EVD Again

In response to my comments on the CER EVD article there’s a new post on the CER IT blog and a corresponding one on Gareth’s personal site in which he defends the original post. Good for him. He also misinterprets what I wrote. In the spirit of a blogging conversation I respond below.

First, let me define what I mean when I say success in relation to disc formats: a disc format is a success if content providers are making lots of content and consumers are buying lots of discs. For example, CD, DVD, PS2, XBox etc. By lots I mean millions not dozens.

The news reports claim that China manufacturers will stop making DVD players in favor of EVD players in 2008. And because most DVD players are made in China the implication is that EVD will take off. Well, hang on. An EVD player is also a DVD player. So they’re not really stopping to make DVD players - just wrapping the DVD player functionality in an EVD box. EVD player sales may increase but it may not be because the consumer wants to play EVD discs. For example, if the Chinese consumer needs to buy a new DVD player and the only choice is an EVD player or an EVD player priced the same a DVD player, of course they’ll buy the EVD player. Note, lots of EVD player sales does not translate as a success for the EVD disc format (see above). If you’ve got an EVD player but are only playing DVD discs then it’s just another piece of consumer electronics with features that are not used.

Another definition of success is profitability. How profitable will it be to make EVD players? Well, look at current DVD player manufacturers - not much. In the world of consumer electronics and particularly in China there is very little markup over production cost on sales prices. The real money is in the content and licensing. Well, to get income from licensing you need someone who wants to use the intellectual property and is willing pay for it. Which, with a new standard, is an uphill battle as potential licensees need to be convinced of the standard’s viability. Maybe companies will be lining up to pay EVD royalties but I doubt it.

Another way to cut costs to the manufacturer is to reduce license fees. So, for example, remove the DVD functionality. I find this highly unlikely. The consumer will not buy a player that can not play their existing discs. Also the idea that taking out the DVD functionality removes all of the patents used in DVD is wrong. There are patents on the physical optical disc technology that are valid no matter what logical format is present and some patents that hold true even if the physical format changes.

It has been known for CE products to be sold below cost price to push out competitors. This is one reason DVD players are now so cheap and the number of manufacturers is decreasing. Another reason to sell below cost price is to build an installed base. This is the reason XBox-360 and PS-3 machines are priced as low as they currently are. In the games industry the strategy is to make a loss on the player in return for greater profits on the content sales. But the games console market differs from the video disc market in the following ways. There are many video disc player manufacturers but only one manufacturer of a particular game console. So any kick-back the hardware manufacturers get from software sales is spread out rather than going to one place. (Assuming such a kick-back exists and can be successfully claimed.)

Movie content does have an advantage over games when it comes to new formats. Once you have a movie it does not take much to re-author for a new platform. (Disney does this all the time.) Compare this to games in which software needs to be re-written for a new platform. Of course, the studio has to agree to put out the movie in the new format in the first place. I doubt movie studios will be lining up to author EVD discs and pay EVD royalties given the amount they loose on pirate DVD movies in China. Of course, another way to increase the number of EVD discs would be for the local pirate to start producing EVD as opposed to DVD. Anything is possible I guess.

Now the misinterpretation. Below is a quote from Gareth’s blog:

“...that this is a new attempt by China to have its own standard and it is a most serious attempt. Simonb disagrees. He may well be right. But he is totally wrong to suggest that the manufacturers are not doing it.”

Gareth makes two claim:

1. That I disagree this is a serious attempt at a new standard. I don’t.

2. That I suggested that the manufacturers are not doing it. I didn’t.

My only criticism of Gareth’s entry was the lack of discussion and analysis that I expect from CER. My suggestion is that EVD will not be a success in terms of number of discs using the EVD standard and in terms of profitability.

At the end of my previous entry I had the following paragraph:

“While we're on the subject, lets explode the myth that China can do nothing about piracy: try buying fake Beijing Olympics branded goods.”

This was in no way meant to imply anything in relation to Gareth’s writings. It was put in there because piracy is relevant to the discussion of new content standards.

One last thing. I wish Gareth would link back to my original entry so that those that are interested can read what I actually wrote in its entirety. To me that’s only fair.