XBOX 360 and HD-DVD

In a recent discussion, a friend wondered why Microsoft had opted not to include an HD-DVD drive in the recent update to the XBOX 360 console (the XBOX 360 Elite). The logic would seem obvious. In the US, 94% of Blu-Ray players sold are included as part of the PS3 game console. This has led to a situation where more Blu-Ray players are sold each month than HD-DVD players. By including an HD-DVD player in the XBOX 360, wouldn't that help to provide the same push behind the HD-DVD format that Blu-Ray is currently experiencing from PS3 sales?

Perhaps, but I can see a number of reasons for Microsoft to hold off on such a move. There is a lot of risk in Microsoft hitching its game console horse inextricably to one of the HD disc formats. Though Microsoft has made clear what disc format they would prefer, that's different than taking economic risks to ensure it happens.

A failure of the Blu-Ray format would negatively affect PS3 sales (though I would argue that the PS3's failure as a game console is more dangerous, explained later). Why would Microsoft want to put itself in the same "all-or-nothing" bind by hitching itself to HD-DVD? Better to keep HD disc support an external add-on, providing Microsoft the opportunity to offer a Blu-Ray drive should the need arise.

Inclusion would add considerably to the cost of an XBOX. Currently, the XBOX 360 has a cost advantage over the PS3, largely due to its lack of reliance on the HD disc playback technology. This is important given that large percentages of game console owners have yet to purchase an HD TV set, but is particularly important in a market that has proven extremely cost sensitive. Though the Nintendo controller is clearly innovative, it doesn't hurt that a Wii is a relative bargain at $250.00. PS2 sales continue to be strong, driven in no small part by the fact that it costs only $129.00.

Avoiding a final decision on HD disc format makes all the more sense when you consider Microsoft has no horse in the HD disc format race. Granted, Microsoft was involved in the creation of iHD, the XML format used to create the interactive content on HD-DVD discs, but that hardly constitutes a reason to risk the XBOX franchise on an HD disc format. Sony owns the Blu-Ray format, and though I question a decision to put so many eggs into the PS3 basket, their complete devotion to one format in the battle makes sense given the direct financial benefits they would derive from Blu-Ray success. That doesn't apply so much to Microsoft.

Last, Microsoft would vastly prefer a downloadable media model to one oriented around physical discs. I love XBOX Live's movie download service, and though I find it maddeningly short on selection (130 movie titles at last count), the concept is spectacular. Microsoft would prefer that people buy their movies as downloadable content, and later, even their games. That makes the marginal gain from helping HD-DVD win the battle even less important, given that their real goals lie elsewhere.

Things might have been different if it was clear that one format had decisively won the battle. Though PS3 has driven a surge in the Blu-Ray format, the success of the trojan horse gambit is far from assured, given that it is entirely dependent on sales of the PS3. Again, 94% of Blu-Ray players sold recently are included as part of the PS3.

It's highly unlikely that most people are buying PS3's to play their Blu-Ray movies. That means the success of the PS3 depends on its strengths as a game console, and in that arena, it has not been faring as well. PS3's ability to continue shipping Blu-Ray players in those numbers is dependent on the PS3's ability to continue to attract consumers as a game console.

Likewise, around half of HD-DVD players were purchased as standalone players. Granted, the other half was entirely the HD-DVD add-on offered for the XBOX 360, but those buyers can be expected to be buying the player because they want to watch HD-DVD movies, as it adds nothing to game play.

Last, the production cost advantages of HD-DVD still seems to be running strong, and appears to have played some role in HD-DVDs success in Europe (though the PS3 was only recently released in that market, so it remains to be seen whether HD-DVDs lead is sustainable):

Production costs are also of importance to smaller studios which may not be willing to purchase entirely new equipment in order to press Blu-ray discs, or incur substantially higher costs to produce them. French replication company Qol CEO Laurent Villaume told FT that the risk involved in producing Blu-ray disks isn't comparable to that of HD DVD: "An HD DVD replication line costs about €800,000 and you can make 40,000 discs a day on it. A Blu-Ray replication line costs €1.7m or €1.8m and you can make 10,000 to 15,000 discs a day."

There also seems to be some interest in that mandatory ethernet port on HD-DVD players (something which is optional on Blu-Ray players):

The HD DVD standard requires players to have an Ethernet jack and European studios feel that they could take advantage of this to offer extra content to HD DVD players over the Internet rather than on the discs themselves.

The European launch of the PS3 might change things on the continent, but as things stand, three times the number of European films are released on HD-DVD versus Blu-Ray.

The PS3 has put new wind to the Blu-Ray formats sails, but it hardly seems to have blown away the advantages of the HD-DVD format.