Disc vs Disc

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Every since CES earlier this year the debate in consumer electronics companies and technology companies has raged around which next-generation video disc to support. Apple recently jumped on the Blu-Ray side of the line along with most of the other hardware manufacturers. You can read a bit more about it at MacCentral here.

What the article doesn’t tell you?

Media companies are soon going to be in a bit of a quandry, they will have a lot less options to go and get discs duplicated. The duplication houses that make legitimate DVDs pay a fixed-fee per disk to the people who own the intellectual property rights to the technology. This does not look like a healthy business however when you think that the volume duplication requires expensive equipment costs to offset against profits and continually declining earnings. With a popular DVD now, the booklet that accompanies it may cost the film company more than the disc. So as a percentage of costs in DVD duplication, the intellectual property fees became more expensive as the standard matured.

The duplication companies have been trying to get out of the business, most notably Rank recently managed to offload its Deluxe duplication business after many years of trying. With a business that is so unattractive that players are looking to sell out, there will inevitably be a decline in market competition as consolidatioon takes hold. It would be an act of commerical sucicide for the management team of one of the duplicating companies to suggest a huge capital investment in Blu-Ray for such small returns. In addition, payments to intellectual property owners per disc is likely to be higher with Blu-Ray due to the increased amount of companies involved in developing the standard that have to get a slice of the cake.

However Sony’s duplication business has an advantage, since it is part of the DVD patent pool it does not have to pay the intellectual property tax like other duplicators and this is likely to be the case with Blu-Ray as well. This is the reason that iODRA, the duplicators industry body is so unhappy.

With Sony being the only duplicator with a financial incentive to invest in Blu Ray it puts media companies in an awkward position. The Japanese conglomerate could use the knowledge gained from its relationship as a supplier to like Paramount (things like launch schedules) to the advantage of the various competitive media businesses that are also part of the Sony behemoth. Knowing that I know about Sony that would require far more organisational cohesion and organisational smarts than they have. But there is still the doubt….

In addition, Sony could dictate the cost of disc supply providing Sony media businesses with a price advantage or still benefit the group through ‘transfer pricing’ (deliberately charging to much to internal customers, so the ‘profit’ on a sale is booked in another part of the business).

A third, more fiendish ploy is to encourage piracy by making legitimate media more expensive, some of the first Blu-Ray disc factories will be in hock to the global piracy rings. Sony would stilll be booking a profit in other parts of its group if it plays its hand right from increased hardware and blank disc media sales, and got out of the media business while the going is good if the rumours about a company split are true.