CE Companies Clash on HD DVD

[Gregg Lengling]

With DVD now firmly entrenched as the dominant consumer video format, it can be difficult to appreciate the change in home video distribution since 1997. It was in the dog days of August seven years ago when the first DVD players reached retail stores in the United States. As the cliche goes, the rest is history.

Video enthusiasts-weary of aging VHF tapes-immediately got it when presented with the benefits of the "Digital Versatile Disc." The sound and picture quality were stunningly better. The familiar form was convenient and durable. The little five-inch silver platter was already a trusted media currency-from music and game systems to personal computers. In no time, DVD exploded as the fastest selling consumer electronics format in the history of the industry.

DVD revolutionized the video marketplace. Revenue from home video sales increased more than 300 percent, from about $4.6 billion in mostly VHS sales in '97 to $14.3 billion (of which more than 85 percent represents DVD sales) in 2003. Combined with rental revenue, the entire home video aftermarket is estimated to have topped $22.5 billion for 2003, according to research by "The Hollywood Reporter."


RED LIGHT LASER DISCS

Based on red-light laser technology, DVDs for video, multimedia, games and audio have capacities ranging from 4.7 to 17.1 GB of data. A consumer video DVD holds 4.38 GB on each side-enough capacity for a movie more than two hours long. Each side can hold two layers of data, allowing a single DVD to contain 15.9 GB of data.

The development of today's DVD format goes back to 1994, when there were two primary competing technologies-Super Disc (SD) from Toshiba, Warner and Multimedia CD (MMCD) from Philips and Sony; while Panasonic had a format of its own. Manufacturers, having suffered through the VHS-Betamax format war of the 1970s, decided to avoid another battle and combine their technologies.

They created a cash cow. Several patent groups, including the original companies and others, now collect royalties on DVD technology. DVD player manufacturers estimate that royalty payments equal as much as 10 percent of the player's hardware cost.

Now, with HDTV catching on, the original DVD format needs an upgrade to efficiently deliver full-length HD movies to the home. Two hours of HD video contains four to six times more information than similar standard-definition material.


BLUE LIGHT LASER DISCS

The solution, according to some major electronics companies, is to create a new kind of high-capacity DVD using blue light-rather than red light-laser technology. A blue laser beam can make a smaller spot of light, meaning each bit of data requires less space, thus increasing disc capacity.

Mastering blue light laser technology has been a long, difficult task, but blue laser technology can now store up to 27 GB of data on a standard-sized DVD. With twin layers on both sides, up to 108 GB can be stored.

The good news is that blue light technology is here and can be affordable. (Sony's XDCAM is based on blue light laser technology.) The bad news is two different blue light standards have emerged, again pitting different segments of the industry in a potential format war.


BLU-RAY vs. AOD

On one side, there's Blu-ray, a consortium that includes Sony, Philips, Samsung, Sharp, TDK, Hitachi, Thomson, Hewlett-Packard, LG, Matsushita, Pioneer and Dell. The Blu-ray disc, enclosed in a plastic sleeve, provides up to 50 GB on a dual layer, single-sided disc, which holds about five hours of HD video content. On the downside, Blu-ray is not backward-compatible with today's red laser format, so a separate red-laser assembly would have to be added to a Blu-ray player to play current DVDs. Blu-Ray players will hit the U.S. market in late 2005 or early 2006, the consortium has said.

Competing with the Blu-ray group is a blue-laser technology from Toshiba and NEC Electronics. Officially dubbed HD DVD, but previously known as Advanced Optical Disk, or AOD, this system holds about 15 GB of data single-sided, or 30 double, but offers backward compatibility with today's red laser discs using a dual-laser optical head. Add advanced video compression and AOD can handle about the length and quality of video as the Blu-ray system.

Another advantage is that AOD discs can be replicated in existing DVD plants with minor modification. Fabricating Blu-ray discs would require new facilities.

Enter a third group, the DVD Forum, an organization made up of about 220 companies, from car makers to chip manufacturers, whose job is to assure DVD format compliance. Though not officially a standards-making body, it gave its stamp of approval to AOD, meaning the group has ruled out the Blu-ray system.

The DVD Forum's direction prompted the Blu-ray consortium to go it alone in trying to establish its technology as the standard. That move got the attention of the U.S. Justice Department, which, according to a report earlier this year in "The Wall Street Journal," began a preliminary investigation into the actions of the Blu-ray consortium.

While none of the parties will comment on the investigation, news reports say the Department of Justice sent questionnaires to Blu-ray consortium members. No other information has been made public.

At this stage, with the success of DVD, no one wants a format war. However, to the companies involved, the stakes are extremely high. In the end, Hollywood's motion picture studios-owners of the world's most valuable content-will have to make a choice. Sony Pictures has already announced that it will make its titles available on Blu-ray; Warner Home Video favors red-laser HD technology using WM9 compression.

Last January, Robert Chapek, president of the Buena Vista Home Entertainment and Digital Entertainment Group, urged the two DVD technology groups to resolve their differences and come together with a single format.

"I call upon each of you today to engage in the debates, while not forgetting that the consumer is our ultimate audience," Chapek said at an industry event. The way to encourage video enthusiasts "to once again take the plunge and invest in yet another home video format [such as hi-def DVD] is to roll out a single, simple-to-understand format that doesn't confuse consumers."

Of course, the entire hi-def DVD contest is not about the well-being of consumers or the best technology. It's about money-potentially huge amounts of it. This is why the Blu-ray group has no intention of bowing out simply because the DVD Forum prefers its competitor. Too many dollars are at stake from future licensing.

In a low-margin business like consumer electronics, income from intellectual property is essential to profits. Philips, a pioneer that helped invent the original CD and DVD technologies, has vowed to double its 2-to-2.5 percent profit margins with additional income from patent royalties.


MEANWHILE, IN CHINA

Not everybody, however, wants the consumer electronics giants to enjoy another DVD windfall.

China, the leading location for the manufacture of low-cost DVD players, is rebelling against the stiff fees it must pay those who hold DVD intellectual property rights. To counter the major companies, China has developed its own high-definition video disc technology.

Called Enhanced Video Disc or EVD, the Chinese technology is already on the market with players costing only $200 and packaged with eight free movie discs. Current EVD uses conventional red-laser with MPEG-2 encoders from LSI Logic. Next-generation devices will use compression from On2, a New York City-based company formerly known as the Duck Corp. IBM is said to be lined up to provide China's copy protection technology.

China has worked on EVD since 1999, with funding from their State Trade and Economic Commission and Ministry of Information Industries. The new format will "attack the market share of DVD," said China's state news agency, Xinhua.

All this is making Hollywood studios very uncomfortable, said Richard Doherty, analyst at The Envisioneering Group, a technology testing and market research firm in Seaford, N.Y.

"The real irritant here is that the Chinese are already shipping their HD DVD format while the AOD and Blu-ray groups are still trying to get their acts together," he said. "The fear is Hollywood might not be in the driver's seat if China's EVD catches on before another standard is chosen."

The ball is now in the court of the studios. Their decision on a DVD format, expected through the Hollywood Advisory Council, a group of studio representatives, has no real due date but is expected in late summer.