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DVD's Decline pt.1

The Hollywood studios created a small storm in a glass of water with this, but by moving the way they did the storm became huge, and has already swallowed up Blockbuster.

The decline in DVD that saw me get laid off from my previous job in the DVD post-production chain is due to many factors but all of the factors were foreseen. None were a surprise and none could have been for-stalled. But in a good example of a communal pool where nobody has the incentive to help everybody, (that sounds rather reminiscent of Green Market's theory of the communal fishing pond) the individual incentives ended up hurting everybody. In Green Market's example a pond's fish stock is failing. It would be advantageous to all the boats in the area to reduce their catch for a few years and let the stock rebound less the fish stock could collapse. But lacking rather enlightened fisherman or regulation you don't get that. What you get is that as the individual's boat's catch reduces they make more and more fishing trips in order to maintain their cash flow, which further over fishes the pond. In Green Markets, they contrast this with a pond that is whole owned by one fisherman. When owned by one player then there is no question that it's better for the fisherman to fish sustainably rather than make the fishery collapse, but when you have a market with many players, you may get the opposite. (Of course this is theory only, because even if the pond was owned by one fisherman it could be exploited for short-term gain and collapsed anyway. There is also a time frame issue at hand too.)

While in Green Markets the this is presented as the "failure of the commons" for the pond is owned "collectively" and there is a theory (not supported by the book but explained) that to preserve nature it should be whole owned by corporations rather than communally; the DVD market's decline tracks this "failure of the commons" without any physical communal property.

The DVD market collapse has many players. The first disaster was the format war for DVD's High-definition's successor. This happened because Sony came out with the competing format "Blu-ray" while the DVD consortium (the people that created the original DVD) came out with HD-DVD mostly lead by Toshiba. Here the "communal" property is the shared licensing of the format. Very quickly you see there are some key players in this: Sony, Microsoft, Apple, the Studios, Toshiba (and other hardware makers) and Netflix.

The HD format war was very costly in two sides: time and people. First as companies tried to supply both formats they had duplicate groups working on competing formats. The video, audio, programing and manufacture were all different in this formats so you needed two of everything. But the major cost of it was the time, and time is really what caused the greatest damage. Because this allowed Netflix, Amazon and Apple to push forward digital delivery.

But let me talk a little about some of the players first.

Sony, of course, came out with the competing format Blu-Ray. But this was no surprise. Sony didn't join the DVD consortium this time around. It had already come out with High-Capacity Blu-Ray data discs and any body could see that they were going to come out with a format for high definition movies. It was perfectly positioned to capitalize on it's strengths to control the format this time around as opposed to the Beta days. First it was coming out with a high-definition successor to the wildly successful PlayStation2 (which was my first stand-alone DVD player) that could push this format. Second it owned a studio, so not only did it play from the hardware side but also from the content-provider side. However, Sony wasn't a golden boy. It's Sony Stores where ghost-towns compared to the Apple Stores, it had lost all it's thunder in portable music to Apple -- it had backed "MiniDisk" as the successor to the walk-man but made it near useless by blocking recordings on it, then was the PSP, the Playstation Portable. The PSP provided a coming attractions of what the format war was going to be about.

Microsoft was coming out with the PS3's competition: the Xbox 360 and was in my opinion the company that assured Sony's winning of the format war. Microsoft came out with the 360 well ahead of Sony's system with a cheaper system that looked good and had good games. It had the lead. It then produced a Toshiba-made HD-DVD player for the Xbox 360, but Microsoft also sold the software used to make the HD-DVDs so if the format won it would have made some serious money in software sales. And this was Microsoft's battle to loose and they lost it thoroughly. The first DVD player I ever used was in a computer. Microsoft's portable HD-DVD player could be hooked up to a PC. The Xbox 360, was a year ahead of the PS3 competition. The positioning was perfect. But the execution was in typical Microsoft style. Here is what they did. They put out the HD-DVD add-on as a just in case addition priced originally at $200, contrast that with the recently released "Kinnect" at $150. Why was it so expensive? Because they wanted to monetize it. That's economics talk for setting the price at the highest point where you make the most money even if you sell less units you sell them at a higher profit. So it was positioned to be a money maker not a market maker. Very dumb. Then they decided to not make HD-DVD the official format for delivering games. Today many programmers who love coding for the xbox360 hate the compacting required to make games fit on DVDs where on the PS3 they have room enough for what they need. Again not very smart move. But by far the dumbest move was not providing a free HD-DVD player for windows, immediately and free of charge. Considering that they already made the encoders for the video and the muxer (the program that integrates audio, video and subtitles into one single stream) making a software decoder was a weekend project that all that needed was some money for licensing be made available. Third-party players were available for around $100 dollars. So Microsoft sold the encoding software to companies for HD-DVD and content with the money it did there, did nothing to push the system. Granted Microsoft was a side player in the format wars, but it's competitor Sony was not.

Now imagine how different things would have been if Microsoft would have offered the add-on for free. Yes free to everybody that had a xbox360 already, through a rebate. Buy it for $200 we'll give you say $150 in check back and $50 in Microsoft points. That would have given the format a huge push. Imagine if you could just hook it up to any windows box and watch HD-DVD movies on your HD computer monitor. Then what if the xbox360 had adopted the HD-DVD as the official inside the box drive. All those RPGs could have audio in all languages, cinematics could play forever, and nobody would be upset they bough early because they can get a portable drive that does the same thing for essentially free and can use it with their windows computer as well. This could have been the avalanche needed to win before Sony's Juggernaut the PS3 came out. But Microsoft saw no incentive in this. They own no movie studios, they were making good money from the xbox360, why risk it? The result: I bought my HD-DVD portable player for $30 after HD-DVD format was killed. Essentially they ended up giving them away for free anyway.

Sometimes I wonder if Microsoft requires a certain amount of aloofness to work for them in management. Who knows.

In part 2 I'll show how Sony won the war too late to matter, and how the release of the PSP video disks should have been a warning to the whole industry not to do the same thing with the HD formats.

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