The Hollywood Economist

The Next Big Thing

Sony’s Blu-Ray DVD.

If you want a glimpse of Hollywood’s near future, you need only watch a single scene in David Lean’s Lawrence of Arabia on the split screen at the ground-floor showroom of Sony’s New York headquarters. On the 70-inch TV, you see swarms of Arab camel-riders racing across the blazing desert. On the screen’s left half, the Arabs are so blurred together that they can hardly be distinguished from the swirling sands. When they cross over to the screen’s right half—presto!—they pop into such sharp focus that their facial features are recognizable. It’s the same screen and the same Lawrence of Arabia. The difference is that the source for the left half of the screen is a conventional DVD, and the source for the right half is a Blu-Ray DVD, which, although identical in size and shape to the conventional DVD, holds at least five times as many color pixels, or picture elements.

The left half of the screen is composed from approximately 87,000 color pixels—the maximum that a conventional DVD can hold—while the right half is composed from more than 490,000 color pixels. The 400,000 or so additional color pixels, by providing more details, nuance, and depth, create a high-definition picture. The Blu-Ray DVD is able to display these additional pixels because it employs a blue laser—hence its name—that has a smaller beam spot than the standard red laser and can distinguish between more densely packed data on a disc. In fact, the blue ray can read as many as eight wafer-thin layers—the top layer being only one-tenth of a millimeter—which can contain 20 times as much data as even a dual-layer conventional DVD. Such massive storage—up to 200 gigabytes—provides an almost endless capacity for add-ons by home audiences. For example, with a touch of his remote, a viewer could go from watching an action movieto participating in an interactive game based on the movie, or he could switch to a 3-D version of a particular scene. Sony and its rivals plan to have Blu-Ray DVDs available in less than a year. So, in the near future, the weekly audience that goes to movie houses will have another option: staying at home and watching a high-definition movie with interactive features that is more or less equal in picture quality to what they would see at the multiplex.

If history is any guide, changes in technology that make entertainment more convenient make a difference in the way it is experienced. The advent of mass television, for example, came very close to killing the movie business, cutting the average weekly moviegoing audience from 90 million in 1948 to 20 million in 1966. Once Americans had color TVs, some 70 million people a week stopped going to movie theaters, forcing Hollywood to revive the movie audience with massively expensive television advertising. Videos and DVDs—and the ability to churn out pirated copies of them—have wiped out most of the movie theaters in large parts of Asia and Eastern Europe. So, what effect does Sony expect that its new Blu-Ray DVD will have on what remains of the moviegoing audience? To find out, I proceeded from the ground-floor showroom to the 34th-floor executive suite and put the question to Sir Howard Stringer, the British-born—and first non-Japanese—chairman of Sony.

Sony’s fabled success story began more than half a century ago, in 1946, in a bombed-out basement in Tokyo. Akio Morita and Masaru Ibuka started the company (originally named Tokyo Tsushin) with the intention of manufacturing necessities, such as rice cookers and space heaters, for the war-ravaged population of Japan, but they quickly found an export market in America for consumer electronics. They went on to introduce a string of remarkably inventive entertainment products—including the CD. Along the way, Sony also bought a number of American companies to get content for these products, including CBS Records (now Sony Music), the Columbia TriStar studio (now Sony Pictures Entertainment), and, most recently, MGM.

Even though Sony helped bring about the digital revolution, the company has failed to adapt to it. The standardization required to manufacture consumer digital products undercut the value of Sony’s branded products. For example, the Chinese and other low-labor-cost manufacturers, using the same computer chips, could make the same DVD players and digital TV sets as Sony for a fraction of the cost. The result was a commoditized rat race that became unprofitable for Sony. When it became clear that Sony had to “revolutionize itself,” as Sony’s previous chairman Nobuyuki Idei termed it, the revolution involved transforming Sony from a company that had focused on engineering proprietary products, such as the Trinitron color television set, the Betamax VCR, and the Walkman, into one that could capitalize on—and protect from piracy—the streams of digital data that would include games, movies, music, and other intellectual property. When Sir Howard assumed the leadership of Sony this year, part of his mandate was to move the company, as he put it, “from an analog culture to a digital culture.”

The Blu-Ray DVD is a critical piece of this strategy. As I learned in Tokyo, its multiple layers not only can store vast amounts of digital data, they can also be used to record data downloaded from the Internet. For example, after buying the Blu-Ray DVD for Spider-Man 3, a consumer could then add on a game, music video, or a prior sequel from Sony’s Web site. When I asked Sir Howard if there was concern that the Blu-Ray DVD would result in a further eroding of the world moviegoing audience, he answered that it was “a chicken-and-egg problem.” The “chicken” was theatrical movies; the “egg” the DVD (plus television and licensing rights). Sir Howard, who is also chairman of the American Film Institute, pointed out that it would be difficult to conceive of great movies, such as Lawrence of Arabia, being made without a movie theater audience to establish them; the dilemma is that it’s the “egg” not the “chicken” upon which the studios increasingly depend for their money.

So, even while trying to avoid fatally injuring the chicken—movies—Sir Howard said that studios are under increasing pressure to “optimize” their profits from the proverbial golden egg, the home audience. Indeed, the Blu-Ray DVD make this balancing act more difficult: With its interactive features, it appeals to the very teenage audiences on whom the multiplexes now so heavily depend. It’s also a vital part of Sony’s latest version of its PlayStation, due to be released next year. The prior versions of PlayStation have sold more than 100 million units and have provided the Sony Corporation with up to 40 percent of its profits. PlayStation 3, while it may sound like a child’s toy, is in fact an incredibly powerful computer, exceeding in its processing power IBM’s famed Deep Blue. The Playstation 3 can play high-definition movies and super-realistic interactive games and surf the Internet, providing a gateway for further digital consumption. In addition, the Blu-Ray will allow Sony to reissue its movie titles in high definition. In fact, part of the stated justification for acquiring MGM was the profits to be realized from reissuing the 4,100 films in MGM’s library in the Blu-Ray format.

At some point, Sony has to overcome a competing high-definition format, HD-DVD, sponsored by its traditional rival, Toshiba. HD-DVD, like the Blu-Ray, uses a blue laser optical reader and renders an equivalent high-definition picture. The principal difference is that Toshiba designed the HD-DVD so that discs can be stamped out by existing DVD manufacturing equipment (which unfortunately is also owned by video pirates). That design makes it less expensive to implement, but the HD-DVD lacks the recordable multilayers or massive storage space for interactive features of the Blu-Ray.

While Sir Howard preferred not to speculate on the outcome of this potential format war, I predict that the Blu-Ray will prevail for three reasons. First, Sony has a critical mass of movies that it can release on Blu-Ray. Aside from its own titles, Disney, 20th Century Fox, and Lions Gate have agreed to release their titles on Blu-Ray. Next, almost all of the leading computer manufacturers, including Dell, Hewlett-Packard, and Apple, are committed to using Blu-Ray. So, if a studio wants its high-definition DVDs to be playable on personal computers—or for that matter on PlayStation 3—it will have to issue them in the Blu-Ray format. Finally, the situations of Sony and Toshiba are not symmetrical. For Sony, the Blu-Ray is an integral part of its overall strategy. For Toshiba, the HD-DVD is just another product they manufacture. If the company reached an accommodating deal on licensing fees, it could also make money by manufacturing the Blu-Ray DVDs. One way or another, however, the moviegoing public will soon have one more diversion from movie theaters.