray players have sold many more units

(perhaps less?) than the PS3. If this is the case, as standalone unit sales are difficult to find, it

looks that Blu-ray is growing at about as slow of a pace as the original DVD format as seen on

page 4. DVD obviously turned out as a success, but it seems that Sony will need Blu-ray to

succeed on its own merits rather than by piggybacking on the PS3.

26 Jupiter Research. Oct. 6, 2005. “Jupiter Research forecasts HDTV sales in the U.S. will grow dramatically over the next five years, constituting 70% of all TV sales by 2010.” <http://www.jupitermedia.com/corporate/releases/05.10.06-newjupresearch.html>, accessed Mar. 11, 2007.


Conclusions

After analyzing what I feel are the crucial factors that will play into deciding the winner

of Blu-ray and HD-DVD, I feel confident in saying that Blu-ray will come out as the victor.

However, as the potential market for these products is far smaller than it was for DVD, I think

consumers will take their time to adopt an HD disc format and it could be many years before

either can match the DVD’s success. The deciding factor has to come down to available content.

Studio support for HD-DVD has been lukewarm and when titans like Disney have declared

support for Blu-ray, it is going to be a painful uphill battle convincing consumers to buy into an

HD format that won’t allow them to watch Pirates of the Caribbean, Finding Nemo, or the Lion

King in HD, let alone enormous franchises from other studios, like James Bond. While the size

of the pornography industry cannot be ignored, I believe it will have less of an impact than it did

with tape options and will be content to sit mostly on the sidelines until a winner is crowned.

HD discs don’t represent the same revolutionary great leap forward that VHS and Betamax

contributed to home entertainment viewing, so most will wait before committing.

Outside of content, despite Microsoft and Intel’s support of HD-DVD, I believe

consumers will ultimately want the technically superior format, and having names like Apple and

Dell backing Blu-ray won’t hurt. From what I can see of the current VOD offerings, none give

people a satisfactory way to own movies and build an HD library, so the chances of HD VOD

leapfrogging HD discs seems highly unlikely. Ultimately, I believe the role the PlayStation 3

will play in this war will be far less significant than Sony had hoped it would be. Ironically,

Sony may come out on top with Blu-ray in spite of the PS3, and benefit financially from this

happening. Unfortunately, it looks to have chosen the wrong strategy with the PS3 and outpriced

most potential consumers, possibly killing its most profitable division in the process.


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Media 2010 Final Paper - The HD Video Format War

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Transcript of Media 2010 Final Paper - The HD Video Format War