Digital Trends

According to Pali Research, Time Warner will declare its support for Blu-Ray in early 2008, deciding the end of the HD wars. This prediction comes on top of Michael Bay’s statement that Microsoft is funding HD DVD’s side to ensure that both formats lose. While any prediction is just that (a hopeful guess and nothing more), until a decision is actually made (and Michael Bay probably doesn’t really know what he thinks he does), let’s take a look at the thought process Time Warner is going through that is likely behind all of this. 

As the Market Stands

Right now, Blu-Ray has the advantage coming into the 4^th quarter, and related Blu-Ray disc sales also reflect this strong advantage. Granted, this isn’t always an accurate measure of success, because sales also have a lot to do with the strength of titles featured on any given format. But Warner Bros.’ 300, a banner title that released on both formats, sold significantly more on Blu-Ray than on HD DVD, lending credence to the former medium’s leading status. 

However, player sales on the HD DVD side also went vertical on the opening days of the Christmas buying season, and this, coupled with the defection of several studios to the HD DVD camp, put the momentum back in that direction. In short, neither side is willing to give up the fight – although, amusingly, together they represent just a fraction of the market potential for HD content. 

Also important to keep in mind: Dual-mode players remain too expensive, and recent changes to the security scheme on the Blu-Ray side broke most of them, eliminating these devices as an attractive end-run product that consumers could effectively use to avoid having to pick sides.  

Ultimately, the studios are hurting for money and care less about which format wins than about increasing overall sales, since you have to buy a new movie disc (cha-ching!) to get high-definition audiovisuals. What’s more, because folks are buying HDTVs in massive volumes, the untapped demand for a solution, any solution, is very evident to the studios… particularly Time Warner.

Time Warner’s Problem

By currently playing both sides of the battle, Time Warner is getting iterative sales that studios devoted exclusively to one side or the other are not getting. Nonetheless, given that the time’s about right for the market to explode, Time Warner is likely feeling pressure to become a kingmaker. 

In terms of hardware pricing and sheer momentum, HD DVD is the clear choice. The problem is that we’re currently in a 4^th quarter market and Time Warner’s decision will come way too late to have any impact this year, and since players retailing at aggressive price points are sold out anyway, the market is manufacturing-constrained. So even if Time Warner were to announce their decision today, the only impact would be lower Blu-Ray sales and that would impact Time Warner’s short-term revenues negatively (fewer players equals fewer folks buying movies already in stores). 

 

If the company decides to go HD DVD it would be, on top of other strategies, a decisive move, and the market would begin to focus on HD DVD for the 4^th quarter, but by then HD downloads, which are the eventual future, will be trying to gain greater sell-through as well and the two will be competing for mindshare. More importantly, for every HD DVD player that someone buys, there is one less household looking to try HD downloads in the near-term (folks generally won’t invest in a new technology if an existing technology they have already purchased is good enough).

Factoring in Michael Bay and Microsoft

While I think Mr. Bay’s comments with regard to Microsoft’s funding are stretching the truth a bit, there is no doubt that Microsoft is itself focused on downloads as the future, as are Google, Apple, and most other high-profile technology companies. (Even HP, who is in cahoots with both camps, is doing more work on downloads than on either HD optical disc format.) 

Since such a conflict would hold down sales volume and cause HD DVD to compete for market share at the same time downloadable content was trying to break through, it would simply create another issue for the company to tackle. It would therefore seem to be in the studio’s best interest to let both formats kill each other off so that downloadable solutions can enter the market unhindered by competition with the optical formats and rabidly balloon to its massive revenue potential. 

Bearing this in mind, a decision in favor Blu-Ray would then make sense, because it would once again balance the field, holding down demand for both formats and allowing downloads to ramp more strongly. Since Time Warner makes money off of the sale of movies regardless of formats, this would likely result in the more profitable – and faster to cash in on – of the two choices.  

Why Downloadable Movies are Better

What makes downloadable movie services better for the studios is they don’t have to stock the movies any place but digitally. Keep in mind that much of their vast libraries of films haven’t made it to DVD yet, and only a very small fraction to HD. Motion pictures sitting in archives and not on DVD are simply gathering dust, not revenue, but many have such small potential audiences the cost of producing, stamping and stocking a DVD would make reissuing them on a new format an unprofitable endeavor. However, studios have been digitizing these movies for some time now already, just to preserve them, and the incremental cost to make these reasonably high-quality transfers available isn’t that great. 

Collectively, the move to downloadable flicks could make a multi-million dollar difference to the bottom line for many studios, and given the size of Warner Brother’s back catalogue, we are talking the high end of a rather impressive revenue range for them.  

This also reduces the time needed to fulfill a movie order. For instance, say you saw a movie clip for a small independent film on YouTube and want to order the film. With downloadable content, you get it instantly; for DVDs you have to locate a retailer or the movie has to be pressed and sent, and by the time you go through the process of finding a source, you might decide to buy something else entirely. Downloads cut time, cost and the risk of a lost customer down substantially if they are done right – and that’s a very attractive proposition to any studio. 

Wrapping Up

Regardless of which side you are on in this fight, it’s apparent that optical storage is going the way of the floppy drive, record player and laserdisc, only to eventually be replaced by some sort of download or subscription service. (Eventually a mix of both like we currently have with cable, only much friendlier…)   In essence, Time Warner and most others in this space have no real tie to ether optical format and simply want to make money.  

Be aware that all the aforementioned thoughts are purely speculative, and I truly doubt that Time Warner, which is a complex company, has fully made up its mind yet. Also keep in mind that downloadable films are far from ready for mass adoption and that will likely play a part in this battle. Regardless, downloads are the future – when they’ll fully take over simply depends on which way Time Warner goes and how fast folks like Cisco, Amazon and BitTorrent get their respective hardware and services together. Of course, getting this same sort of content to work on TVs, portable players, cars and cell phones for a reasonable price won’t be easy, but once it’s done, I doubt we’ll imagine it being any other way.