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HD DVD, Blu-ray Disc and the future of home : A strategic analysis

screendigest Contents

HD DVD, Blu-ray Disc and the future 37 HD DVD—the evolutionary solution of home entertainment: 37 Physical specification A strategic analysis 38 Data modulation, error correction and 3 Contents 38 and content protection

5 List of tables and charts 39 Blu-ray—the revolutionary solution 39 Modulation, error correction and file system 7 1 Management summary 39 Video and content protection

13 2 , SD and HDTV 39 Other formats 13 From analogue to digital 40 Technical status of the formats 14 Developments in digital video 40 Licensing 14 Interlace vs 41 Is a single, merged format possible? 15 From SDTV to HDTV 16 HDTV around the world 43 5 Protecting video content 18 Video compression technology 43 Background 18 HDTV and 45 The analogue hole 21 In the beginning, VHS 45 Digital on 46 Content protection requirements 21 3 markets 46 Making content protection stronger 23 Introduction of DVD 47 Licensing 24 Growth in the home video market 48 Revocation vs renewability 26 The future of home video 49 Content protection for BD-ROM and 26 Consumer reaction to new formats HD DVD-ROM 27 Threats and opportunities 49 Advanced Access Content System 28 Conclusions: success or failure? (AACS) 51 Criticism of AACS 31 4 A tale of two formats 51 Interim AACS license 31 The essential technologies 52 Self-Protecting Digital Content (SPDC) 32 Competing formats 52 End to end protection and HDCP 33 Requirements for a new format 53 Forensic watermarking 34 From red to blue 54 BD-ROM mark and HD media mark 34 Introducing Blu-ray and HD DVD 54 Implementing content protection 36 Blu-ray and HD DVD compared 54 Conclusions: the impact of using 36 Common features content protection

www.screendigest.com 3 HD DVD, Blu-ray Disc and the future of home entertainment

57 6 Supporting Blu-ray and HD DVD 84 Testing and emulation 57 Licensing 84 Authoring studios 58 Which format will win? 84 Title testing 59 Blu-ray Disc Association 85 Conclusions 60 DVD Forum and HD DVD Promotion 87 Disc manufacturing requirements and Group equipment

60 Content owners 87 8 Manufacturing next generation 61 Pictures discs 61 Twentieth Century Fox 89 HD DVD-ROM disc manufacture 61 Lionsgate Home Entertainment 90 BD-ROM disc manufacture 61 MGM 91 Manufacturing costs 62 Paramount 92 Equipment suppliers 62 97 Replicators 62 Warner Home Video 97 The future for the replication industry 63 Disney/Buena Vista 98 The future for suppliers 63 The Weinstein Company (TWC) 101 components 63 Studio Canal 63 Other video content owners 101 9 Hardware for next generation formats 65 The software balance of power 102 diodes and optics 67 Pricing strategies 103 Players and recorders 67 Genre breakdown 104 Blu-ray Disc hardware 68 Games companies 104 HD DVD hardware 105 Games consoles 69 companies 106 , drives and writers 69 Apple 107 HD compatible displays 69 Dell 107 DVI, HDMI and HDCP 69 Hewlett Packard (HP) 107 (DVI) 69 108 High-Definition Multimedia Interface 70 (HDMI) 70 NEC 108 High bandwidth Digital Content Protection (HDCP) 70 Consumer electronics companies 108 HD-ready 72 The hardware balance of power 109 Display devices technologies and 74 Conclusions capabilities 109 Compatibility 75 7 Compression and authoring 76 Interactive multimedia 111 10 The future 76 CD-interactive 112 The future for Blu-ray and HD DVD 77 Digital Video Interactive (DVI) 113 Fourth generation optical discs: myth or 77 Macromedia Director reality? 77 Video compression 113 Holographic storage 79 Audio compression 114 Near field discs 79 Authoring and programming 115 Will there be a fourth generation? requirements 79 Authoring HD DVD-Video 117 11 High definition DVD 81 Programming with iHD market overview 81 Authoring BDAV 117 Hardware sales to get off to slow start 81 HD Movie mode (HDMV) 117 High definition disc market outlook 82 BD-Java mode (BD-J) 120 Consumer confusion will dampen 82 Status of compression and authoring enthusiasm tools 121 Lower buy rates, higher prices 83 Video compression 122 Hi-def discs will boost consumer 83 Sonic’s High Definition Authoring spending Alliance 123 Impact of implementing ICT 83 Other authoring tools

4 screendigest © 2006 1 Management summary

might be in the format battle. The software also ahead in terms of titles exclusive to the giant has also agreed to launch an add-on format – 95 compared with BD's 76 – despite optional HD DVD drive for its 360 the fact that BD had the support of seven games console, due to be launched in the US studios to HD DVD's three. However, it is in time for the Christmas selling season. worth noting that none of the major studios Part of the strategy for HD have completely ruled out releasing titles on DVD is to bring Chinese and other second- the other format. tier manufacturers into the market far earlier HD DVD hardware made its global in the technology life cycle than occurred debut in Japan when Toshiba launched its with DVD. This might result in a steeper initial model at the end of March 2006. The price reduction curve than for BD, although first two HD DVD player models (from Sony has already indicated that it expects BD Toshiba) were launched into the US market a hardware pricing to reduce twice as fast as few weeks later in April 2006 priced at $500 DVD did. In a bid to win early market share, and $700. Two months later on 25 June 2006 Toshiba has adopted an aggressive pricing the first BD player model was introduced to strategy from the outset. It is believed that, the US market by Samsung with a $1,000 until the manufacturer can use less costly price tag. Although delayed, BD models from components in the design, Toshiba will be several other manufacturers are expected to losing a significant sum on each player sold. be introduced during the second half of However, this differential between the cost of 2006. To start with, the lowest priced BD components and the selling price is not likely machine will be Sony’s next generation games to be any larger than that to be incurred by console, PlayStation 3 (PS3), now set for a Sony on the BD-based PlayStation 3 (PS3) global launch in November 2006. Two PS3 games console. The key difference between models will be offered, one at $500 and the two cases is that Sony’s business model another at $600. Both will include BD drives for PS3 is predicated on the ability to and be capable of playing BD movies. generate significant revenues from royalties Launch of players for either format in on the sale of PS3 games whereas Toshiba Europe is unlikely to happen before the can expect no comparable revenue stream. fourth quarter of 2006. Although the Toshiba group has fairly ‘deep HD DVD and BD drives for computers pockets’, there are limits to how long it will – along with corresponding blank media – are be able to sustain such investment – becoming available and laptops with suitable particularly as the company’s audio-visual drives for each format have also been products division is currently loss-making. announced, with Toshiba shipping its first One of the keys to reducing the cost of HD DVD-equipped laptop to the US market both systems will be the speed at which in May 2006 priced at $3,000. Sony has also semiconductor manufacturers integrate the introduced a BD-equipped laptop at a $3,500 required functionality into a single more cost- price point. However, in general terms, the effective chip design. The availability of such availability of HD DVD drives to PC chips – and a so-called 'reference design' that manufacturers is running ahead of manufacturers can base their products on – corresponding supplies of BD drives. When will also be a critical factor in enabling the supply situation is sorted out, there is a second-tier manufacturers (including those strong argument to suggest that the PC from China) to enter the hi-def disc market. industry will eventually veer towards the At the time of the launch of the first greater potential capacity of the BD format players from each camp, only a handful of as a solution. The counter titles were available for early adopters to buy. argument is that the integration of HD DVD However, by July 2006 the number of technology into the Microsoft Vista operation available HD DVD titles had risen to 32, system will make that format an easier compared with 13 on BD, reflecting the later solution for PC users – and also importantly release of the latter hardware. Overall about a potentially less costly item (in licensing 180 named titles had been slated for US terms) for PC manufacturers to include in release on each format, with a further 18 HD their designs.. Whatever the relative merits of DVD titles announced (by France's Studio these arguments, there is no doubt that the Canal) for European release. HD DVD was www.screendigest.com 9 3 Home video markets

extremely limited interactive capabilities and a that movies required multiple discs. The modest improvement in sound quality studios wanted an format that compared to VHS. Perhaps most important, would hold a full-length movie without none was able to win more than limited compromising the audio or . support from the Hollywood studios, who were only just starting to appreciate the Introduction of DVD importance of movies on VHS tape. It would The solution was DVD, a new format based take the advent of /video on MPEG-2 video compression, and multi- compression, starting with the MPEG-1 and channel digital audio systems from Dolby and then MPEG-2 standards, to create a viable DTS. It was developed by the major Japanese technology base for a successful disc-based and European consumer electronics home video format. companies and Time Warner. Before its The first digital format to be evaluated launch, there were two proposals, MMCD was Video CD (VCD), but the MPEG-1 from and Sony, and SD developed compression used for VCD provided neither primarily by Toshiba and Warner. the picture quality nor the single-disc storage Following several weeks of frenzied capacity the studios demanded for an average negotiations and an 11th-hour summit in late two-hour movie. Furthermore, it did not 1995 between the two competing groups, offer the anti-piracy protection considered they agreed to merge into a single format essential by Hollywood. Despite these which essentially took all elements of concerns, VCD was rapidly adopted for home Toshiba/Time Warner's SD format except video throughout much of Asia. By 2000 the modulation coding scheme (EFM Plus), there was an installed base of 50m VCD which was taken from Sony/Philips' MMCD players across the Asia Pacific region proposal. The latter decision meant that the (although the format was never adopted in capacity of a single-sided single-layer disc was Japan) and local software needs were being reduced from 5.0 GB in the SD proposal to enthusiastically met by local distributors and 4.7 GB, but members of the SD Alliance pirates. Faced with a de facto market, most agreed with the view of the computer studios began distributing their own titles on industry (and IBM in particular) that EFM VCD and by 2002 studios and independents Plus was more robust than the system between them were selling around 400m originally proposed by Toshiba. The legitimate VCD discs across Asia. However, compromise proposal made by Sony/Philips the format was still not considered suitable and accepted by the Toshiba group effectively for Western markets. Super Video CD, which reduced future patent revenue streams for the was developed for the Chinese market, partnership of Sony and Philips, which had offered video quality approaching DVD, but grossed $500m from licensing their existing the storage capacity was much less meaning CD patents in 1995 alone, although the pair also held the patents for EFM modulation. Figure 3.3: DVD sales 1997-2005 Less than a year later, after some more months of wrangling over details such as 2,500 Rest of World copy protection, the first players went on sale Japan in Japan. 2,000 A single layer DVD disc can hold up to Europe 135 minutes of high quality PAL or NTSC North America video plus up to three audio 1,500 channels, and multiple language . DVD also offered a limited graphics

units () 1,000 capability for menus and plus navigation and interactivity. The features, some of which were rather hurriedly defined 500 and developed, combined with a promotion and marketing campaign that united hardware 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 manufacturers, content providers and the computer industry in an unprecedented way, Source: Screen Digest

www.screendigest.com 23 5 Protecting video content

Background the wisdom of leveraging the value of their From the first days of consumer VCR sales content libraries rather than petitioning the in the mid-70s, the major Hollywood studios courts to win concessions from hardware complained that consumers would use them manufacturers. to copy movies broadcast by TV and At the top of that target list of therefore unfairly depress their revenues. In concessions was content protection, and in November 1976, less than a year after Sony recent years the studios have won that battle introduced its format VCRs in the more than they’ve lost. US, Universal Studios as lead plaintiff on In the late 1980s, a Silicon Valley behalf of other studios sued in the US technology startup, Macrovision Inc, Federal District Court in an attempt to halt developed a means to prevent consumers sales by claiming the devices infringed on copying from prerecorded VHS to a blank held on broadcast VHS tape. This analogue system modified the programming. The now-famous ‘Betamax video output from VCRs playing prerecorded Case’ held the entire home video industry’s tapes in such a way that would not affect the future in limbo until the US Supreme Court display on a TV, but would seriously distort in January 1984 reversed an Appeals Court images on copies made from the prerecorded ruling in favour of the studios and cemented tape. The studios quickly began applying the legality of home video taping. Macrovision analogue copy protection to Ultimately, both sides won. Within two their preprecorded VHS releases and virtually years of the ruling, VCR penetration had all VHS VCR makers similarly built surpassed 50 per cent in the US and studio Macrovision copy protection circuitry into revenues from home video ultimately their VCRs. exceeded theatrical box office revenues. But The DVD Forum’s specifications the disputes over content protection and include Macrovision’s Analogue Protection copying have outlasted the transition from System (APS) copy protection for the analogue to and continue to this analogue outputs of DVD players. Digital day. set-top box makers who distribute boxes in The Betamax court battle—and the the US and many other international markets aftermath -- was an object lesson for both similarly include Macrovision protection for sides—one that framed relations between the analogue outputs on their devices. them as they negotiated the details of the Macrovision’s system, in fact, is the only copy initial DVD format specifications. Consumer protection technology ever written into US electronics manufacturers learned the value of federal law—which, unlike home recording bringing the studios into format discussions policy in EU countries, has in recent years from the beginning, and the studios realised taken an increasingly hard line on consumer www.screendigest.com 43 6 Supporting Blu-ray and HD DVD

In horse racing, backing the winner is crucial. intellectual property, including patents on Much the same can be said about BD and CDs and CD-ROMs. Philips has realised that HD DVD as there is a lot of money at stake, licensing represents potentially a more particularly for the developers, who have important source of revenue than the invested a lot of money, time, effort – and hardware products that it has manufactured corporate pride – in their chosen format. for decades. And Philips is not the only Content owners and hardware manufacturers consumer electronics company for which need to choose the correct format to avoid licensing revenue can mean the difference throwing money away on the wrong one – between profit and loss from one year to the and missing out on the revenue flowing from next. the winning format. Disc replicators similarly By the early 1990s, Philips and its have to invest in equipment and they need to competitors realised that a new format was invest wisely. Finally consumers will be wary needed if CD's success with music was to be of investing in a format that does not have a repeated for video. The home video market future. was too important for hardware This chapter addresses the important manufacturers and the potential patent issues in assessing which format might win revenues could not be ignored. The result was including licensing, the reasons for success, the pre-DVD pitting Philips and the organisations promoting each format and Sony against Toshiba, Time Warner, the supporters in each of the industries. Matsushita and others. In fact, Toshiba and Time Warner had Licensing approached Philips and Sony in 1992 and The developers of the winning format can proposed the joint development of a gain, not only by selling products, but also system. It is believed that Philips from patent royalties on hardware and discs. signed a Memorandum of Understanding to In the 1960s when Philips launched the co-develop such a technology. However, in compact cassette, it achieved universal 1994 Philips and Sony came forward with a acceptance by offering it to the consumer rival system called MMCD. There followed a free of any license fee. protracted struggle with Philips/Sony seeking But when Philips and Sony launched the supporters for the MMCD format, while they demanded license fees Toshiba/Time Warner did the same for the from all participants. This did not prevent the rival SD format. It was not until summer CD becoming the de facto format for music 1995 that a compromise agreement on a and set a precedent. single DVD format was agreed and later that Since then Philips, for example, has year the DVD Forum came into being to earned billions of dollars from licensing its manage the progress of the system. www.screendigest.com 57