1. High-definition DVD Format Wars March 14, 2007 Saud Al Shamsi Vikas Bhargava Karen Hsu Josh Palmer Mark Schelbert Edmund Wong Strategic Computing

2. 1 Introduction Blu-ray vs. HD DVD  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

3. Strategic Computing 2 Blu-ray vs. HD DVD Future  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)

4. Strategic Computing 3 History of Format Wars  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

5. Strategic Computing 4 Outcomes of Similar Format Wars  Certain format wars were never won, but instead compromised with the introduction of multi-format technology  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

6. Strategic Computing 5 Tech Comparison Blu-rayHD DVD Storage (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.  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)

7. Strategic Computing 6 Network Comparison Blu-rayHD DVD Content Network 20th Century Fox, Apple, Dell, Disney, LG, Lion’s Gate, Paramount, Philips, Sony (Columbia and MGM), Warner Paramount, Universal, Warner Player NetworkLG, Phillips, Samsung, SonyLG, RCA, Toshiba Gaming Network Sony PS3 (integrated), Electronic Arts (EA) Microsoft Xbox 360 (external)  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

8. Strategic Computing 7 Security, Durability & Other  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  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 DVD0.6 HD DVD0.65 Blu-ray0.85

9. Strategic Computing 8 Current Market Share  Sales trends illustrate Blu-ray gaining dominant market share

10. Strategic Computing 9 Why Blu-ray is On the Rise?  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

11. Strategic Computing 10 Business Model HD Optical Disc Format CompetitorsComplementors 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

12. Strategic Computing 11 Current Marketing Strategies 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 Industry XXX

13. Strategic Computing 12 Current Marketing Strategies  “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 DVDBlu-ray  Blu-ray has adopted a “pre-emptive strike” marketing strategy with its “War is Over” advertising campaign

14. Strategic Computing 13 Future Drivers  What are the drivers that will determine the future of this format war? EconomicPerformanceRegulatory  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

15. Strategic Computing 14 HD vs. Standard: is it worth the hype?  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  Resolution (NTSC) –640 x 480i pixels  Audio – Stereo, 44kHz StandardHigh 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.

16. Strategic Computing 15 HDTV Sales Trends  HD TVs expected to increase from 4M HHs in 2006 to 52M HHs in 2009

17. Strategic Computing 16 Has HD Optical Media Crossed the Chasm?  With the PS3, Blu-ray is quickly approaching the chasm… …but HD-DVD is lagging behind.

18. Strategic Computing 17 Possible Compromises 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

19. Strategic Computing 18 Thank You  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