Digital downloads linked to HD disc format war?

As everyone already knows, the HD disc format war is over, resolved in true domino fashion by Warner Brothers' decision to back Blu-ray exclusively. Most of the studios in the HD DVD camp have now agreed to back Blu-ray, particularly now that Toshiba has announced it will cease pushing the HD DVD format (though Dreamworks is an odd holdout).

As everyone already knows, the HD disc format war is over, resolved in true domino fashion by Warner Brothers' decision to back Blu-ray exclusively. Most of the studios in the HD DVD camp have now agreed to back Blu-ray, particularly now that Toshiba has announced it will cease pushing the HD DVD format (though Dreamworks is an odd holdout).

HD discs have had microscopic sales compared to standard definition DVD, however, which may partly explain why Dreamworks feels no driving need to switch its allegiance in the near future. I also don't think the studios are expecting a huge surge in Blu-ray sales, mostly because Blu-ray players always were, and continue to be, MUCH more expensive than HD DVD players. That's hardly the kind of thing that can be expected to seed the market in expectation of HD disc sales revenues sprouting from the ground.

But, there are other reasons that the studios had a strong interest in making HD disc formats viable...besides the obvious need to keep the movie disc money train moving. They may need them as a way to buy off important distributors who were actively trying to prevent the growth and spread of digital movie downloads.

The following is an extract from a briefing in the February 23rd edition of the Economist:

For the moment, most people are still happy with DVDs, so the studios have had little incentive to switch to an unproven new format. The DVD business is huge, bringing in $23.4 billion in America last year, against $9.6 billion from the box office. The studios are terrified of damaging that source of revenue. In 2006, when Disney made a deal with Apple to sell movies via iTunes, Wal-Mart, America's biggest retailer, reportedly threatened to retaliate: the internet, after all, bypasses it. Wal-Mart accounts for about 40% of DVD sales in the United States and if it sharply cut shelf-space for DVDs, the lost sales would far outweigh new digital sales in the near term. At the end of last year Wal-Mart shut its ten-month-old movie-download site. Now that it no longer has a foot in the internet camp, studios expect it to take a harder line against any further efforts they may make to favour online distribution.

In the next paragraph, an unnamed studio executive notes that Wal-Mart would be crazy to pull shelf space, as they rely on it to bring "higher-income people into their stores." The studios, in other words, have more power to push back than they might think. Even so, the easiest path to a digital download future is likely one that gives the Wal-Marts of the world a physical product that they can continue to use to attract buyers, even as consumers embrace the parallel market for digital download services.

Odd as it may seem, a resolution to the HD disc format war, provided it actually results in Blu-ray becoming a serious generator of revenue, could help unlock digital downloads by removing the resistance of key distributors who have a stake in the movie disc revenue pie. That seems a tall order now that they have settled on a more expensive format with a more fluid standardization story, but you can at least see why a major Hollywood studio had an interest in pushing things along to a speedy resolution at a time when revenues barely registered and HD DVD players had just reached the $100 price point.

If HD DVD had started to use its price advantage to push sales up (Blu-ray did have the sales advantage), it could have perpetuated the format war for the foreseeable future. Though Blu-ray isn't a perfect solution, that took a back seat to settling on a single format as soon as possible. The Internet beckons, and the studios can't afford Wal-Mart building walls against it.

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