Thursday, September 18, 2008

E-commerce and Video Distribution:
DVD and Blu-ray

By Ricardo Blanco


Welcome to E-commerce and Video distribution, a series of blogs that will serve to inform and foster discussion of the various methods, platforms and issues regarding the impact that e-commerce has had on physical, online download and streaming video media distribution. In this initial installment we will discuss the various mediums for physical video distribution (at a non technical level) and how the internet and e-commerce have been embraced to optimize video media distribution.

E-commerce has proven to be an effective and ever growing means for distribution of video content. According to a report of internet search and online shopping habits, released by iCrossing in 2007, 39% of online American adults make online purchases, a strong indication that online shopping has become an ingrained activity of the American Consumer. More importantly for the topic of this blog, of this increased shopping activity, DVDs, books, and music continue to be the most widely purchased items online regardless of age, sex and income demographics (1).

DVD

The DVD is an optical disc storage media format, mainly used for video and data storage. Interestingly it has never been clearly established if DVD stands for Digital Versatile Disc or Digital Video Disc or neither. However later forums have indicated that Digital Versatile Disc is the true name. The popular use of the word typically refers to DVD video a movie on a shiny disk similar to a CD. The DVD has been touted by many sources to be the most successful product ever launched in American History. Barry McCarthy, CFO of Netflix, describes the DVD as the most successful product in the history of the US in amount of growth measured by the number of units owned in individual US homes. Perhaps as you stare at the stack of DVDs you may own (many of which you may have purchased online), you see the truth to this statement. Impressively the DVD only took 5 years to reach 50% entrance into US homes (2).

Why did the DVD attain such success? The DVD provided an open and standard platform for playback and production, meaning that every company could use the same standard in DVD manufacture and advertising. This early standardization is claimed by many to be the paramount reason for the rapid success of the DVD platform. If you recall, the costly VHS vs. BETAMAX and more recently the HD-DVD vs. Blu-ray DVD format wars were and will continue to be detrimental to the rapid progression and widespread availability of newer technologies. In 1993 two competitors emerged on the scene with new optical disk systems that both used the improved MPEG 2 compression. Sensing an on coming and problematic format war between the two optical disc formats developers that would become the DVD, computer industry experts representing many computer manufacturing companies, formed a rare consortium known as the Technical Working Group or TWG. The TWG threatened to boycott both of the competing format developers, pressuring them to develop a single storage and format design. Thus the standardized DVD platform was born (3).

As with distribution formats to come (Blu-ray and Digital download and streaming distribution), the DVD formats dominance was not complete; it lacked substantial content for distribution. The “Hollywood community,” who owned the rights to the movie content, was reluctant to release content to yet another format until they could be guaranteed that precautions were in place to battle against illegal piracy and loss of revenue. To address these hesitations a larger consortium of individual representatives from the motion picture, consumer electronics, recording and computer industries formed the Copy Protection Technology Working Group or CPTWG. In October of 1996 CPTWG agreed upon a scrambling system that eased concerns and by 1997 players and titles hit the US marketplace. Though some of Hollywood’s studios remained hesitant to adopt the DVD format, which limited the DVDs immediate success, they soon caught on and also benefited for the revolutionary boom in home video distribution. As we will see, regardless of these last studio hold outs the initial sales figures of the DVD format surpassed the success of the improved technologies of the next formats HD-DVD and Blu-ray DVD (4).

By 1997, mass retailer sales of DVD player and DVD video titles had begun. 1998 proved to be even more successful with the availability of approximately 2,500 titles and the sale of 23 million players. In addition to DVD sales the rental of DVDs begun by Blockbuster had by 2003, surpassed weekly VHS rentals. In many cases, revenue produced by DVD sales exceeded box office sales and thusly has become an extremely lucrative part of the industry, one which it fights to protect and extend Today. Aided by more affordable progressive scan players and cheaper title prices, DVDs remain the most dominant form of home video distribution worldwide (3,4).

E-commerce has revolutionized the distribution and advertisement of DVDs in a variety of ways. As mentioned earlier, DVDs account for a large part of the majority of online sales. Online retailers such as Amazon.com and others offer wide selections of new and used titles from a variety of sellers at competitive prices. Regardless of additional shipping prices, convenience, selection and competitive prices have made internet DVD sales an extremely successful enterprise. The internet has proven to be a cost effective and far reaching means for advertisement of video release and availability information that influence both online sales and traditional retailer sales. Many traditional large to small brick and mortar retailers have also made the most of the e-commerce boom. Offering most of their in store selections and additional inventory online with various shipping and in store pick up methods. The Internet has also provided mainstream and independent movie distributors the opportunity to distribute their content directly. The low overhead and broad accessibility that the internet and e-commerce provides have especially made it a viable distribution model for smaller independent producers and distributors.

In addition e-commerce has revolutionized the video rental industry. Netflix an online mail delivery DVD rental company is a prime example of this new success. Netflix boasts a catalog containing over 95,000 titles as well as a more limited catalog of titles available for online viewing. With this large inventory (one that traditional brick and mortar rental and retailers could scarcely spare the shelf space for), the company claims that 70% of its business is in back catalog movies, where as traditional stores rent as much as 90% new releases and provide a limited selection of back catalog movies. Their ability to provide an efficient way to search through their enormous catalog online (also a capability that most brick an mortar stores could not efficiently accommodate) and their innovative methods for linking people with videos they might like, are keys to their success and profound examples of the impact that the internet has on DVD and other video format distribution. McCarthy clearly feels that electronic video distribution is what is next for Netflix, providing a more efficient way to deliver media and a way to expand abroad in countries where postal infrastructure is lacking. The company has anticipated this shift in media distribution and invested early on in its development (2). They have also begun to distribute the next best physical video format, Blu-ray.

Blu-ray

DVDs successor, at least in the physical realm of video distribution, is the Blu-ray disc. Beginning in 1998 high definition television sets, which provide higher resolution images, became available on the consumer market. There however was no broadly available method to play or record high definition content. This changed with the utilization of blue lasers diodes, as opposed to red laser diodes used by DVDs. Blue lasers have a much shorter wavelength and allow for the storage of more data and larger video files on optical discs that share the same dimensions of DVDs and CDs. Two leading formats for this new technology would surface, and following a costly and stifling format war Blu-ray discs emerged victorious over their HD-DVD competition. Unfortunately, unlike the success in DVD format mediation, attempts to prevent the high definition format war proved to be futile as neither side was willing to sacrifice revenues produced by royalties (5,6).

Although HD DVD was the first to reach the market, they failed to gain a foothold in the marketplace. Several factors contributed to this. One such factor was the launch of Sony’s PlayStation 3 gaming console that used a Blu-ray disc drive. Another factor often cited is Blu-ray’s adoption of the BD+ anti-copying systems which drew many content rights holders to the format. By January of 2007 Blu-ray had outsold HD DVDs. A chain reaction of events, including the pullouts of content providers and nation wide retailers prompted Toshiba to cease production of HD DVD products in February of 2008, ending the high definition format war. With the format war ended all major movie studios embraced the Blu-ray technology (5,6).

This format war clearly hindered sales and acceptance of the high definition formats. It is apparent that consumers were unwilling to invest in a system that had an unclear future. Nielson Media Research and Adams Media research report that 16.3 million standard DVDs were sold in the first two years of release as compared to the 8.3 million combined Blu-ray and HD DVD sales in 2006 and 2007. Analysts also suggest that since high definition video can only be viewed on high definition television sets, the number of HDTV’s in households, 26.5million compared to 100million standard TV’s also influenced HD video sales. Additionally, many average people do not see as much of a difference between standard and high definition picture quality, at least when compared to the difference between VHS and standard DVD. On the bright side of things these analysts do suggest that since a single format has been settled on, Blu-ray sales will likely increase (7).

The new and improved Blu-ray format will likely have the same success as DVDs had in the e-commerce realm; particularly if prices of HDTVs and Blu-ray players as well as movie titles continue to decrease. Video rental companies have already embraced the newer format and if by only using their existing business models, both brick and mortar as well as online stores, could expect the same success. However as a late comer to the industry, Blu-ray technology is increasingly at risk of being overlooked due to the increasing availability and popularity of digital download and streaming distribution. Duncan Riley of Tech Crunch explains why this will not happen anytime soon. He says that old habits die hard, and although newer generation are now accustomed to digital downloads, a substantial number of generations are accustomed to physical formats. Though he does see an end to physical format preference, he feels it is at least 5 to 10 years away (8). Another factor that plays a role in physical videos preference, both DVD and Blu-ray, is the fact that many want to watch content on their television sets. The computer provides a personal viewing experience, while a larger television screen has more potential for a social interaction. One must also account for the substantial investments that persons have made in home theater systems of both high and standard definitions. There are alternatives that do allow downloaded and streaming content to be viewed on TV sets, however there are many alternatives and few share a standard format and once again we have lack of consumer confidence in a product that only works with certain content and has an uncertain futures. For these reasons Blu-ray will likely see continued success, however it could likely be the last major physical media format (8).

Conclusion

Most believe that electronic distribution will become a viable and mainstream option for media distribution and acquisition. However the amazing penetration that the DVD market (and likely the Blu-ray market) has had and continues to have in US households cannot be ignored. It is also very evident that the so called format wars have influenced consumer behavior as well as the rate at which victorious formats and resultant products penetrate the market. It is clear that regardless of format or medium, the power that the internet and e-commerce provide in capitalizing on the video distribution industry is immense. The success of online physical and digital video distribution is dependent on leadership and business models that absorb lessons in innovation, in letting the marketplace determine what works and doesn’t work as well as what it wants. The ability to incorporate, anticipate and fearlessly confront technological change in an ever changing industry is essential to the survival of a video distribution company.

Thank you for reading this initial installment of the E-commerce and Video Distribution blog series. I hope that it has been an enjoyable experience and that it has informed and fostered some points for discussion. Please feel free to comment and provide additional or updated information, as your participation is crucial for the enlightenment of the author and the readership. Stay tuned to the next installment in the series that will discuss the e-commerce of digital downloads and streaming video distribution



References


(1). How America Searches: Online Retail Survey conducted by Opinion Research Corporation. report written by iCrossing September 2007. www.i crossing. Com
(2). Barry McCarthy, Chief Financial Officer of Netflix. Sunday, January 13, 2008. iinnovate, A Podcast by Students as Harvard’s Business and Design School.
http://iinnovate.blogspot.com/search/label/Media
(3). DVD From Wikipedia, the free encyclopedia:
http://en.wikipedia.org/wiki/Dvd
(4). Digital America. 2008. Consumer Electronics Association.
http://www.ce.org/Press/CEA_Pubs/929.asp
(5). Blu-ray Disc From Wikipedia, the free encyclopedia.
http://en.wikipedia.org/wiki/Blu-ray_Disc
(6). Format war From Wikipedia, the free encyclopedia.
http://en.wikipedia.org/wiki/Format_War
(7). High-Definition Sales Far Behind Standard DVD's First Two Years. February 20th, 2008. Movieweb.

http://www.movieweb.com/dvd/news/20/26720.php

8. Digital Downloads Are Not About To Kill Blu-Ray by Duncan Riley. Tech Crunch on February 17, 2008.
http://www.techcrunch.com/2008/02/17/digital-downloads-are-not-about-to-kill-blu-ray/

1 comment:

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