High-definition DVD Format WarsMarch 14, 2007

MANGAL DASHIMANSHU RAMCHANDANIMUDIT NIGAMMOHIT KUMAR

Strategic Computing

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

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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 PS3)

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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 high-definition 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

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Certain format wars were never won, but instead compromised with the introduction of multi-format technology

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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

Most performance metrics of these two technologies are the same

Blu-ray storage capacity is more practical for HD movies One high-definition movie (~20GB) fits on just one Blu-ray layer

(25GB); while HD DVD requires two layers (2x 15GB)

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Blu-ray HD DVDStorage

(single layer)25GB (5 hrs of HD video) 15GB (2 hrs of HD video)

Storage

(dual layer)50GB (9 hrs of HD video) 30GB (5 hrs of HD video)

Cost/Disc* ~$1.59 ~$1.45

Cost/GB* ~$0.064 ~$0.097

Disc Player Price

$500 (PS3) - $1000 $500 - $800

* Sources: ProActionMedia, WesleyTech; single layer.

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

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Blu-ray HD DVD

Content Network

20th 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 NetworkSony PS3 (integrated), Electronic Arts (EA)

Microsoft Xbox 360 (external)

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

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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)

Disc Aperture Settings

DVD 0.6

HD DVD 0.65

Blu-ray 0.85

Sales trends illustrate Blu-ray gaining dominant market share

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Availability of Hardware (players) Blu-ray (with PS3) : HD DVD =

5 : 1 Blu-ray sales up 700% since

the launch of PS3 and other players 687,000 PS3 sold in US

Availability of Content 19 of the “Top 20” DVDs in

2006 were released by studios supporting Blu-ray

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HD OpticalDisc Format

Competitors Complementors

Customers

Suppliers

Disc Replicators / Factories

Machinery Providers

Entertainment Industry

HDTV

Media Players

Game Consoles

Consumers

Retailers / Distributors

Licensees

Internet

VHS

TV

On Demand (VOD)

Flash Memory

There are several players in determining a dominant network However “Content is King” and will largely determine the victor

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ESTIMATED ANNUAL REVENUE 2006 IN U.S.

$3.6 Billion

$12.5 Billion

$35 Billion

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

Video Game Industry

Film Industry

Adult Film IndustryXXX

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“The Look and Sound of Perfect” $150M advertising campaign

Xbox 360 supports external HD DVD player

Pornography industry experimenting with HD DVD

“War is Over” advertising campaign

PS3 internal Blu-ray player

Sony cutting player prices from $1K to less than $500

Future Blu-ray car players

HD DVD Blu-ray

Blu-ray has adopted a “pre-emptive strike” marketing strategy with its “War is Over” advertising campaign

What are the drivers that will determine the future of this format war?

Economic Performance Regulatory

Content – Blu-ray has greater support

Price – Similar pricing

Complementors - HDTV supports both formats

International View – Japan sided with Blu-ray

Storage Capacity – Blu-ray greater capacity

Security – Promising dynamic BD+ encryption

Durability – Blu-ray offers proprietary coating to prevents scratching

Associations - Blu-ray, BDA; HD DVD, DVD Forum

Europe –European Commission (EC) seeking open technology

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Resolution (NTSC) 640 x 480i

pixels Audio – Stereo,

44kHz

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Resolutions

– 1920 x 1080p

– 1920 x 1080i

– 1280 x 720p Audio - AC-3: 48 kHz

sampling rate, up to 8 channels, up to 18 Mbit/s

Standard High Definition

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.

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HD TVs expected to increase from 4M HHs in 2006 to 52M HHs in 2009

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With the PS3, Blu-ray is quickly approaching the chasm…

…but HD-DVD is lagging behind.

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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 3Q 2007

– Costs marginally more than current discs

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

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+) PS3 integrated Blu-ray players Larger capacity of 25GB (vs 15GB)

Questions & Answers

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