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    Is This The End For Blu-Ray?
    By Hank Campbell | January 19th 2008 10:51 AM | 16 comments | Print | E-mail | Track Comments
    About Hank

    I'm the founder of Science 2.0®.

    A wise man once said Darwin had the greatest idea anyone ever had. Others may prefer Newton or Archimedes...

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    Yes, you read that right. I said Blu-ray. Ever since the defection of Warner Bros. from HD-DVD to Blu-ray a few days before the Consumer Electronics Show(CES), every expert who knows anything at all about this industry has predicted the demise of HD-DVD. And they're wrong.

    The most important reason is that no one is an expert on the high-definition marketplace. The industry barely even exists so people making projections based on expert knowledge of laser disc or DVD figures are only slightly more accurate than Voodoo shamen sorting chicken bones. You just can't rely on recent sales in a nascent industry and extrapolate a projection from it. Projections about what people will or will not do at this stage are even less accurate than political exit polls.

    My thoughts are not based on any secret knowledge of the DVD marketplace but I have a pretty good knowledge of business. Absent an overwhelming leap in technology from Blu-ray some time soon, here are my reasons HD-DVD will win:

    1. Technology: My wife is not an expert on technology, she just likes the 'experience' of technology. She has an Apple iPod. Apple did not invent the MP3 player, they don't even have a particularly good one, but even though it is technologically unspectacular Apple controls the experience in a way she likes. They took very basic components, built software people like, negotiated agreements with vendors and created an elegant way to buy and use music. Even I sometimes use iTunes. I just don't bother with an iPod. The iTunes experience made the iPod valuable.

    This is the first place where experts are wrong; they rely on the past. They insist that Apple's adoption of (and success with) controlling the user experience means everyone must now do it to win. Marketing experts, like military commanders, are always preparing for the last war and not thinking about the one in the future.

    In new technology markets, absent an overwhelming marketing buzz, engineering and the advantages it brings are likely to win. HD-DVD has top-notch system design and that means player stability and lower cost and consistent manufacturing. HD-DVD is half the cost of Blu-ray and every player sold comes with an ethernet port to do upgrades because Toshiba focused on functionality, not the experience. The iPod and its experience came out years after I had an MP3 player and Apple got into that business because it was already popular and just needed a killer product. Early adopters are not worried about the 'experience', they want the best tool. I still have three Replays in my house because they are better than TiVo. I simply configured them so my wife had the easy experience she likes.

    Because Blu-ray can fit more data than HD-DVD (25 GB per layer versus 15 GB per layer) and they have adopted a higher audio and video transfer rate (54Mbps versus 36.55Mbps) they are regarded as 'technologically superior' but Betamax was also technically superior to the VHS VCR. Betamax was also championed by ...

    2. Sony, and this is one fight they can't afford to lose. Experts will contend that Blu-ray cannot lose because Sony is betting it all; their movie studios on the home viewer market, their Playstation 3 with gamers and computers with everyone else. Marketing people love to think big companies who bet it all can't lose - and it's a safe bet. Sony only stopped making Betamax players in 2002 so it's true they stick to their guns, but not losing hardly counts as a win.

    Betting it all means they will do whatever it takes, the theory goes. That's marketing talk, not business. The people running the businesses at Sony have a Plan B, as do their Blu-ray brethren at Pioneer and Samsung. Showing support does not mean they will drive their business into the ground. Plus, they are squared off against a team with another company that's used to sticking with a plan named ...

    3. Microsoft: Did you use Windows 1, 2 or 3? I didn't either. But a lot of people used Windows 3.1 even though it wasn't as elegant an experience as the Apple interface. Microsoft can stick to a plan in a way that conservative committees making decisions at Sony cannot. Of course, just because Microsoft sticks with a decision doesn't mean they are fanatical. You don't see them promoting Microsoft Bob these days. But when they believe, they put their money behind it. Netscape used to own the browser market too but Microsoft won that with an inferior product. HD-DVD has the benefit of not only being not inferior, it's also cheaper.

    Microsoft is sticking with the Xbox and with HD-DVD on the Xbox, at least for now. In addition to Microsoft (and Toshiba), Intel and Hewlett-Packard are also along for the HD-DVD ride.

    But what about the people who make the content and the decision, those bean counters in ...

    4. Hollywood: The most ridiculous, faith-based nonsensical thing I have read or heard on this subject has been that the Warner Bros. move to Blu-ray somehow tilts the battle away from HD-DVD. Nothing could be further from financial reality.

    Broadcom and Sigma and other chip companies have to think about foundries and inventory and manufacturing estimates - without huge write-offs, they are stuck on their path. Hollywood studios do not have that concern because they are not in the manufacturing business. Studios are going to make movies in whatever format the public wants, Warner Bros. included.

    Rumors that hundreds of millions of dollars have changed hands to cause these mass defections, all magically hidden in secret marketing budgets - as if no one is going to notice a petty cash marketing increase of $150 million to $400 million on any company's books - are good press but they don't mean much. Whatever money Warner Bros. got, they were smart to take it. They can sell movies in Blu-ray and, if it fails, sell them again in HD-DVD. But they do not dictate to the market what the market will buy.

    Most movie studios are behind Blu-ray but Toshiba alone has sold 50% of the HD players. I see estimates, for whatever they are worth, as high as 70% of HD disc sales for Blu-ray. How can that be possible? Is a player that costs twice as much going to win based on movie sales? Not necessarily.

    If Blu-ray sells 100 machines and each customer bought 7 discs with it, that's good for studios and not great for player manufacturers. If HD-DVD sells 300 players and 1 disc with each, Toshiba is much happier than studios. Which of those groups can easily change direction? The studios. If it's true that Toshiba sold 50% of the players out there, disc sales to-date are not all that relevant. 300 potential customers versus 100 tells the tale. Studios have to make discs for people who want to buy. The perception that hardware companies can fight to the last drop of studio blood is misguided.

    Toshiba has made no secret that they think, all things being equal, the same quality at a lower price will win. Aficianados can argue until they are blue in the face about bit rates but to the average user, the quality of either format will be spectacular.

    So I think Blu-ray is going to lose this fight. Does that mean Toshiba and HD-DVD will be the big name in high-definition discs four years from now? Maybe not.

    Apple may have an iDisc in the works right now.

    Comments

    Hank
    An article published this morning titled Blu-Ray crushing rival DVD format in Japan reaffirms my belief that HD-DVD will win. The Japanese are legendary early adopters, they do not care about price and they take pride in who they buy, not what they buy on merit, as the collapse of the Nikkei showed in the late 1980s.

    The culture war between Hamamatsucho and Minato-Ku will not make or break these formats; Wal-Mart buyers will.

    Thulium
    My Response I've attempted to abbreviate your blog into its most salient points. Let me know if I've misunderstood you:
    -Even though all the experts think Blu-ray will win, you disagree. -You think nobody is an expert. -You think that knowing about "business" but nothing about the marketplace makes youan expert. -Your wife is no expert either. She likes iPod. You likes iTunes. -You think history does not help us make predictions about the future, therefore the iPod analogy tells us nothing. -According to you, early adopters prefer functionality over form and because HD DVD players are cheaper, they must have better functionality. -Blu-ray is a superior technology, but so was Betamax. EDITORIAL: Actually, Betamax had a slightly superior picture quality when recording in SP...but it was limited on SPACE making it inferior for many applications. Beta had better PQ, VHS had more space. -Sony is stubborn, but doesn't always win. -Sony is likely to do whatever it takes to win, but maybe they won't. -Microsoft is stubborn too and has money. Microsoft can beat up little companies even when their product is crap. Oh, don't forget, HD DVD is cheaper. -"Stubborn" Microsoft, Intel, and HP, are on HD DVD's side...for now. -You think that Warner Bros. abandoning HD DVD is not a blow to HD DVD regardless of evidence to the contrary. -Studios don't have to worry about costs of switching sides, therefore they will choose the format preferred by the public. -You think that co-marketing deals between Warner and the BDA are the equivalent to the transfer of liquid assets, aka a buyoff. Buyoffs are okay because Warner will change their decision. -Even though Blu-ray has greater studio support, Toshiba still sells almost half of all standalone players sold because they are cheaper. (*cough*PS3 anyone?*cough) You don't understand why HD DVD is losing. You don't think that greater studio support is enough to overcome cheap entry-level players. -A 7:1 attach rate would overcome a 3:1 hardware advantage in actual sales, and studios are motivated by actual sales. Editorial: I presume that Hank is trying to convince us that studios care more about attach rate than actual sales. Unfortunately, his theoretical numbers have no correlation whatsoever to the present situation. -Toshiba's strategy is to have lower priced [hardware]. Hank says that regardless of any technical advantages Blu-ray may have, HD DVD will always be just as good. -Blu-ray will lose. -You think that because the Japanese overwhelmingly prefer Blu-ray, it means that Blu-ray will lose because the Japanese spend money for brand names like Sony.
    Is that really your argument? Seriously? No offense, but I'm afraid you've been arguing for natural selection in the face of the laws of entropy for a little too long.
    Hank
    The 1:7 and 3:1 analogy was just that, of course, not a sales comparison, mostly because zealots on both sides are just reciting sales claims from marketing people they agree with to each other. There are no valid sales comparisons.

    I am a big believer that good systems engineering will lead to a lower price and fewer returns and that product will win. Not picayune claims about better technology. I doubt I have to start listing examples where the best technology did not win. Early adopters want functionality and HD-DVD does have better functionality across the board at a lower cost. I have yet to see an HD-DVD player without an ethernet port for upgrades and the players consistently behave the way they are supposed to behave. Can you really say that about Blu-ray?

    You may feel Blu-ray is compelling and have carefully positioned numbers to back it up - a baseball player who leads his team in 9th inning doubles in the month of August does the same thing. It doesn't mean they won any games.

    Thulium
    We're not talking about "carefully positioned" numbers. We are talking about the fact that Blu-ray leads in nearly every category: More players sold, more movies sold, more CE manufacturers, more studio support, more space and more bandwidth. HD DVD's advantage is cheap entry-level players, but Toshiba's players aren't cheaper because of some manufacturing miracle...they are cheaper because Toshiba keeps dropping the price. There is nothing inherently cheaper about Blu-ray players, and Toshiba is the only company selling blue laser players for less than $200 because they are using the players as a loss leader under the "razors versus blades" concept. (Give away one razor, sell lots of blades) The only actual COST advantage HD DVD has is that the format doesn't require anti-scratch coating like Blu-ray, but that slight cost difference hasn't translated into lower prices on the discs themselves. On average, Blu-ray discs are actually cheaper! You are quite right that a superior product can lose, but it doesn't happen for no reason. There are some that think Blu-ray is the inferior product, for that matter. My preference happens to be for Blu-ray because I see it as the superior product, but being "superior" isn't why Warner dropped HD DVD. Warner is dropping HD DVD because supporting two formats was stifling overall adoption and Blu-ray was outselling HD DVD in spite of Toshiba's artificial price advantage. Your blog posting manages to give examples of how it is possible for a product to buck a trend. That's all well and good, but you failed completely to give any evidence as to why this might be the case here. Its ironic you would even mention the iPod because it is a perfect example of how a more expensive product can succeed over cheaper competitors. The quality of the iPod and iTunes is arguable, you might think the Zune or another MP3 is made better and easier to use and they're certainly cheaper than the iPod...yet the iPod remains the market leader. Why? Perceived value is more important than price. Need proof of perceived value being more important than price? How much do you think it costs to pull a 1 carat, colorless, VVS1 diamond out of the ground and have it cut? I can assure you it is considerably less than it costs to make a $149 HD DVD player, yet the MSRP is about 25 times greater. Why? Perceived value.
    Hank
    Its ironic you would even mention the iPod because it is a perfect example of how a more expensive product can succeed over cheaper competitors.

    It's not ironic since I used that example specifically as an average product that successfully owned and managed the user experience. This is why novice people flocked to them.

    But, as I also said, Apple was only able to do that after the market was well established by others. Apple may well do it again in HD in the future but they would not be able to do it today.

    Diamonds are a tightly controlled supply and a huge marketing budget for a product that is well known. That's not really an apples-to-apples comparison. Insisting Blu-ray has won as a more expensive product that may or may not be clobbering HD-DVD (wasn't Blu-ray also dead in August when Michael Bay folded on his claim to hold out on Transformers 2 if the studio dropped it?) based on short term sales sounds a lot like laser disc talk to me - except laser disc had no real competition and Blu-ray does.

    Thulium
    It's not ironic since I used that example specifically as an average product that successfully owned and managed the user experience. This is why novice people flocked to them.
    That is only one aspect of the iPod's success, but how does that relate to the HD format war? Do you mean to suggest that Toshiba has successfully owned and managed the user experience? It is ironic because the iPod is an example of how other factors (such as the user experience, perceived value, and to put it simply... software) can be a larger determiner of success than price. Yet price is the only thing you cite as the differentiation between Blu-ray and HD DVD.
    But, as I also said, Apple was only able to do that after the market was well established by others. Apple may well do it again in HD in the future but they would not be able to do it today.
    I disagree that the market was well established. The iPod wasn't the first portable MP3 player, but it was the first to successfully supplant CD as the dominant portable music format, and replacing a format is a different animal than simply entering an established market. If you like the iPod analogy, keep in mind that Blu-ray has more in common with the iPod while HD DVD has more in common with the Zune. Like HD DVD, the Zune is manufactured by Toshiba but software supported and branded by Microsoft. The Zune's "advantage" is in price and a few bells and whistles that will eventually come to the iPod. The iPod is more expensive, like Blu-ray players, but easy access to a larger library overcomes the price factor. Since you're the scientist, you should appreciate this: Brain scans prove that expensive wine tastes better.
    Diamonds are a tightly controlled supply and a huge marketing budget for a product that is well known. That's not really an apples-to-apples comparison.
    Fair enough, but there are controls on supply of HDM as well, they just aren't so artificially controlled as the diamond trade.
    Insisting Blu-ray has won as a more expensive product that may or may not be clobbering HD-DVD (wasn't Blu-ray also dead in August when Michael Bay folded on his claim to hold out on Transformers 2 if the studio dropped it?)
    I'm not sure I follow you here. HD DVD promoters wanted to proclaim victory when Payamount accepted a financial offer from Toshiba to drop support of Blu-ray even though Blu-ray was maintaining a signifigant sales lead. But even though Payamount would apparently rather have Toshiba's money than that of 2/3rds of the HD market... There was nearly no measurable impact of that defection. HD DVD almost won a week of sales from having Transformers as an exclusive, but that brief sales surge was overcome by a Disney promotion. Michael Bay? Michael Bay was pissed that Payamount backdoored him and took away support for the more popular format and the format that he feels is the only way to properly reproduce his movie and in a fit said that he was not going to make Transformers 2. A day later, apparently the suits at Payamount--their pockets freshly lined--managed to get Michael calmed enough to walk the company line...at least until the Warner announcement where Michael reconfirmed how he REALLY feels about HD DVD. That said, here you actually have a semblance of an argument: Blu-ray survived the Payamount defection. (But even that doesn't fit with your thesis: that Blu-ray won't survive the Warner defection to Blu-ray.) However, this happened for a lot of reasons, and just because Blu-ray could survive the Payamount defection does not mean that HD DVD could survive it. And just because Blu-ray could survive a Payamount defection doesn't mean they could have survived a Warner defection to HD DVD.
    based on short term sales sounds a lot like laser disc talk to me - except laser disc had no real competition and Blu-ray does.
    Laserdisc had competition. First it had competition with SelectaVision, then Beta, then VHS, then DVD. Its form factor and cost were signifigant barriers to adoption, but Laserdisc was not defeated until well into the DVD lifecycle. There was some seriously long term sales to discuss with LaserDisc. Or are you referring to Pioneer's talk of superior attach rates with LaserDisc over other formats? Because that does sound like short term predictions...but on the HD DVD side!
    Hank
    ... how does that relate to the HD format war? Do you mean to suggest that Toshiba has successfully owned and managed the user experience?

    No, I said insistence that the Apple model must be followed in a new technology was a mistake experts are making, which is why I also used my 'preparing for the last war instead of the next one' comparison.

    The interesting that about that study using wine you cited was that fMRIs showed people did actually believe it was better, even though the $90 and $10 wines were the same. You may believe Blu-ray is better if I hooked you up to an fMRI also.

    I would not because I am not thinking in terms of 'better' I am thinking in terms of who will win. I can easily buy another player if Blu-ray fails so I have no real favorite. I have owned plenty of failures to launch like Turbografx, the Atari Jaguar, laser discs and others too numerous to list. They were all better than comparable products and did not last because other companies did something important much better; system design, which led to reliability and cost.

    I guess I can ask again; is your experience that consistency of quality and reliability in Blu-ray is the same as in HD-DVD? If not, projections about victories and losses are no different than assuming Mike Huckabee will be the Republican presidential nominee because he won the Iowa caucus.

    Finishes on discs are an esoteric feature, much like bit rates. They are part of the equation for early adopters but not "iPpod stage adopters" - most iPod users can't tell you what storage is in their device but everyone who bought an MP3 player in 1999 could. By 2002 when the iPod shipped to real users, a lot of trial work had been done by other companies. The market was ready for a glossy product that cost a little more than competitors because the systems issues had been worked out.

    The HD market today is more like MP3s in 2000 and we could be arguing about who will win, Diamond or Creative Labs. The real winner may be Microsoft (or Apple or Cisco or anyone else) who come up with their own system that has nothing to do with legacy players.

    The analogy is not 100% because my MP3s would still work if I switched players - but a sales lead in a low-volume HD war is like Huckabee's win in Iowa. It can be wiped away pretty quickly by an aggressive competitor with a decent product.

    Given the system designs approach of these competing formats, who can more easily sell a $100 player? HD-DVD. So even if Blu-rays sales ended up being 2:1 over the holidays, it doesn't matter. Diamond had a wildly successful MP3 player and exceeded all expectations during three holiday seasons yet was quickly an also-ran.

    fMRIs may show you like the more expensive player better even though they are the same visual quality - the Blu-ray contingent is counting on that - but if you can actually see a difference in quality you're basically the Joe DiMaggio of vision.

    Hank
    Nielsen: Sales at 85% Blu-ray and 15% HD DVD for Last Week.

    I guess if we can use one month's sales to extrapolate a trend we can use one week too.

    ryoaska
    This has to be one of the funneist articles I've ever read! I mean- it was already pretty funny the first time I read it, but coming back now that HD-DVD has lost makes it even better! This article is filled with conflicting arguments, bad analogies, and just generally terrible logic. The only semi-good reasoning used ends up pointing to why blu-ray would win instead of backing up your premise! All that stuff was great entertainment, but this has to be my personal favorite: "The most ridiculous, faith-based nonsensical thing I have read or heard on this subject has been that the Warner Bros. move to Blu-ray somehow tilts the battle away from HD-DVD. Nothing could be further from financial reality." Haha, yeah- that didn't tilt the battle in blu-ray's favor at all! In fact- I think it made hd-dvd stronger! hahahahaha.
    Hank
    Do you really think Blu-ray has won anything but a minor pyrrhic victory? Where is the huge surge in sales? They were outselling HD DVD but ... big deal.

    With competition, there was some interest. If HD DVD dies, so does the industry because prices are going to stay high - just like laser disc players. And, like those, no one will buy them. It will kill physical media.

    You might also be gloating about Super Audio CD over DVD Audio too, but most people will not know what you are talking about - a fate Blu-ray will probably suffer.

    Thulium
    The huge surge in sales? How about a sevenfold increase in Blu-ray player sales (not counting Playstation3) the day after Toshiba made their announcement? Going back to the Warner deal, Blu-ray went from about 2:1 sales advantage in 2007 to a 4+:1 advantage already for 2008...and that is before Warner actually drops HD DVD support! If you look at the growth patterns, HD DVD was growing about as fast as DVD was in its infancy so the fact that Blu-ray was able to double the growth rate with a "format war" holding back many consumers is quite telling. Also in this "minor pyrrhic victory", Blu-ray has now won 100% studio support with Universal coming on and Payamount coming back. That is no small victory as Blu-ray can now truly come out of its scratchcoated shell and begin the real competition to replace DVD. Granted, the elimination of HD DVD is no guarantee of success for Blu-ray...but a prolonged format war would have guaranteed the failure of both Blu-ray and HD DVD. What Blu-ray has won is a chance.
    ryoaska
    Yes, nobody would know what you are talking about if you bring up SACD or DVD-A, whereas tons of people will know what you're talking about when you bring up Blu-Ray vs. HD-DVD. So...again, bad analogy. Regardless, your ideas about competition compared to only having one format have nothing to do with the fact that your original article was dead wrong on pretty much all points. So, forgive me if I take your comment on the industry dying with hd-dvd with more than a grain of salt. Your skills in reasoning and prediction leave a lot to be desired. You sound pretty much like all the other delusional hd-dvd supporters in forums everywhere that swore hd-dvd would win, then when Toshiba backed out, they didn't comment on the loss and instead changed their tune to "blu-ray will never beat dvd", "hd-dvd players are the best standard dvd upconverters", and of course "digital downloads will kill blu-ray!". With those prediction skills of yours, i'm sure you think blu-ray quality downloads will be mainstream by 2009...
    Hank
    You sound pretty much like all the other delusional hd-dvd supporters

    Except I don't own an HD-DVD player and am not a supporter of either format.

    Would you be here commenting telling me how psychic I am if Sony had left the Blu-ray market? Are there any published articles where you made an analysis last August that Blu-ray would win on its merits rather than your simple devotion? If so, then you are a much better analyst than anyone in the market because there was no advantage to Blu-ray, then or now.

    I'm glad you bought Blu-ray. Maybe you own an Apple MP3 player and a Fisher sterero as well. Like Blu-ray, they are functional, overpriced and successful. Sometimes inferior products win. I am okay with my prediction. Anyone could have made the safe bet in January of 2008.

    ryoaska
    whether you are an hd-dvd supporter or not, you sound a lot like all of those hd-dvd supporters who tried to discount every single event that reasonable people knew was a blow to hd-dvd that would eventually lead to it's end. Of course I wouldn't be saying you were psychic if you wrote an article in January (as many did) correctly citing the reasons why blu-ray would win. Because it was obvious by that point! I never said anything about it winning solely based on it's own merits. It would be a mix of it's own merits and idustry factors (such as marketing and exclusivity deals). You also tried to use both hd-dvd's merits and your idea of what certain market indicators mean or don't mean to support your idea. The problem was just that you were wrong about them most of the time. For the record- I bought both blu-ray and hd-dvd, but I sold my hd-dvd player the day after the warner move while it still had it's highest resale value. I got about 100 dollars more than it sells for now. I didn't need any articles to see what was coming up, it was very clear. Maybe some other people would have made that bet in January, but it would have been anything but safe. And I don't know ANYONE that would have gone far enough to say:
    The most ridiculous, faith-based nonsensical thing I have read or heard on this subject has been that the Warner Bros. move to Blu-ray somehow tilts the battle away from HD-DVD. Nothing could be further from financial reality.
    That is just ridiculous. To address what you're saying now that we've seen who lost the format war- no, the industry will not die with hd-dvd. The war itself may have increased interest, but there were a lot of people 'sitting on the fence' waiting for one format to win before dying. It hasn't even been a full week before Toshiba's annoucement, so it makes no sense to ask where the huge surge in sales are... That's like me asking "where are the huge drop-offs in sales that show the industry is dying with hd-dvd?!"
    ryoaska
    Also, from what you say yourself, you seem to be aware of the fact that sometimes technologically inferior products beat the competition. We disagree on whether or not hd-dvd is technically superior, but for the sake of argument I'll agree. Then why would you say something like:
    If so, then you are a much better analyst than anyone in the market because there was no advantage to Blu-ray, then or now.
    That is making the assumption that all analysts in the market wouldn't predict a win for blu-ray because it dosen't have an advantage over hd-dvd. If were talking about technical advantages, that goes against your own reasoning with products like the ipod. If you were talking about non-technical advantages, then you are incorrect because blu-ray had/has several advantages over hd-dvd in the industry such as better marketing, more sudio support, more retail support, and...well now the fact that hd-dvd is dead! Eitehr way, you missed the mark again with that statement.
    this just goes to show how much the h-- that wrote this article really knows...completely wrong.