By January 8, 2008

The Blu-Ray/HD DVD War: Defections And Betrayals

It’s said that the best alliances are made when all of the parties involved have a stake in the outcome and when each one is operating in the other’s “mutual self-interest”.

But what happens when an individual decides that his own best interests are no longer aligned with those of the group?

What happens when the other side starts winning?

Does that individual honor his original commitment and stand by his friends and allies? Or does he defect?

The choice is made…

On Friday, movie studio Warner Bros. confirmed that it will switch to releasing HD movies only in the Blu-Ray Disc format. Warner, as you may recall, was one of the studios that released its films in both Blu-Ray and HD DVD.

According to Warner, abandoning HD DVD was a difficult decision “based on a shifting balance of power between the two formats”.

Warner’s switch put as much as 70 percent of all major-label HD movies in the Blu-ray camp.

In other words, Warner defected.

And others follow…

Now the Financial Times is running a story that Paramount is also poised to drop its support of HD DVD.

Paramount, it seems, has a clause in its contract that would allow it to switch sides in the event of Warner Bros. moving to Blu-ray. In effect, a “rats leaving the sinking ship” clause.

Such a move would effectively leave Universal as the remaining major studio backing the Toshiba format, with Disney, Fox, MGM, Warner, Paramount, and of course Sony on the other side.

Why did Warner defect?

Well, one reason given was that the format war was hurting consumers and manufacturers alike. While hardly news, this viewpoint was supported this past holiday season by declining sales of DVDs.

From the studio’s point of view, sales were off not just because consumers refused to commit to a given format, but also because that in doing so they were delaying purchases of standard DVDs as well.

In effect, why buy a standard definition DVD now if I’m going to buy a Blu-Ray or HD DVD player in the future?

In fact, if you’re old enough and if you’ve consistently guessed wrong, you may well have copies of the same film in Beta, VHS, LaserDisc, DVD, HD DVD, Blu-Ray, and perhaps even in PSP or in Wal-Mart’s ill-fated digital download format.

More to the story?

Another reason that last season’s sales were off in terms of dollars might lie in the fact that many stores are heavily discounting DVDs.

Wal-Mart, for example, sells many recent films for $12.95, sells three-movie bundles for $13.95, and sells other “modern classics” for as low as $7.50 or even $5.00.

Blockbuster has long sold “previously-viewed” discs for low prices, and recently NetFlix too jumped into the fray, selling used discs after a time for $9.99 and $5.99.

Just wait, the public’s reasoning goes, and you too can buy three films for the price of one.

Ironically, these discounts are appearing just as the studios may be forcing Apple to raise prices to “standard” wholesale levels. And this despite the fact that retailers frequently sell new feature films at a loss to pull people into the store.

Such sales also undercut future sales of high-def DVDs, as few people will replace existing titles in their library with high-def versions unless the film is one of their favorites.

And what of digital?

Another factor that may have pressured Warner into action could have been the recent news that Netflix and LG announced a partnership to develop a movies-on-demand set-top-box device and service.

And of course, Apple is well on its way to securing more partnerships with studios for iTunes content, as well as for the widely anticipated iTunes movie rental service.

Two birds…

So rather than see digital move in and take over while Blu-Ray and HD DVD squabble in the corner, Warner unilaterally moved to end the war.

Why? Well, Warner can talk about market confusion and strategic planning and multiple-format inventory issues if they want, but in my book it comes down to dollars and cents, pure and simple.

High-definition disks, you see, are the secret strategy behind rationalizing higher DVD prices. Consumers have historically resisted every attempt by the industry to raise prices, and competition has in fact lowered them. As such, we pay much less for a DVD today that we did a decade ago, despite that fact that inflation should have boosted the price of a disc along with most everything else.

A new format kills two birds with one stone: It provides a rationale for higher prices for a higher quality product and —as mentioned above— lets us pay for our favorite movies yet again in yet another format.

Digital, on the other hand, will have the effect of lowering prices, as consumers will not want to pay more for a format that has no production and distribution costs, fewer “extras”, and which they’ll have to download and store themselves.

And on-demand rentals lower the price bar even further.

Higher prices for the same content. Lower prices for the same content.

If you were Warner, what would you do?

One last thought…

It appears that the Warner clause in the Paramount contract was an open secret in the industry. So if Warner announced they were abandoning HD DVD… could they force Paramount do likewise?

And effectively end the war?

It might be worth the risk.

In fact, given all of the above, the only thing that’s really surprising about Warner’s defection…

Was that it didn’t happen sooner.

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Comments

  1. Jman says:

    It also helped that Warner got a huge chunk of money *cough* bribe *cough* from Sony to be persuaded into defecting to the Blue-Ray side.

  2. Rob Toole says:

    I think Hitler sums it up well in this movie:
    http://www.youtube.com/watch?v=friS4OOcdgQ&e

  3. Glenn says:

    Nice analysis, but the Tivo/Netflix deal (and your link) was from 2004. It got canned some time after that. As far as I know, and I’ve just checked Tivo’s press release section, there is no current agreement. Perhaps you meant the recent Netflix/LG announcement…

  4. Michael Long says:

    Thanks Glenn, and yes I was thinking of the NetFlix/LG deal, but blew the Google search with “netflix ondemand deal”.
    Another aspect is that Warner is one of the companies Apple has on board the rental bandwagon, and as such Warner would have known about it through their negotiations.
    With NetFlix/LG and a resurgent iTunes/Apple TV, the pressure had to be on.