High-Def Battleground

Videogame consoles have been about more than just videogames for a while now, from Nintendo’s news-downloading Famicom modem to the music-playing Sega CD. But the game console didn’t really become a multimedia hub until the PlayStation 2 and its included DVD player.

Thanks to a combination of strong brand recognition, a low, Sony-subsidized price point and impeccable timing, the PlayStation 2 became the movie player of choice for millions of consumers ready to advance past the decades-old VHS format. For a time, PS2 hardware was selling better than PS2 software in Japan, suggesting that many early buyers were ignoring the system’s game-playing functions altogether. More than any other product, the PS2 drove DVD adoption in the format’s infancy, driving down prices on hardware and software through sheer volume and force of corporate will.

Now, one console generation later, videogame makers are again trying to use their position in the gaming space to influence the home movie market. So far, the results of their efforts have been less than transformative.

Of course, things are a bit different this time around. Instead of a single DVD standard, we now have two high-definition movie formats fighting for dominance: Blu-ray, which is integrated into Sony’s PlayStation 3; and HD DVD, available as a $179 add-on player for Microsoft’s Xbox 360. Roughly one year out, the larger movie format battle is at a bit of an impasse – while the lower-cost HD DVD players are selling more on the hardware side, the Blu-ray camp is selling nearly twice as many actual discs, mainly due to a larger selection of movies.

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In general, PlayStation 3 owners have been a relatively minor part of this battle. “We estimate that [PS3 owners] are buying movies at a rate of the low single digits per year, as opposed to the 10 to 12 movies a year the owners of dedicated players consume,” says Tom Adams, President of Adams Media Research. While consumers might see Blu-ray movies as a nice bonus feature on the PS3, the system is selling (or not) on the strength of the games. “I think within six months after someone buys a PS3, they’re primarily gonna be using it to play games,” says Greg Kaufhold, Principal Analyst at In-Stat. “The Blu-ray movie playback feature is not going to be that important, because why they bought the PlayStation 3 in the first place was to play games on it.”

That doesn’t mean Sony’s system is having no impact on the race. Adams said the sheer number of PS3s sold has helped the Blu-ray format, even if console owners aren’t buying many movies. “It’s definitely having an impact early on. What it’s not doing is having the major impact studios hoped, which is that the game homes would see the purchase of one of these machines as a great way of purchasing lots and lots of HD movies.”

Indeed, Sony’s attempt to replicate the PS2’s DVD-integration success has backfired. “The PS3 was supposed to have ended this fight, but it didn’t work that way,” says Rob Enderle, President and Principal Analyst at the Enderle Group. “Instead of the PlayStation 3 helping Blu-ray, Blu-ray ended up damn near tanking PlayStation 3.”

According to Enderle, Sony’s decision to include Blu-ray in the PS3 had a double-whammy effect on the PS3’s market penetration by pushing the system’s release back into late 2006 and increasing its price to a consumer-unfriendly $599. “Sony is clearly off balance right now. … It’s like the basketball player who wanted to play baseball – his basketball game fell apart and he was lousy at baseball. You’ve got to focus. The other competitors in this space aren’t going to take a year off because you want to play around in two different marketplaces at the same time.”

Microsoft, for its part, didn’t think the movie wars were worth the wait. “I think Microsoft had to make some strategic decisions about ‘Do we want to ship the Xbox 360 and take advantage of that early launch, or do we want to wait for HD DVD to ramp up?'” Kaufhold says. “They made the right decisions for themselves at the time. The decisions that you’d make for a videogame console are just quite a bit different from the decisions you’d make for launching a next generation optical disc.”

While Microsoft did limp into the movie format battle with an HD DVD player add-on in late 2006, the Xbox 360 accessory failed to set the market on fire. Roughly 150,000 Xbox 360 HD DVD players have been sold to the over 13 million Xbox 360 owners worldwide.

The slow performance has led some to question how invested Microsoft really is in the high-definition disc battle. “I think the player was done to show a commitment to HD DVD, but it isn’t really strategic to the Xbox, because you can’t play games off it,” Enderle said. “The HD DVD player is a one-time sale of a piece of hardware. It’s kind of like selling a joystick – they like selling joysticks, but if they had their druthers they’d rather sell a couple games, because that’s pure profit.”

With standalone HD DVD players quickly dropping below $200, Enderle doesn’t see Microsoft’s commitment to the add-on lasting much longer. “If suddenly HD DVD players started showing up for $150, as they will in a few months, Microsoft’s going to look at that and say, ‘We don’t really want to sell this, we’re not making a whole lot of money off it right now anyway.'”

And why try to force a new format when good old DVDs are still good enough for a large portion of the market? “A lot of people feel they can watch their DVDs and have a nice home theater setup, and it’s working just great for them,” says Angelique Flores, Managing Editor of Home Media Magazine. “They don’t feel any need to move over to HD. … It’s not like the difference between DVD and VHS.” Many people with HD sets are finding that new player technology can provide a good high-def experience with their current library of standard DVDs. “The up-converting DVD players are getting a lot better,” Enderle says. “Chances are no one’s even gonna know the difference.”

But while DVDs might be good enough for now, the format won’t reign forever. “I think as people buy these beautiful, widescreen HDTV sets, they’re all starting to realize that getting true HD content does make a difference,” Kaufhold says. “There are people that have four or five of these widescreen TVs in their house already, so they want to have HD content on all of them. … Even grandma’s going to have an HDTV in a year or two.”

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So which high-def format will grandma choose? Well, she might just skip the battle altogether and download her movies directly, as she already can through services like Xbox Live. “What Microsoft sees as strategic is movie downloads – and they get a royalty for those,” Enderle says. “[Microsoft] seems to believe, as many of us do, that [downloads] represent the real future; that HD DVD and Blu-ray both are sort of transitory technologies until people figure out how to do downloads, and once they do we’ll take the next step.”

Then again, once they figure that out, the format war may be a moot point anyway. “Eventually the cost of manufacturing dual-disc players will be not dramatically higher than single-format players,” Kaufhold says. “For about the next 12 months, if you’re a gamer who also likes movies, the PS3 is the best bet. Within the next year, though, it’s going to be come a player business, not a videogame console business. When it becomes a player business, the dual-mode player is the right choice for most consumers. … The endgame is we probably still have HD DVD and Blu-ray movies, but if the average consumer has a dual-mode player, it won’t really matter.”

But the scariest option for the high-def movie market might be perpetual war – a generational cycle of new formats and players that starts to resemble the videogame industry. “There are actually two new [movie disc] formats lining up after this,” Enderle says, “a lower cost high-definition format’s been proposed by a U.S. company that looks like it can come in substantially below HD DVD and Blu-ray, and China has a play that they’re going to make. … This is kind of the last Christmas where we’ll be standing around with this fight, one way or the other.”

Escalation

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