Here’s a radical idea. The Blu-Ray vs. HD-DVD fight may never yield a clear winner as a two-tiered market for both technologies may emerge. The history that is repeating itself is not Betamax vs. VHS, but DVD vs. Video CD.
Everyone loves to cite VHS vs. Betamax and the battle fought by Sony and others as a case study of market share and marketing over technical superiority. Every MBA school from Harvard to University of Phoenix talks about it as a case study to apply forward. However, I think the press and industry participants are trying too hard to take the current DVD format wars and plug them into the template created by the history of Betamax and VHS.
While leaving CES I sat next to someone from an unnamed consulting group who was charged with helping architect the marketing case for one of the above formats (Names here are always changed to protect the innocent). I heard a good 15 minute tutorial about the technical and market benefits of both formats. Hereâ€™s a snapshot of what I think is important.
In short, the issue is about capital costs. Can the additional capital costs of a Blu-Ray upgrade be recovered? Absolutely. Why? The existing DVD equipment infrastructure isnâ€™t going to be thrown away, just re-used to service a lower margin business model.
Video CD is the historical point everyone appears to miss. Video CD used the same format as the Audio CDâ€™s you know so well from the 90â€™s except the data they contained was video, not just audio. Movies in the 4.7GB DVD format were shoehorned into the 650MB capacity of the CD by grossly sacrificing quality and sometimes requiring multiple discs.
While everyone in the US got on the DVD bandwagon, Video CDâ€™s were a rip-roaring hit in Asia, particularly China. Even today, walking Temple Street in Kowloon youâ€™ll see Video CD vendors by the hundreds, most hawking perfectly legitimate product (The DVDâ€™s they sell, well thatâ€™s a different story).
Why did consumers choose a radically inferior format? Video CDs used the existing infrastructure and supply chain already in place to make dirt-cheap products. The magnitude of marginal costs for DVD hardware and media for Western consumers were minor when compared with Video CD, but for the emerging middle class of Asia it was a substantial cost difference. Five dollars more for a western consumer is not the same as five dollars more (or 40 Yuan) to a Chinese consumer.
Even better, content owners could tariff less for media in Video CD format because the quality sucked. The marginal costs of selling another copy of â€œTerminatorâ€ are virtually zero to a Hollywood studio. Video CDâ€™s allowed them to create a lower pricing tier and extract more marginal dollars than they could by selling the more expensive DVD format.
Once the fixed costs for the Blu-Ray upgrade are absorbed, the marginal costs for HD-DVD and Blu-Ray media probably wonâ€™t be that different, and the costs for the players will be nearly identical from a Western consumer perspective. That means Western consumers wonâ€™t be biased on price in the long run, and may be slightly more biased to Blu-Ray for technical reasons.
Content owners really donâ€™t care so long as the new copy protection gets implemented â€“ they want to kill off the DVD and close the copy protection hole pronto, particularly in Asia. The opportunity to migrate to a new format gives them the perfect chance. Why not re-use the existing DVD media production infrastructure and sell the lower cost HD-DVD format in emerging markets?
The result? Both formats win.
The fact is that even if this is a format war, itâ€™s probably the last format war weâ€™ll see until some new mega-bandwidth hog media format comes about that requires holographic storage. 35mm film, audio CDâ€™s, CD-ROMs are all transported digitally now, with 100Mbs connections to the home it wonâ€™t be long before video is distributed exclusively electronically.
Finally, I can say that regardless of what physical format is used, High Definition media absolutely blows DVD quality out of the water. Stop building your DVD collection today, youâ€™ll wish you had the new format. And if youâ€™re reading this blog, itâ€™s likely youâ€™ll be running Blu-Ray.
(Header image from Engadget.com, ‘Strive’ image from Flickr user rollerboogie)