Blu-ray Loses, Rhapsody/MTV Target iTunes Weakness, Product of the Week

I think that, for all of us, the battle for the next generation of DVD technology has gotten really old. This is especially true for the studios, which are well off their revenue targets.

This week, we’ll look at why DreamWorks and Paramount backed HD-DVD, effectively assuring that Blu-ray will lose whether HD-DVD wins or not — and it may still not win either.

Rhapsody picked up the old Microsoft partner MTV, both showcasing the opportunity cost of Zune and — if it is successful — hitting Apple and iTunes where it likely is the most vulnerable. While this is by no means a sure thing, given Apple’s dominance, it will represent the strongest competitive threat Apple has faced so far.

Finally, the product this week is a set of active noise-canceling headphones from Ableplanet that are better, to my ears, than the Bose headphones many of us currently travel with.

Blu-ray: RIP

I was one of the folks who thought that Blu-ray was going to eliminate HD-DVD and by this time HD-DVD would be toast. In fact, I was one of the analysts who helped convince Time Warner to hedge its bets and go with both formats.

However, this was all before I knew the cost of the Blu-ray technology, and it was based on the assumption that Sony would never be stupid enough to price itself out of the game console market, effectively giving it to Nintendo and Microsoft.

Given my history with Sony, you’d think I’d know better and would have assumed it would be that stupid. That likely would have resulted in a lot less pain all around.

PlayStation3 Impact

Not only was Blu-ray too expensive, the technology wasn’t as far along as Sony led us to believe. The delays not only make the PS3 too expensive; they made it late. That was effectively a one-two punch, knocking Sony out of the lead so far in the game console business. Now, Sony is dead last by a significant margin.

This means that developers, instead of favoring Sony with their best stuff, are now concentrating on the Xbox first, and increasingly the Wii. That’s because both have more homes, and thus represent a greater revenue opportunity, than Sony does.

So instead of the PS3 ensuring Blu-ray’s success, right now it appears that Blu-ray may have effectively killed the PS3, at least in terms of market leadership. We’ll have to wait until the PS4 before Sony has a chance to come back.

Not a Viable Data Storage Option

Blu-ray’s biggest advantage is storage capacity; however, storage has grown so fast that you can get a 750 GB Seagate external drive for less than US$250.

To back that up on a 25 GB Blu-ray recorder would take 30 Blu-ray disks and more time than I think anyone in their right mind would accept. Neither HD-DVD nor Blu-ray are likely to become backup platforms, and most of the data we move still fits easily on a standard dual-layer DVD.

With increasingly high-speed networks, people are using things like BitTorrent to use big files or portable high-capacity hard drives. So as transport, they aren’t particularly practical either.

The high-volume home for HD Optical disks remains as a replacement for the DVD. The studios, which are not doing anywhere near as well as they’d like, desperately need something to drive revenues higher.

Both Could Fail

That won’t happen until both one standard is clear and the related players drop below $200. They need both to happen or the market won’t move. Currently, Blu-ray is running at more than twice the target price on players and HD-DVD is about 15 percent over target. In the case of the Xbox 360 accessory, it’s actually about 15 percent under target.

This means that if the studios have any chance this year of getting a large ramp — and I would include Wal-Mart, Amazon and anyone else that sells HD movies — it has to be HD-DVD. Blu-ray simply can’t get there.

I think all realize, or should, time isn’t unlimited either. We are already talking about what comes after HD-DVD and Blu-ray, and scalers are getting so good that increasingly many are arguing that you don’t need either now.

In other words, while Blu-ray can’t win, in my view, there is still an excellent chance the market will simply bypass both if one doesn’t ramp to high volume this year. In that instance, everyone loses.

Cause for Change

I think Paramount and DreamWorks saw this outcome and are trying to avoid it. While they did get an estimated $250 million incentive to move, that doesn’t change the result. The studio execs likely realize if revenues don’t improve, many of them may not be around by this time next year. Unemployment is a rather impressive motivator for change.

So, as of right now, I think it is reasonably obvious Blu-ray lost. The only question is whether HD-DVD will be allowed to win; and the decision may be up to Time Warner or Disney and not Sony or Toshiba.

If both lose, the long-term strategic fallout for Sony and Disney will be both impressive and memorable in terms of either company’s influence going forward — in fact, for Sony, I’m not sure things actually could get much worse.

Rhapsody America

Apple’s iTunes has three competitive weaknesses that are currently overwhelmed by a lack of truly competitive offerings, strong hardware designs, and what many believe to be the best user experience.

They are:

1. Limited scale when taken against the sum total of the hardware competition
2. A lack of subscription offerings, which prevail in other markets, like cable, and
3. AT&T — the biggest problem with the iPhone.

The Rhapsody America partnership appears designed to address all three with a vengeance. This could represent the most powerful competition Apple has yet faced and put Rhapsody America ahead of Microsoft in terms of setting standards for the next generation of digital media — at least with respect to music.

Because Rhapsody America isn’t doing hardware, it should be more attractive than post-Zune Microsoft as a partner for MP3 and cell phones, and it already supplies a superior service on the Sonos hardware.

This should give Rhapsody access to every hardware manufacturer for MP3 players and cell phones, including those on Microsoft’s mobile platform, but excluding Apple and Zune.

Musical Migration

Apple is so dominant in the space that this alone would not be good enough unless the market moves, as appears to be the case, from stand-alone MP3 players to cell phones.

Transitions typically put the entrenched vendor at risk; and Apple’s own cell phone offering is selling at relatively low volumes because of its excessive connectivity cost.

However, by the time Rhapsody America is ready with its solution, Apple will likely have a lower cost, more affordable phone in market and be better able to hold off this competitive threat.

Competition Is Good

Unfortunately, the iPhone will still be tied to AT&T, giving Rhapsody a strong edge, both technically and in terms of customers’ comfort, with Verizon.

If Rhapsody can execute — and I’ve seen more partnerships like this fail over the years than succeed — it will represent what is likely the strongest competitive threat Apple has ever seen.

For us, however, this is all about choice; and Rhapsody already provides better music coverage in terms of dedicated players from companies like SanDisk, and home music systems like the Sonos. This could result in a vastly better overall solution than either Apple or Microsoft have been able to supply.

This is likely one of the best examples of why competition is a good thing.

Product of the Week: Ableplanet Headphones

I travel a lot, and recently have been spending a great deal of quality time on JetBlue enjoying TV and movies for 5- and 6-hour hops.

Active noise cancellation headphones are a must in situations like this, and I have a variety of them from Sony, Bose and a number of other vendors. The over-the-ear style, while clearly the most bulky, is also the most effective and comfortable. The only headphones better than the ones by Bose that I normally carry are the Clear Harmony headphones from Ableplanet.

They pass through plenty of volume while providing a strong range of sound and also locking out most of the airplane noise.

While they are one of the more expensive products I’ve used, they are arguably the best as well, and appear well worth the extra cost (list price: $349.99). Not a lot of folks have them either, which makes them somewhat exclusive.