The Independent Way

Infodisc was the first independent replicator to take the plunge into Blu-ray. MICHAEL GUTOWSKI, the company’s CEO, tells JEAN-LUC RENAUD, DVD Intelligence publisher, the challenges he faces forging ahead in a marketplace yet to guarantee a level-playing field.

When did you get into the replication business?

I had worked for Rank Video Services (that became Deluxe), which was concentrating on VHS. My first job was to install a quality management system. After near a year when the project was finished, they asked me to take over responsibility for materials management, then production, then customer services. At the end I oversaw complete operations.

At the end of 1998, there was the first demand coming out of the US for DVD packaging in Europe. At the time Warner Advanced Media Operations (WAMO) had all the studio customers under contract as the only company able to produce DVDs. Together with their sister company Warner Music Manufacturer Europe (WMME) they could not supply enough packaging capacity for the increasing demand.

So, in January 1999 Deluxe set up DVD packaging operations and a month later we hand packed the first release. After three months I was asked if I wanted to do it myself. WAMO had an affiliate in Taiwan called Infodisc, handling most of their offload work. Infodisc wanted to expand into Europe and needed a European point man. A few conference calls later, between WAMO, Infodisc and myself, Infodisc Germany was founded in October 1999 as a packaging and distribution company to serve the needs of Hollywood studios in Europe. Six weeks later we were fully operational. In January 2000, we handled the European DVD needs of 20th Century Fox.

To make a long story short, through a management buy-out in 2004, I took over Infodisc’s German operations. It is since a separate and completely independent company.

When did you start replicating?

In 2003. After a few years of successful packaging, we noticed that it was no longer a business model that would work for us as prices fell sharply. Customers demanded ever faster turnaround so we needed to start production on our premises. We installed four DVD lines.

Fulfillment turnaround time seems to be the most important factor for customers these days?

Absolutely. That is the reason why Far East replicators cannot service the European market any longer. The price of DVD is so low there is no room for transportation costs. Air freight would be the way to meet the demand for short turnaround time. This is out of the question on economic grounds. Asia is no longer a competition to European replicators.

When you entered DVD replication in 2004, prices were already quite low. How do you position Infodisc as a smaller independent replicator in this market?

Owing to our relations with the studios and other replicators we were always the first port of call for offload work. We have always been working for Cinram, Technicolor, Sony and Sonopress. We are too small to win big international accounts, but we are the right size to serve individual territories or to help out when help is needed. Our capacity is 150,000 DVDs a day. We are small enough not to be seen as their competitors. We are seen as an ideal strategic partner.

Does this model still work well?

Yes, but now the strategy of the big replicators is to install more in-house capacity rather than off-loading to third party.

You are the first independent replicator to move into Blu-ray. Wasn’t it risky?

We already wanted to start Blu-ray back in 2006. We thought that BD would be the winning format and it would be good for us to be the first to offer this format to the market.

Why do you think BD was going to win?

We had Philips as a customer for many years and they supported the format. Also, the group of supporting companies around Sony looked to us much stronger than a single company like Toshiba, albeit a giant player. We did install HD DVD capacity because we are a service provider and produced in total a couple hundred thousand HD DVD discs.

More important, HD DVD was just too easy to replicate. With decreasing demand for DVD, there is huge overcapacity in Europe. DVD lines can easily and relatively inexpensively be upgraded to HD DVD. It would not have triggered the consolidation and diversification the market needs. Prices are already so low. We are too small to be in the sharks’ basket. We need to find our niche and we think that high definition could be our niche for the future. There is a barrier to entry into BD, which keep competitors at bay. HD DVD only required investment of 150,000 Euro (to upgrade existing DVD lines), that’s too easy.

In September last year, when equipment became available, we installed a Blu-ray line.

How confident were you that the market would develop in such a way that a move into BD would not be too risky?

It was my personal feeling. Someone told me I am either the greatest visionary or under the influence of an illegal substance when I took this decision. In truth, there were not too many choices for us, given the size of our company. You either gamble the whole company’s future or you don’t, but not gambling is also a huge risk.

How do you go about educating your customers on the fact that BD is more expensive than DVD?

Promotion is pretty much done by Sony and the Blu-ray Disc Association. We started educating those customers that put the first order about the nitty-gritty of the format.

All the independent publishers are testing the waters, looking at their catalogue, identifying one or two titles to bring into BD. They are also finding out who might be their potential partners, who will do the authoring, etc.

Though we had already expected it last year, this year’s Christmas will define the success of the format.

One-stop-shop seems to be the new business model for replicators. Are you expanding the range of services you offer your customers?

Yes. We have been offering packaging, printing, warehousing and distribution services to our customers worldwide from the start. We can now offer the full range of authoring services for standard- and high-definition (Blu-ray) via our sister company Infomedia, located in Dortmund, that we founded in April of this year. It enable us to customised all-in-one service offerings to fit our customers’ budget.

Do you see BD eventually replacing completely DVD?

No, it won’t replace DVD completely. It will take a significant share of the DVD market and will add its own layer on top. The gap will be fulfilled with DVD and the growth will be coming from BD.

Do you think the price erosion of BD will be faster than that of DVD and what will be the implication on the economics of BD manufacturing?

I expect good prices for the next 12 months, then I expect OK prices for the next 24 months, then it’s very hard to predict what will happen in a longer time frame.

You have installed a second BD line, now fully operational. Can you keep up with demand?

As far as the BD25 line is concerned, we notice an increasing demand, but we do not yet run the line every day. Much more volume is needed to run it successfully. As for the dual-layer BD50 line, due to the huge studio demand for the format, we expect to be busy with offload and direct orders up to the end of the season.

Is BD25 the format of choice for independent publishers? How do you see the market split with BD50?

The major studios tell us that if you want to release a BD in the same quality and the same content as on DVD, you need more than 25GB. If that is true, it’s also true for the independents.

The price difference between BD25 and BD50 is roughly 50 centimes per disc. The price for BD 25 is around €3 or less for 1,000 units, and in the region of €1.20-1.50 for larger quantities. We have not yet received orders over 20,000 units.

Your market is dominated by Sony DADC that controls most of the BD levers. They offer special all-in-one introductory deals to publishers. How do you compete with them?

They are in a tricky situation. They had to fight against another company to win the format war. They had to be competitive in terms of pricing and turnaround service offered to the customers. They had to fill the capacity demand of all the big customers in the world. You can understand they had to be aggressive using promotional tools.

However, we are now at the stage where the market is defined, the war is won, other companies are operational, like us. There is no longer any need to give incentives to anybody. Now, everybody that has stepped in the BD market needs to have enough to make a living. Time has come to operate on a level playing field.

Infodisc will never be in a position to fight a giant, it can only hurt. To put it bluntly, we are all very much dependent on Sony. We can fight competition in our league, but can never compete with Sony. They will always have a built-in advantage and they will always win. Full stop.

At the start of DVD, Warner’s manufacturing arm WAMO, created a worldwide affiliate systems for DVD production. They decided to manufacture only 60% in house and offload 40% to the affiliate partners who got certain territories and defined offload. At the end of the 90s it was the most successful story to tell to promote the format. Maybe it would be worth having a few thoughts on a system like that for Blu-ray which would give early replicators a greater stake in the industry.

If analysts are right in announcing a sharp demand and Sony wants us to step in, then we should have a good year. If, that’s just talking and the reality looks like they are running around and grabbing everything they can, taking away customers from independent replicators with massive reduction or subsidies, then it’s a different story. Not only the smaller companies will die, but the format will die. So, I think they have a huge responsibility right now.

In my opinion Sony will need to step back from the independents’ market. They should stick to the big studios and leave smaller publishers for independents. But, it looks like that may not happen. Sony is not only expanding massively their capacity at their Austrian plant, but also at their facilities in the US and Japan.
I want a level playing field, no more subsidies, no more benefits in kind. I am all for competition, but it has to be fair competition.

You are critical of the current AACS fee structure.

The system was obviously designed for Hollywood studios with massive pressing volumes. Smaller publishers account for a very significant share of the market in Europe, volumes are considerably smaller. At $3,000 a license plus $1,400 per content certificate per title, the existing compulsory AACS fee structure is a burden for independents publishers and, at $15,000 a AACS licence for replicators like ourselves, a potential obstacle to the market take-up of the format.

I am pro-content protection. But if a test disc has glitches and needs to be redone, you have to pay the fees again. It cannot be right.

For new release, AACS copy protection is a must, but for catalogue titles, it should not be necessary to include AACS for films which have been released in a dozen of formats already. You should pay one fee for your catalogue, perhaps more expensive, but not for each titles. There should be a catalogue license. If a title is older than 12 months it become covered under a single catalogue fee.

It does not seem to be conceivable for AACS to become optional. To my knowledge, none of the BD players on the market would playback non-encrypted discs.

Do you see competition from Chinese manufacturers on the horizon?

With BD50 at premium price, there is enough margin to justify air freight. Large facilities in the Far East, India, China could enter the market as they are linked to the US dollar, not the Euro. They are already offering BD discs at stupid rates. The strong Euro compared to the dollars is killing our overseas customer base.

What is your take on the trend toward green, eco-friendly products?

The politically correct answer is of course that it’s very important and we will do our utmost to preserve the environment. There is no question, we need to protect what we have because some of the natural resources are not renewable. We need to be very responsible corporate citizens.But on the business side, there is to be a level playing field. in Germany we have to work to the highest environmental standard under strict laws, which is fine, but which puts us to a disadvantage if you compete with products from China, for example, where you can do pretty much whatever you want with the environment.

As long as everyone plays by the same rules, that’s fine, but if we are put at a business disadvantage, there is something wrong with it.

Where do you see yourself in 5 years time?

To establish and expand Infodisc´s position in BD. Packaged media will still be around and BD will have the majority share of it. We will see a few generations of BD. I can even see BD100 coming around. But BD will be the last physical format. In five years the market will have reached maturity. By that time, we will have a close look at VOD and downloading.

On a personal level, l hopefully with have improved my golf handicap!
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