PEVE 2008 Physical media not dead ... yet

Though the PEVE 2008 conference convened at the ancien régime Château de Fontainebleau replica, the sumptuous Cité universitaire internationale in Paris, the preoccupations of the 320+ delegates were very much turned to the future – the future of packaged media in a changing marketplace. JEAN-LUC RENAUD reports.

Now under the sole stewardship of Screen Digest, the conference remit was broadened to include, in addition to traditional topics on packaged media retailing, panels on digital delivery platforms, video games, manufacturing on demand and even 3D home entertainment.

It was fitting that it should be Ron Sanders, President of Warner Home Entertainment – the studio whose decision to join the Blu-ray camp triggered the series of events that led Toshiba to throw the HD DVD towel – to open the proceedings forcefully putting the case, with a battery of statistics, for why consumers will be breathing the Blu air sooner rather than later. Screen Digest forecasts 45 million standalone Blu-ray players and 25 million PlayStation3 consoles by 2012, translating into 40% of TVHHs in Europe.

To achieve this objective will require “converting PS3 owners into Blu-ray movie watchers,” says Sanders, in an interesting new strategic twist in the on-going debate on how to build the Blu-ray market. This is a tall order if one goes by some recent UK data showing that the number of BD movies purchased by PS3 console owners (the so-called attach rate), already below one copy per user, is falling with the arrival of a richer picking of PS3 games.

Sanders and fellow keynoter, Matt Brown, EVP International for Sony Pictures Home Entertainment, urged delegates from across the industry to capitalise on Blu-ray Disc’s ability to fill what the latter called the "HD content gap" – the fact that by 2012, Screen Digest data shows that 75 per cent of European HDTV households will still not be receiving HD broadcasts.

Kim Hansen, Product Area Manager for Denmark’s Co-op, warned that some BD products released so far were “very bad” and this will affect consumer perception. “Quality will be critical to get regular consumers jump to HD, past the early adopters. You need to explain to consumers why they have to pay €40-50 per BD title when regular DVDs can go for so little.” Hansen reckons it will take longer that the three years usually given by the optimists for Blu-ray to reach 40% of the market.

How long a Blu-ray movie will maintain its premium price and, the corollary, its perceived value, is a question that exercised the mind of many. It has a bearing on the publishers’ commitment to producing advanced, web-connected material, a key unique selling proposition of the BD format. It also has a bearing on independent replicators’ commitment to heavy investment in BD lines if margins drop quickly.

“My plea is to look carefully for what’s to be done to make it successful,” exhorts Frank Simonis, head of the Blu-ray Disc Association Europe, aware of the quality issue. “HD screens are penetrating the market fast. People are getting hungry for Blu-ray as the best source of high-definition content. The industry needs to make sure it can deliver this perfect quality,” or else consumers will re-appraise the BD value proposition.

Simonis reminds replicators they must be aware that, like DVD at the start, BD requires efforts to get up to speed, more steps are involved to deliver a perfect product. “Make sure the titles that come to market this Fall are best quality products. Planning must take place this quarter.”

The rapid fall in price of DVD is a worrying precedent. And a similar trend is unavoidable, delegates were told. The UK illustrates the worse case scenario, according to Lloyd Wigglesworth, former MD of the largest independent distributor Entertainment UK. There, some 30 million DVDs were sold under £3 and 50 million as free covermounts.

In the US, Wal-Mart prices BD titles at $20. In Europe, consumers will not expect to pay more than €20. It is a tough call for publishers.

“UK supermarkets have been selling blockbuster titles such as Casino Royale as loss leaders for £7. This undermines the 1-2 week “premium price buzz.” Can we stop them going on with this policy?” Wigglesworth laments.

David Stevens, VP International Marketing Europe for 20th Century-Fox Home Entertainment, thinks not. Price is a double-edged sword. If BD is too expensive, people will turn to something else, like games, or digital downloads. “Look at supply and demand, more SKUs went into the market than demand for it. Last year, 10,000 DVD SKUs were put into the market and it was a flat market. And that is on top of the 275,000 titles already there. There will price degradation. We cannot control the price, we have to live with it.”

Jim Taylor, Senior VP and GM Advanced Technology Group, Sonic Solutions, goes even further. “Price will erode even fast than with DVD. Partially because the studios benefited from the incredible growth of DVD and now it has plateaued. They need something to replace that. Such is the pressure to maintain revenue that any temptation to lower prices to improve market penetration will be hard to resist. And this includes letting retailers use BD discs as loss leaders.”

A recurring theme was the need for the industry to ramp up BD replication capacity fast enough to meet such a potential increase in demand. The onus rests with independent replicators. So far only Germany’s Infodisc, France’s QOL and Laser Video in Russia have committed the large investment needed to install BD50 lines.

Given that Sony DADC dominates – less generous observers said monopolises – Blu-ray disc replication in Europe, it takes some courage for smaller players to commit the huge investment required, not knowing how fast Blu-ray will develop and how long BD discs will maintain their premium price.

It was left to Michael Gutowski, MD of Infodisc – sadly the lone European voice on the grand panel on the future of the high definition format – to tackle this issue. He recalled that, at the start of DVD, Warner manufacturing arm WAMO, created an affiliate systems for DVD production. “They decided to manufacture only 60% in house and offload 40% to the affiliate partners who got certain territories. It was nice. 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 gives would-be early replicators a greater stake in the industry.”

Gutowski also addressed the high cost of AACS copy protection – a recurring concern amongst smaller, independent industry players. The compulsory AACS license costs $25,000 plus a $1,400 certificate per title.

“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. It’s very difficult to understand why I have to employ two American layers, one in New York, the other in Los Angeles, to sort out a 105-page AACS contract,” Gutowski complains. He reckons there is no need for every catalogue title to have a new AACS key. He is calling for a single fee for one European language only to pay.

The BDA is aware of the issues occurring in Europe. Simonis said a letter was sent to AACS “to be supportive and cater for smaller territories than the US and to address the many European languages. It should be more market responsive, customer driven.”

Some of these concerns were alleviated by a timely statement emailed by the AACS office to the conference organisers.

“We are very aware of the concern expressed with the application of AACS technology to Blu-ray especially for the smaller content owner in Europe and the replicators who work with them. We know the existing arrangement is perceived as cost prohibitive by some. We have already taken several steps to address these concerns related to cost.

From the beginning we have a special content owner category designed with the smaller studios in mind: Basic Content Provider category. While the full-blown content participation agreement carries a $40,000 annual fee, the Basic Content provider category carries only a one-time fee of $3,000. This represents a huge saving over what large studios pay. For the replicators and authoring houses, the annual fees of $15,000 is much less than the $25,000 base fee paid by device manufacturers. We purposefully try to make the AACS technology financially accessible by smaller studios and replicators knowing that content is what drive new technologies such as Blu-ray.

Our content certificate price has been reduced over the past 18 months due to our on-going effort to identify cost-saving efficiencies in our processes, and we are currently taking further actions which we are optimistic will result in our ability to significantly reduce the price later this year.”

The perennial online-vs-physical delivery debate seems to have entered a more serene phase, owing principally to the recognition – by the online prophets – that packaged media is still an enormous business – $70 billion worldwide, servicing an installed base of 1.3 billion DVD playback devices – and that online digital delivery revenues are still minuscule. Screen Digest forecasts that they will account for just four per cent of movie spending in the US and Europe by 2012.

Sonic’s Taylor reckons that, while inexorably heading thist way, delivering high-definition content without physical media “might still be 20 years into the future.” There is not yet consumer-friendly methods of delivering quality content over the internet on a on-demand basis “unless you are not very demanding,” Taylor quips. Internet speed, price of blank BD disc, burning time, DRM constraints, cross-device standards, all conjure up to make a physical-free entertainment world far off the horizon.

Simon Calver, CEO of LoveFilm International, sounded a note of warning as he reminded delegates that "free is the price point people want to pay online" and stressed that in the intensely competitive digital delivery space heavyweight consumer brands will have a substantial advantage.

It is a time of experimentation. Recent moves to include 'digital copy' (also known as 'second session') electronic movie files on DVDs were welcomed as introducing traditional DVD buyers to an easy – and, crucially, legal - way to access digital content. The continuing fragmentation of the digital marketplace remains a barrier to progress, although the increasing willingness of the Hollywood studios to experiment with different business models is a positive development.

“BD will replace DVD. It will be the last mainstream physical delivery format,” forecasts Taylor....

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