Media Wonk

Chasing the downside - June 29, 2007

Back in the days before just-in-time inventory, and even to some extent since, a studio thought nothing of stuffing the retail pipeline with product to make sure it captured every possible sale while interest in a title was at its peak.

Better to risk the return of unsold merchandise, the thinking went, than to fail to capitalize on an opportunity. They can’t buy it if you’re not selling it, after all.

True, the channel stuffing would sometimes go too far, forcing the studio to write down more unsold inventory than accounted for in the prospective P&L. But it was the rare sales rep that lost a job for chasing the upside.

How times have changed.

Last week, the DVD Copy Control Assn., at long last, secured a revision to the CSS master license to allow in-store and in-home burning of downloaded movies using the same copy-protection system used on commercial DVDs.

It took four years and untold and often acrimonious meetings at crummy airport hotels for the industry to agree on something that should have been a no-brainer.

It was clear for much of those four years that consumers were interested in downloading movies. And it took no great feat of imagination to see that consumers might occasionally want to burn what they had downloaded to a disc for easy playback on their set-top DVD player.

They’d been doing something similar with downloaded music for years. Retailers, too, expressed interest in capturing incremental sales through the magic of virtual inventory and on-demand manufacturing.

It would be a more difficult technical challenge with movies than with music, but most of the big technical problems were solved fairly early on.

So why did it take so long?

Somewhere along the way the industry stopped chasing the upside.

When a solution to the technical problems with CSS burning was first proposed, back in 2003, the studios’ first response was to try to leverage the interest of the IT industry in on-demand burning to force DVD-CCA to “fix” the long-since cracked copy-protection system.

The studios wanted a comprehensive agreement that would cover both burning and so-called managed-copy, which would allow consumers to copy their DVDs to a hard drive under carefully DRM'ed conditions.

In exchange they demanded a host of “enhancements” to CSS intended to make it more resistant to hacking.

Many of the enhancements, however, required a redesign of DVD drives and players, putting most of the economic burden on player manufacturers, who were getting the least out of the deal. When they objected, the talks bogged down.

Eventually, it dawned on the studios that burning might let them capture incremental sales through retail and drive consumer interest in legal downloads, so they agreed to separate the issues of burning and managed-copy.

Another 12 months of discussions went into resolving the burning issue (managed-copy is still under discussion), with the studios ultimately dropping most of their demands for enhancements to CSS.

By then, however, the two companies that control the master license for CSS, Toshiba and Matsushita, were heavily invested in the newer technologies of HD DVD and Blu-ray Disc, respectively. They suddenly had second thoughts about adding new functionalities to the DVD format that might slow consumer adoption of the newer formats.

Six more months of discussion.

Finally, it appears, all the issues have been resolved and on-demand manufacturing will become a reality.

In the meantime, though, DVD sales have flattened and begun to decline, retailers have cut back their commitment to the format, downloads have sputtered and the format war has done more to slow consumer adoption of HD DVD and Blu-ray than anything in the DVD market could have done.

All the while, CSS has remained cracked and hackers are making steady progress against AACS.

That’s what happens when you base your strategy on minimizing risk instead of capturing an opportunity.

Sometimes, you just have to stack ‘em high and hope they fly.

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