Koo’s Corner

Awhile back I read an article about how Sony has lost 3 billion dollars on the PS3 (2.16 billion in 2006, 1.16 billion in 2007). The artile does point out that losing money on gaming hardware is actually normal (money made on software) and PS3 sales have been better in 2008.

Regardless of what the bottom line says, the PS3 will end up being a huge cash cow for Sony. Why you ask?

Royalties, blu ray royalties.

I blogged pretty extensively about the HD format war between HD DVD and  Blu Ray and accurately predicted their demise and subsequent surrender. So while accountants and Wall street throw stones at Sony for bleeding money, you have to consider that the PS3 was essentially the biggest difference maker in the format war.

With blu ray prevailing, the Blu Ray consortuim (1/3 of IP believed to belong to Sony) can sit back and collect money as the technology is slowly adopted. CNET has a great article about the royalties Sony will be seeing.

The article points out that hardware manufacturers had to pay $15-$20 in royalties to install DVD drives in computers, dvd players, cameras, etc. But for every player in the market came dozens or sometimes even hundreds of DVD disks. Royalties for the disks ranged from 7 cents to 4 cents over the years.

While Sony will only get about a 1/3 of these hardware and disk royalties, Blu Ray via the PS3 is entrenched to replace DVD in terms of consumer adoption sometime in the next 3-6 years. Its going to take time but as more shelf space at Blockbuster, Best Buy, Circuit City, push Blu Ray Players, and the the Blu Ray drive begins shipping in new computers, its only matter of time until Sony dwarfs their loss with substantial profits.

Reports are surfacing that Toshiba backed HD-DVD will throw in the white towel following a string of setbacks that have unfolded in 2008.

Back in December I predicted that sagging HD DVD sales would help the biggest studio, Warner Brothers, switch becoming a Blu Ray Exclusive studio.

A month later Warner Brothers did make the switch, tilting the playing field heavily in Blu Ray’s favor.

[youtube=http://youtube.com/watch?v=ywWfmRdOmJ0]

In the following month corporate America opted to accelerate the death of HD DVD hoping to end the next gen format war.

In Late January , Woolworths, the biggest distributor of UK electronics decided to exclusively back Blu Ray with Best Buy and Netflix making similar commitments in the following weeks.

I had planned to write up something on the eminent demise this weekend only to find out that Wal Mart, the biggest domestic seller movies and players had also joined the Blu Ray party.

With the onslaught of setbacks, Toshiba will allegedly throw in the white towel early next week. Its been a fun, intriguing, and hard fought battle between Sony and Toshiba. Its been intriguing to see the corporate game of chess played with Fortune 500 companies filling up the board as all the major studios (Fox, Disney, Warner Brothers, Paramount, Unviersal), retailers (Target, Blockbuster, Wal Mart, Best Buy, Netflix), and hardware makers (Apple, HP, Microsoft, Samsung).

About a month ago I posted how this holiday season would be a real critical junction for the Blu Ray vs HD DVD format war. A huge part of my rationale was that Warner Brothers was believed to be mulling over making the move to become blu ray exclusive instead of releasing movies in both formats.

Warner Brothers indeed made the move official today, dealing a crippling blow to Toshiba’s HD DVD camp. Warner Brothers will continue to release in both formats until May where they will make the switch to Blu Ray exclusive. While this is not the end of the format war, its likely to be the beginning of the end.

Blu ray now boasts 5 studios that release exclusively in their format compared to 2 for HD DVD

Target, Netflix, and Blockbuster have all chimed in for HD DVD as well.

To those who just bought a HD DVD player for Xmas, my suggestion would be to return it if you can.

I have long contemplated blogging on this topic but decided to chime in now as I see this holiday season being HD DVD’s last stand. Let’s recap for those of you who don’t know squat about Blu Ray and HD DVD. I thought by now most people were somewhat familiar with this next generation format war, with the amount of advertising circulating about both products. To my surprise one of my more plugged in and knowledgeable friends confessed he was unfamiliar with Blu Ray and the format war.

Similar to how VHS won out over Beta and Laser Disc lost out to the DVD, a third generation format war of what technology is the chosen video media format has been raging for over a year. Sony’s techology, Blu Ray (or sometimes Blue Ray), is more expensive but holds higher amounts of memory compared its competitor HD DVD. Sony rolled the dice on bundling in a blu ray drive into all PS3’s which have been shipping since November 2006. At the time blu ray players were going for around $800 while PS3’s were a much more functional alternative for $600.

Through out 2007 new HD DVD and Blu Ray players hit the market with the price for both players dropping a hundred bucks or so every other month with HD DVD consistently being a hundred bucks or more cheaper than Blu Ray. Gadget gurus, reporters, technology analysts, and bloggers monitored the situation as corporate America began to take sides on which technology to embrace. Below I will break down why I think Sony Blu Ray is on the verge of claiming victory against Toshiba backed HD DVD.

Origins-

Long story short, this war was almost avoided but electronics makers, movie studios, and technology companies could not come to an agreement on what would replace DVD as the next generation of disc for movie. For more information Wikipedia has a great write up on the rift and dispute

Studios Take Sides: Many believe the most important factor for this format war will come from movie studio support as they control which format their movies will come out on. Currently Blu Ray boasts Sony Pictures, MGM, 20th Century Fox, Lionsgate, and Disney as studios who exclusively release in Blu Ray for HD titles.

New line Cinema and Warner Brothers release movies in both formats while Paramount, Universal, and Dreamworks exclusively release to HD DVD. In August Paramount and Dreamworks made the switch from supporting both formats to being HD DVD exclusive with rumors that they committed to be HD DVD exclusive for $150 million for a 18 month commitment. This announcement ruffled some feathers in Hollywood with Michael Bay stating he would not direct Transformers 2 because it would not be on Blu Ray (he later retracted the statement but is still bitching about it.) Below is a list of popular recent movies and what formats they have been released on.

HD DVD

Knocked Up, Bourne Ultimatam , Transformers

Blu Ray

Superbad, Simpsons Movie, Talladega Nights, Spiderman 3, Ratatoile, Pirates of the Carribean 3

Both

300 The Departed

Technology Companies, Rental, and Retail Pick Sides:

Not to be overlooked is the actual distribution of new players and discs of these next gen players. With both format’s consortuims lobbying hard to win over corporate America, Blu Ray has taken a stronger position in this regard.

On the technology side Apple, Dell, Samsung, HP and Pioneer are members of the Blu Ray consortuim with, Intel, NEC, Microsoft, and Fujutsi all in HD DVD’s camp. Bottom line these electronic makers are on board with only making hardware that play, record, or burn these type of disks. With HP, Apple, Sony, and Dell in Blu Ray’s camp its safe to say Blu Ray holds an advantage in this category.

Although sales for players is still largely dominated by PS3 blu ray players over stand alone players, we are beginning to see traction of Blu Ray camcorders and disk drives in PC’s, laptops, and desktops.

The rental market has also chimed in heavily for Blu Ray with Netflix and Blockbuster opting to push Blu Ray nationally (testing showed blu ray were 70% rentals of HD rentals) prompting both to push roll out Blu Ray rentals only nationally. Target and other retailers have opted to carry movies on both formats but elected to only stock Blu Ray players over HD DVD as well.

The bottom line is that domestically and internationally Blu Ray movies have been sold at a much higher rate than HD DVD. Although this was to be expected with PS3’s making inroads in gamer’s houses all over the world, the unwillingness of corporate America to support HD DVD has led to some countries to boast 5-1 or even 9-1 advantage of Blu Ray disc sales compared to HD DVD. On the home front its not that bad but movies released in both formats tend to usually be 2-1 to 3-1 in favor of Blu Ray (Departed and 300 being the best 2 benchmarks)..

Below a quote from a great Business Week article about the number of players in the US for both sides

“According to industry tracker Adams Media Research, by the end of this year as many as 578,000 U.S. households will own HD DVD players, compared with 370,000 that have Blu-ray players. Adams also estimates there are 300,000 more HD DVD players in circulation as an external add-on to Microsoft Xbox game consoles. But that still pales in comparison to the estimated 2.3 million Blu-ray-equipped Sony PlayStation 3 consoles sold through November in the U.S.”

From these estimates you would have around 900,00 HD DVD players compared to 2,700,000 Blu Ray players with many of these being PS3’s that may or may not be utilized as a Blu Ray player.

So why is this Christmas season so special?

Although there are a not of players out in the market compared to DVD players,those who got that big fat HD TV in the last year or so might feel the need to splurge on one of these 2 kinds of players. HD DVD backers have thought the lower price would allow them to gain ground on Blu Ray. I would guesstimate the average playing being sold this Chrisman season for HD DVD would be around $225 with the average Blu Ray player being purchased at $400 (price of PS3, recently lowered which is sure to help the cause). Despite this price advantage,

10/25 Update… Price dropped from $400-250 for only 1 day I am told.

It was a about 6 months ago I read David Pogue’s New York Times article about the soon to be released Vudu Box. For months I eagerly awaited the release of the Vudu, a small box that allows you to watch over 5000 movies with just a click of a button.

This past month Vudu officially started shipping their small box (about the size of a dictionary) with the first wave of pre-orders reaching their destinations over the past couple weeks. It’s my belief that this great product could revolutionize the movie rental industry as consumers will now have the option to watch “the right movie, right now”, only requiring a fast internet connection. Convenience doesn’t come cheap though as a box will set you back $400, with movies running $1-5 with an option to buy movies for what seemed like lesser than DVD prices.

$400 seemed a little steep, especially for never have seen one of the Vudu Boxes. Luckily for me, Vudu is a Silicon Valley company who is happy enough to give you a demo if you stop by. With HD content right around the corner (currently their titles are better than DVD quality because Vudu scales up the resolution ) and the ability to use a wireless bridge, I took up the Vudu demo offer that was extended my way.

After speaking with some members from the Customer Care team, I was in the official Vudu demo room which consists of a flat screen a couple of comfy chairs and the smallish box that I had read so much about. The demo mainly consisted of me playing with the remote while trying not to drool on it as I basked in all the glory that was Vudu. Below are some of my initial impressions.

- Remote A+
Its a freaking 4 button remote that includes a Blackberry like wheel that also can be clicked. In a nutshell this thing is so easy to use that I am confident that both of my parents could easily utilize Vudu without needing to consult me for tech support. Took me less than a minute to be confident and proficient with the remote. Simple is better and they nailed it.

- User Interface A
There is a button similar to the Iphone home button, that allows you to go to the Vudu home screen if you wander too far. Movies can be searched by title, genre, actor, director and be sorted by alphabetical order, imdb ranking (huge plus), as well as release date.

The UI is sharp, simple, elegant, and clean. Movie posters and images are on almost every screen with information on each movie within Vudu’s library. When you select a certain title the screen consists of a short description, some movie artwork, pricing information on the title, as well as pictures of the director and main actors. You are then able to browse the directors and actors other titles in addition to selecting movies that are deemed very close to your selected title.

The bottom line is that its easy to find titles that you want to watch. Its just as easy to browse through the library to select a title that fits your taste and mood.

Picture quality and download B+
Vudu movies use a hybrid system of ensuring your movie can play from start to finish without any interruption or buffering. Depending on your connection speed, movies play within 5 seconds of being selected and usually are fully downloaded in 10-20 minutes. Of course this will change once Vudu releases HD titles which is believed to be right around the corner but I am confident the Vudu guys have the speed and technology to overcome the fat media file size that comes from HD Content.

Although there is no HD content at this point, all movies are DVD quality and in fact better. Vudu upscales movies if you utilize the HDMI output to your HD TV. With HD content right around the corner in addition to the likely addition of External storage to build your Vudu collection, I signed on the dotted line and ordered Vudu shortly after seeing this great product.

My take on Vudu
The product is awesome but how are Vudu’s prospects as a company? I did a case study on Tivo’s initial launch and see some of the same hurdles Tivo had to overcome in Vudu’s way. Vudu is an unknown entity at this point and has limited distribution (only Magnolia is signed on as a retail distributor) and will have to earn the business of consumer electronic early adopters before making deep inroads in the massive market of movie watchers who have high speed internet connections.

However I think Vudu is on the right track to overcome these hurdles. First off if anyone benefits from the Blu-Ray vs DVD-HD format war, its got to be Vudu. This Christmas consumers can choose between

a) a HD Blu Ray player that costs $400 and up that has a 60% chance of becoming the HD format of the future

b) a HD DVD player that costs $300 and up that has a 40% chacnce of becoming the HD format of the future.

C) a Vudu box that costs $400 that can deliever 5000 movies with just one click (deals with all major studios with more movies being added every week)

Of course I opted for option C as I am confident the Vudu team will get the word out to the masses. They are confident they got a winner and let the product win me over rather than giving me a sales pitch during the demo.

From a marketing perspective I think it would be interesting to see Vudu in high end hotels like the W or Hotel Nikko as this is light years ahead of anything that one would find as a hotel pay per view system. More mainstream distribution is also a must but I am sure its in the works as the concept of Slingbox was sold to retailers, and I think Vudu has a superior product that will be in higher demand. I would also stress product marketing similar to the Iphone where product functionality and ease of use is articulated as people need to know exactly what Vudu does and how easy it is to use. It would also be funny to see marketing campaigns aimed to show the social situations where Vudu can be a life saver. For instance ads showing

a) the age old ploy to get a girl to come over to watch a movie after a night of partying. “What movie?” “I got Vudu”…. and they lived happily ever after at least for that night.

b) A boyfriend on the verge of getting killed for renting Robocop for their anniversary.”Got Vudu”

C) a sudden urge to watch a movie, but wait….. the rental store is closed because it’s too late.

You could even show off these type of videos in the advertisements in theaters right before the previews.

So with all that I am anxiously waiting my own Vudu box and will be back to report my initial reaction to the small box that will likely transition my bar tab to my Vudu tab, so in that regard this might even be considered a healthy purchase.