Strategic Computing High-definition DVD Format Wars March 14

Strategic Computing High-definition DVD Format Wars March 14, 2007 Saud Al Shamsi Vikas Bhargava Karen Hsu Josh Palmer Mark Schelbert Edmund Wong Strategic Computing

Introduction Blu-ray vs. HD DVD § In recent years, high-definition (HD) television and HD optical discs entered the market § Two HD formats have appeared in the DVD market, both claiming to be the rightful successor to the DVD throne: – Blu-ray (developed by Sony/Phillips) – HD DVD (developed by Toshiba) § Measured by most performance metrics these two technologies are the same, except that Blu-ray has significantly larger capacity (66%). – However, Blu-ray appears to have greater network support Strategic Computing 1

Blu-ray vs. HD DVD Future § While the format war rages on, entirely different outcomes are possible: – LG has introduced a dual-format player and drive – Internet may replace the DVD as a movie delivery vehicle § International view: Japan (96% Blu-ray), Europe (pushing for open licensing of both formats), China (proprietary HD format), India (small $ market), South America (unknown); Xbox 360 but still no PS 3) Strategic Computing 2

History of Format Wars § Before HD, IBM arbitrated a standard DVD format intended to avoid a format war, but the outcome favored Toshiba regarding royalties, leaving Sony unhappy § In response, Sony began developing the next generation of highdefinition optical media – Toshiba followed suit with its own HD technology – While there were many “peace talks”, neither party reached agreement § Comparison: VHS vs. Betamax War – Despite Beta’s superior quality, VHS won the war because of its strong “content” network Strategic Computing 3

Outcomes of Similar Format Wars § Certain format wars were never won, but instead compromised with the introduction of multi-format technology § DVD-R vs. DVD+R – Multi-format DVD drives accommodate both § CDMA vs. GSM – Can make/receive calls regardless of technology – Both prevalent around the world § Flash Memory Formats – Over 50 different kinds of flash memory – All-in-one readers handle most types Strategic Computing 4

Tech Comparison § Most performance metrics of these two technologies are the same § Blu-ray storage capacity is more practical for HD movies – One high-definition movie (~20 GB) fits on just one Blu-ray layer (25 GB); while HD DVD requires two layers (2 x 15 GB) Blu-ray HD DVD Storage (single layer) 25 GB (5 hrs of HD video) 15 GB (2 hrs of HD video) Storage (dual layer) 50 GB (9 hrs of HD video) 30 GB (5 hrs of HD video) Cost/Disc* ~$1. 59 ~$1. 45 Cost/GB* ~$0. 064 ~$0. 097 Disc Player Price $500 (PS 3) - $1000 $500 - $800 * Sources: Pro. Action. Media, Wesley. Tech; single layer. Strategic Computing 5

Network Comparison § While both formats have support from various large companies, Blu-ray has greater support from content providers that are critical to achieving a network effect § Consumers will follow the format of the CONTENT providers Blu-ray HD DVD Content Network 20 th Century Fox, Apple, Dell, Disney, LG, Lion’s Gate, Paramount, Philips, Sony (Columbia and MGM), Warner Paramount, Universal, Warner Player Network LG, Phillips, Samsung, Sony LG, RCA, Toshiba Gaming Network Sony PS 3 (integrated), Electronic Arts (EA) Microsoft Xbox 360 (external) Strategic Computing 6

Security, Durability & Other § Digital Rights Management – Blu-ray promises BD+, which allows encryption keys to be modified when they are hacked – AACS is the copy protection scheme used by both HD DVD & Blu-ray. Took years to develop, but broken in weeks Disc Aperture Settings DVD 0. 6 HD DVD 0. 65 Blu-ray § § Blu-ray more prone to error due to high aperture Without protective hard-coating, Blu-ray is easier to scratch (data layer is closer to surface) 0. 85 Strategic Computing 7

Current Market Share § Sales trends illustrate Blu-ray gaining dominant market share Strategic Computing 8

Why Blu-ray is On the Rise? § Availability of Hardware (players) – Blu-ray (with PS 3) : HD DVD = 5 : 1 – Blu-ray sales up 700% since the launch of PS 3 and other players • 687, 000 PS 3 sold in US § Availability of Content – 19 of the “Top 20” DVDs in 2006 were released by studios supporting Blu-ray Strategic Computing 9

Business Model § § There are several players in determining a dominant network However “Content is King” and will largely determine the victor Customers Consumers Retailers / Distributors Licensees Competitors Internet VHS Complementors HD Optical Disc Format HDTV TV Media Players On Demand (VOD) Game Consoles Flash Memory Suppliers Disc Replicators / Factories Machinery Providers Entertainment Industry Strategic Computing 10

Current Marketing Strategies § Key players with influence in the format war between HD DVD and Blu-ray: the film industry, the adult film industry, and the video game industry ESTIMATED ANNUAL REVENUE 2006 IN U. S. Film Industry XXX $35 Billion Adult Film Industry $3. 6 Billion Video Game Industry Strategic Computing $12. 5 Billion 11

Current Marketing Strategies § Blu-ray has adopted a “pre-emptive strike” marketing strategy with its “War is Over” advertising campaign HD DVD Blu-ray § “The Look and Sound of Perfect” $150 M advertising campaign § “War is Over” advertising campaign § Xbox 360 supports external HD DVD player § PS 3 internal Blu-ray player § Sony cutting player prices from $1 K to less than $500 § Future Blu-ray car players § Pornography industry experimenting with HD DVD Strategic Computing 12

Future Drivers § What are the drivers that will determine the future of this format war? Economic Performance Regulatory § Content – Blu-ray has greater support § Storage Capacity – Blu § Associations - Blu-ray, -ray greater capacity BDA; HD DVD, DVD Forum § Price – Similar pricing § Security – Promising dynamic BD+ encryption § Complementors HDTV supports both formats § International View – Japan sided with Bluray Strategic Computing § Durability – Blu-ray offers proprietary coating to prevents scratching § Europe –European Commission (EC) seeking open technology 13

HD vs. Standard: is it worth the hype? § TV remains the Limiting Factor for the time being – High-definition provides far superior resolution; however, without HD televisions the improvement in quality will go unnoticed. Standard § § Resolution (NTSC) – 640 x 480 i pixels Audio – Stereo, 44 k. Hz High Definition § § Strategic Computing Resolutions – 1920 x 1080 p – 1920 x 1080 i – 1280 x 720 p Audio - AC-3: 48 k. Hz sampling rate, up to 8 channels, up to 18 Mbit/s 14

HDTV Sales Trends § HD TVs expected to increase from 4 M HHs in 2006 to 52 M HHs in 2009 Strategic Computing 15

Has HD Optical Media Crossed the Chasm? § With the PS 3, Blu-ray is quickly approaching the chasm… …but HD-DVD is lagging behind. Strategic Computing 16

Possible Compromises Internet / Flash § Internet/flash memory may replace DVDs as the dominant media delivery vehicle for movies § “DVD format will be irrelevant” – Bill Gates … may be replaced by flash memory or Internet Dual-disc / Dual-player § LG Super Multi Blue Player and Drive – Supports playback of both formats – Available now for $1, 199 § Warner Bros. Total HD – Single disc compatible with both players – Available 3 Q 2007 – Costs marginally more than current discs Strategic Computing 17

Thank You § Blu-ray is positioned to win the format war because – Stronger sales in the US and Japan – Larger studio network providing film content (promise of superior security BD+) – PS 3 integrated Blu-ray players – Larger capacity of 25 GB (vs 15 GB) § Questions & Answers Strategic Computing 18