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Warner gets the blu's - January 4, 2008

Media Wonk attended an industry dinner in Hollywood in early December where he ran into Warner Bros. Home Entertainment Group president Kevin Tsujihara and home video president Ron Sanders. Although always nice to see Kevin and Ron, Media Wonk was somewhat taken aback by their apparent alarm at the state of the business. Now we know why.

"Not only did neither [high-def DVD] format really take off as expected in fourth quarter, but standard-def was softer than expected given the release slate," Sanders said Friday, shortly after the studio announced that it will drop is support of the HD DVD format and release its high-def titles exclusively on Blu-ray starting in June. "We’re seeing research now that shows that consumers are starting to delay purchases because of the format war, not just on high-def but standard-def purchases as well. That’s very alarming.”

As part of its ongoing tracking research, Warner has been asking consumers for months whether the format war has had any effect on the regular DVD purchase habits.

"They're waiting for something to happen," Sanders said. "They're waiting for the whole situation to become clear so they know what to buy. If you look at the historical conversion ratios of box office into DVD sales, several titles this fourth quarter underperformed where they should have been."

Whether Warner's move will clarify the situation any is an open question. Between now and the end of May, Warner will issue new releases simultaneously on standard-def and Blu-ray, followed by a release on HD DVD "after a short window."

According to Sanders, however, Warner's decision was driven by consumer behavior, more than an expectation of resolving the format war.

"It’s hard for us to speculate about impact this will have on the format war. All we can do really is make the best decision for our business and the rest of it will really take care of itself, in time," he said. "One of the things you see in the NPD data for this fourth quarter was that even with a $100 [price] premium, Blu-ray set tops outsold HD set tops in December. Even with Toshiba having the lowest-cost player in the market, software sales remained 2 to 1 in favor of Blu-ray."

The studio certainly wouldn't mind if it did help resolve the format war, however.

"Warner Bros.’ move to exclusively release in the Blu-ray disc format is a strategic decision focused on the long term and the most direct way to give consumers what they want," studio chairman/CEO Barry Meyer said in a statement. "The window of opportunity for high-definition DVD could be missed if format confusion continues to linger."

And finally, because someone is bound to ask, Sanders insisted that no financial inducements were involved in Warner's decision, despite the fairly constant buzz of rumors that Warner was being actively courted by both sides.

"There is absolutely no incentive from either side that would have changed the decision we made based on what we were seeing in the consumer data," he said. "The worldwide DVD business is about $40 billion. Any incentives we might have been offered would have paled next to the lost profits from that business if we get this one wrong.”

Not quite Sherman-esque, but he's unquestionably correct that the long-term risk is greater than the short-term gain.

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