Dialog: The final format war

SCOTT FULTON, BetaNews: You used the phrase, "they'll have no choice." Meaning, once the studios have made that decision that the bottom line is better impacted if they switched their investment completely to Blu-ray, then once again they have set the market conditions on the consumer's behalf. And then the consumer has this choice: Do I re-invest in a different format for some of the same movies I already own -- maybe they look better, maybe they don't, or maybe I can't tell the difference -- or do I invest in the fat pipe? Isn't that a format war?

CARMI LEVY, SVP, AR Communications: It is, but you don't have to buy additional capability in order to download something from the Internet. In other words, you don't have to buy a special box and special discs --

SCOTT FULTON: You don't today. But look at where I'm going with this: Look at a company like Macrovision, which we've been covering because they're a fascinating company. These guys have sold off their software arm...and they're investing in set-top box technology that will deliver TV Guide to everybody, and this is the program platform for people who have these next-generation sets that have the scheduling chip inside of them. And that chip runs on a particular format, and that format delivers interactive video in a specific way. One of those ways that it could have been, is the same HDi that was in HD DVD -- Microsoft developed it. So there's a market in the delivery of that interactive channel-changing format. Macrovision will have something, Microsoft will have something, Sony will have something, and Sun will have something because they're working on a way of extending Blu-ray Java (BD-J) over into this set-top box market.

And I'm thinking, here we go again.

CARMI LEVY: But it's really no different than what we've been seeing since the dawn of the PC era. Standards have always been fighting it out with each other; now, we're just moving from a tangible to an intangible platform war.

SCOTT FULTON: But in the PC era, especially with software, you could say rationally that consumers made a choice. Consumers made PC compatibility the real thing. Consumers chose IBM PC. They chose MS-DOS, they chose Windows. And they're still choosing Windows.

CARMI LEVY: And they'll do the same thing here; consumers always vote with their wallets.

SCOTT FULTON: But you said, "They'll...have...no...choice."

CARMI LEVY: At some point, you can only buy so much of something before it's no longer available. For example, VHS. My parents were probably the last people I know who bought a DVD player because their VCR was going to be good enough for them, forever.

Eventually, what happens is, the studios decide that they're not selling enough VHS tapes...so they pushed VHS tapes down to the bottom of the barrel, shifted their production and marketing efforts over to DVD, and sure, my parents could continue to use their VCR, but they wouldn't be able to buy new content for it. So at some point, for example, Macrovision might release some new standard for set-top box, and Microsoft will have another standard, and Sony will have a third. And it'll be a Darwinian process whereby only the strongest will survive.

SCOTT FULTON: But who decides "strongest?"

CARMI LEVY: In this case, I believe the consumer decided here. The consumer tipped his or her hand; there's a desire among consumers to not compromise on technical capability for next-generation high-def discs. Blu-ray Discs were consistently outselling HD DVDs, and the studios tipped toward Blu-ray, which increased the flow of Blu-ray and decreased the flow of HD DVD content, and eventually HD DVD could not compete simply because consumers said, this is what we want, the market responded by providing that, and eventually it became un-economic to continue to support the loser.

That's what's going to happen here as well. At some point, there will be a tipping point beyond which it becomes un-economic to support the losing platform, just because there's no way it'll ever achieve traction. And the market has shown with PC operating systems, there can only be one dominant standard...Same thing with the set-top box. There will be one dominant player -- there may be some niche players, but they certainly won't have anywhere near high-double-digit market share. They'll be lucky if they get into the high single digits.

Coming soon: Will HD DVD rights holders have any recourse?