Pioneering next-generation discs

Building on its close partnership with the French cinema industry, QOL was Europe’s first independent replicator to manufacture high-definition DVDs. LAURENT VILLAUME, Founder and CEO, explains to JEAN-LUC RENAUD, DVD Intelligence publisher, the challenges and forward strategy.

How did you get involved in the DVD replication industry?

In the 1980s, I was a banker. In 1988, I financed a film Itinéraire d’un enfant gâté avec Jean-Paul Belmondo. That was my introduction to the world of cinema from behind-the-scene. I then became CFO of a VHS duplicator called Video Pouce. Two years later I was elected president of the professional association of replicators, part of the Fédération des Industries du Cinéma (FICA).

In 1995. I met Cinram founder and CEO Isidore Philosophe who asked me to expand the Canadian replicator’s operations to Europe. This is when I learnt a lot about European and North American management cultures as well as the way to meet studios’ demands.

During a trip to Los Angeles in 1999, I came to the realisation that, while the DVDs of the Hollywood studios would be produced by the large replicators like Cinram, Technicolor and Sony DADC, in Europe and in France in particular we have a rich indigenous cinema – 400 titles annually Europe-wide – which could be serviced by independent replicators as a different approach to publishers was required.

I set up QOL with sole objective to service the French cinema. I would not have been capable of producing blockbuster titles, but I thought it would be very useful to offer replications facilities to small to medium size producers less than 30 minutes drive from their offices and providing a fast turnaround for French titles. The large retails chains like FNAC or Virgin Megastore have always required a very fast response time from video publishers.

I thought these video publishers could find it handy to have a replicator who could respond quickly to their needs, all done naturally in the respect of rights holders, participating to the fight against piracy, delivering high quality products and ensuring close communication with clients.

The ultimate objective for QOL was to offer its French clientele the same Hollywood studios’ exacting requirements. This was going to be our Unique Selling Point.

We never wanted to move into other type of services such as the recordable, CD or games replication, activities about which we have no expertise. We focus exclusively on the manufacturing of DVD Video for the cinema.

What is QOL’s position in the French market?

QOL is the leader in DVD Video. Some 170,000 DVD per day, 170 employees, 24 hours a day, seven days a week, €23 million investment, €6 million in high definition.

About 60% of the market is controlled by the big replicators servicing their Hollywood clients. Of the 40% of the total market ‘available’ to independent replicators, QOL has a share of 60%.

What are the constraints QOL faces given its exclusive focus on DVD Video for the cinema?

Our passion for the cinema meant we needed to offer from the start a service of the highest calibre – a 5-star hotel! We do not operate in the “economy” class. Given that we have put all our eggs in the same basket, if Internet downloads and video on demand start to cannibalise the physical media, we would suffer greatly. So our strategy could be seen as risky.

But after seven years in operation, QOL has joined the league of top replicators in France – and we now eye a European role. Also, because the reputation we have earned with our publishing partners in the cinema industry, we have been able to make an early move into the next-generation DVDs, taking a leadership role, making early investment, learning fast. We are not a follower.

We want to ensure that QOL is a training ground to share our know-how, to become the preferred partner to French, but also European publishers, wanting to move into high definition whose traditional manufacturing partners may not have yet committed the heavy investment in HD machinery that we have made.

Why QOL does not offer DVD authoring services?

We have always maintained a clear distinction between creation and manufacturing. I had seen in the US that authoring houses, though located next door or even under the same roof as the replicators, are independent third-party facilities that are offering the full range of creative services in which they have invested. Essentially, this partnership works best when each stick to its core business. Though complementary, creation and manufacturing are different jobs.

Also, it is critical that the publisher keeps the flexibility to choose the authoring house that fits the specific needs of its individual titles, independently from its manufacturing partner.

The replicator has its own set of requirements to adhere to: fight against piracy, guarantee of service quality and quantity, and ethical considerations. At QOL, for example, we do not service the adult content market.

A publisher would also expect a replicator to anticipate its demands and needs particularly in peak time. QOL’s strengths are to meet clients’ requirement with ever shorter turnaround time. Reactivity is key in today’s business. Product tracking, packaging, storage, fulfilment must be second to none.

It took several years to build our reputation and win the confidence of major publishers like TF1, M6, Pathé, Editions Atlas, Europa Corp. My satisfaction is that we are able to bring the next-generation format to these partners without them asking how it works.

We are expanding our logistics facilities, notably the returns of unsold copies, recycling capabilities. We are about to set up websites for the online offering of unsold products.

Are you involved in games?

We will expand into games when the cinema will expand into games. Our strategy is to serve the cinema in whatever it does.

Why enter the high definition market, and why now?

We have always been passionate about high definition. There had been talks about HD back in 2002. QOL is atypical for two reasons: We are foremost a partner of the cinema, that is we are image-centered. It would have been utterly nonsensical not to be a HD precursor. It was a challenge for QOL which led us to invest over €6 million in the middle of 2005.

From start we did not invest in mastering. We told makers of mastering equipment that we will invest in tools when you will be in a position to sell us systems that allow us to produce standard DVDs as well as high definition DVDs, and in both HD DVD and Blu-ray if possible. Singulus contacted us in mid-2005 to jointly develop high definition mastering, being understood that each of us could loose quite a lot of money, about €1 million each.

So, we decided to share risks with Singulus for the mastering. We invested substantial sums in the entire production chain with testing machines from Dr. Schenk, dr.schwab and Datarius.

With machines in place, how did you drum up business in an uncharted territory?

We organises a presentation in March 2006 in a Paris hotel where we expected 50 industry executives. Some 175 turned up! Toshiba organise of a first demo.

The second event was to produce an HD DVD title 2046 in collaboration with Éclair lab, Sonic Solutions, Singulus and Toshiba, which we presented to the president of the Jury of last year’s Cannes Film festival who happens to be the film’s director Kar Wai Wong.

The third event was a trip to New York where we met top executives from MPEG LA, Microsoft, DTS, Amaray and Toshiba.

The partnerships we have struck with Toshiba, Microsoft, Memory-Tech, and others are bringing fruit in the shape of a closely-knit HD community where we share information, problems and solutions.

You have equipped QOL for HD DVD. How do you see the format war evolving?

We remain cool-headed because we do not know which of HD DVD or Blu-ray will win. At this early stage in the game, it is critical for us to be able to amortize the heavy investment in next-generation replication lines. HD DVD lines enable us to press standard DVDs as well, something we do for 80% of the time. A Blu-ray line, already more expensive than an HD DVD line, can only be used for Blu-ray discs. The risk is just not the same.

Also, Blu-ray disc’s larger capacity may not be such a unique selling point in Europe where most films would fit on a single-layer HD DVD. And expensively produced HD extras are unlikely to be a widespread feature of most titles.

We are committed to producing HD discs for any publishers who want it. Naturally, we want to meet demands for BD discs. But we need answers to key strategic questions. But we need to know if Sony will open up BD manufacturing to independent replicators in Europe.

So far, Sony DADC does not help us, does not give us the key to the format strategy, no information or training is provided. To date there is not even the possibility to invest in a dual-layer BD system.

Also, AACS is compulsory on Blu-ray, but optional on HD DVD. We are AACS registered, but we do not pass the cost of our AACS (expensive) license to publishers who do not wish to include the copy-protection system in their HD DVD title. That makes a difference for small to medium-size European publishers.

DVD royalties payment has been a bone of contention given the absence of a level playing field between independents and big groups. Any lessons for policing next-generation formats?

Today 50% of the DVDs are manufactured by replicators who do not pay licenses because they belong to groups that own patents like Thomson/Technicolor, Sony, Warner. The 50% of the manufacturers, generally smaller, who have to pay, these fees can represent up to 25% of the turnover. Furthermore, patents are not registered in all countries which can lead to unfair competition.

I just hope that the big groups who are now developing these new next-generations technologies draw lessons from the past. I would like to see a unified royalties system between HD DVD and Blu-ray that include, compression, audio and disc specs. I would not want to see a variety of bodies claiming different licenses like 3C, 6C, MPEG.

The costs of these licences should not be abusive. Patent specialists say that patents in France should not exceed 5% of a company turnover. We have suggested that the fees should not be fixed but ought to be proportional to the company turnover.

The price of the license should be unified and imposed on all the actors of the chain irrespective of whether the owners or the group to which they are linked. The cross-licensing model applied to DVD has had a devastating effect. And it could well be that the various ownerships of licenses are at the root of the next-generation format war.

What is the future of packaged media as you see it?

Back in 2002 Le Film Français trade magazine claimed that by 2006 DVD would kill the cinema. In fact, 2006 was a record year for box office receipts not seen for 18 years – 195 million cinemagoers. The conclusion is that both the cinema and the DVD cohabitate very well in the market as 140 million DVDs were sold in France last year.

So, there is no reason to think that the arrival of new delivery channels will spell the death of existing ones. In 1990, 25% of households bought videos. In 2002, the number reached 75%. Today, we consume much more images across media. New technologies enable us to consumer these images more flexibly, in the leaving-room, the bedroom, on the move, in car.

Looking at the cinema theatre, 35mm projectors are being slowly replaced by 2K or 4K digital projection system, turning the cinema into a multi-purpose theatre for various activities.

The transition from CRTs to flat screen displays in less than five years is astonishing. High definition will be the engine of growth, and also for physical media. I reckon QOL will likely make DVDs until 2015 and high definition DVDs until 2020. After, my engineers point to holographic discs.

How do you see QOL in 2010?

We want to export our HD know-how in Europe. We have created QOL Tech for this purpose, for R&D, for patentable copy-protection system.

We have already produce HD DVD for publishers in Italy, Germany and Russia. We are now engaged in a Europe-wide communication strategy.

If you were to relive QOL’s history what would you do differently?

I always prefer souvenirs to regrets....

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