BARE YOUR SPECS IN 30 DAYS, LIEBERFARB SAYS IN CHALLENGE TO BLU-RAY

Replication costs and practicality of manufacture are where “the rubber will meet the road” in the Blu-ray vs. HD-DVD debate, said Lieberfarb, who spoke at IRMA as a Toshiba representative and thereby an HD-DVD supporter. Few have questioned the claims that replicating HD-DVDs would represent a small evolutionary jump from producing DVDs, with relatively minor new capital expenditures required. But the Blu-ray camp says that won’t come without tradeoffs, namely an HD-DVD disc with 40% less capacity than Blu-ray media.

Yet Blu-ray supporters have been left to explain how their own disc -- though revolutionary in structure compared with the current DVD -- can be produced in sufficient yields without significant new plant investments. At IRMA, Sony DADC officials again said they were confident Blu-ray discs could be replicated at costs comparable with DVD once production on the order of 15 million discs monthly was achieved. And while they conceded new plant expenditures will be required, they maintained much DVD plant can be retooled and used for Blu-ray. Although they said again at IRMA Blu-ray media won’t require a caddy, that’s because of use of new “hard coat” technology they concede will require an extra production step.

Lieberfarb runs an L.A. consultancy with client including Best Buy, Disney, Microsoft, Miramax, National Geographic, Samsung and Toshiba. He told the IRMA audience he was speaking without notes, from “a lot of experience and a massive amount of thought.” He said he was “stunned by a history of war stories by the Blu-ray partners over the past 15 years that repeatedly reflected self-interest, not consumer interest.” Nevertheless, Lieberfarb said he wanted to “take the high road” in refuting claims by Blu-ray representatives that theirs was the better system because it offered superior data capacity. He recalled a 1994 meeting at the Peninsula Hotel in L.A. with Sony officials, including Mel Harris, then pres. of Sony’s Columbia TriStar studio. Also present, he said, was Noboyuki Idei, then Sony’s point man on next-generation optical disc developments and now Sony chmn., although Lieberfarb didn’t mention Idei by name.

As Lieberfarb recalled the meeting, it was called by Sony to marshal support for its view that Dolby Digital multichannel sound was “a ridiculous demand” on the Hollywood studios’ wish list of features for the carrier that ultimately was to become DVD. Sony -- which with Philips soon went public with its next- generation proposal for movies on 5” disc with a capacity of 3.7 GB -- believed “monaural sound was adequate” for DVD, Lieberfarb said: “Take that in from the standpoint of the consumer electronics industry’s future product vision: Monaural sound was all that was needed for a next-generation video product.” SD, the rival 4.7-GB system to the Sony-Philips Multimedia CD, was backed vehemently by Lieberfarb and ultimately won broad support from studios and CE companies, most of which cited the system’s higher data capacity as key to their endorsements. Lieberfarb told us in an interview that his intent in bringing up the 1994 meeting wasn’t to ridicule Idei or inflame the already heated debate on Blu-ray vs. HD-DVD. His point was to illustrate that Sony was wrong then in predicting the success of DVD and could well be wrong again on Blu-ray.

A Sony Corp. spokesman in N.Y.C. said any 1994 meeting to which Lieberfarb referred was “irrelevant” to the current debate. “We would like to point out that digital audio was always a part of the MMCD proposal,” Sony’s spokesman said. Although he declined to discuss the private meeting alluded to by Lieberfarb, the spokesman quoted what he called the first press release on MMCD issued by Philips and Sony in 1994 that said “The 3.7 GB disc can carry, for example, approximately 135 minutes of MPEG-2 quality video together with multitracks of compressed digital audio and subtitling.” That announcement outlined a plan to make the draft of the proposed specs available in Jan. 1995, then gather input from relevant industries and finalize the specifications by mid-1995. “The important point is that 13 companies, including many major electronics companies, media companies and the two biggest PC companies are part of the BDF that believes that the Blu-ray is the best format to meet the requirements from many industries including Hollywood,” the spokesman said.

Lieberfarb told Consumer Electronics Daily the HD-DVD camp wasn’t conceding it’s at a competitive disadvantage to Blu-ray on data capacity. He told IRMA that it’s movie-and-game interactivity on a disc, rather than the movie alone, that will “generate replacement demand for library” content, particularly in children’s programming. I'm optimistic that work being done on the code to effect that interactivity will be another variable that brings success” to the HD-DVD format. He wouldn’t elaborate.

Stating his case for the urgency of moving to new HD packaged media in Blu-ray, Sony Senior Vp Mike Fidler told IRMA the DVD market “is rapidly maturing.” As a result, “it has been commoditized as a business and like other commodities, it has lost its real value to consumers in terms of newness and importance,” Fidler said. Also adding to the urgency of having a successor ready in the wings has been the growth in physical and online piracy, “which is really having a dramatic impact on the studios and certainly their shareholder value,” Fidler said. With DVD’s maturity, overall consumer demand for DVD will begin to decline by 2006, he said. There also will be a “precipitous” decline in average selling prices of DVD software, he said. Another issue is that DVD is only a standard-definition format “in a world where HDTV is literally exploding,” Fidler said. “You can just imagine how viable DVD will become in the next few years as consumers shift their preferences and their expectations to HD,” he said, adding that DTV is expected to penetrate 50% of U.S. households by 2007.

That drew a spirited response from Lieberfarb, who told IRMA: “The doomsday [view] that DVD is in trouble, I dispute.” He conceded that “DVD is reaching a level of maturity” that will mean a slowdown in sales growth of new releases and catalog titles as the format approaches 60% household penetration. He said he agreed with the Blu-ray camp on the “urgency” of bringing a high-definition carrier to market, but not for the “motives” of salvaging “the one or 2” studios that may have “exhausted their back catalog” on DVD. Lieberfarb said he believed the better reason for introducing HD physical media sooner rather than later was because it represented “a new business opportunity” to give new DTV owners a higher-value product vs. other forms of HD content delivery.

Lieberfarb disputed many of Fidler’s claims on the commoditization of the DVD business, saying there hasn’t been erosion or “margin pressure” in the pricing of “front-line” new releases in the format. The downward pricing has been in catalog titles, which “was not unexpected” given that the DVD business went from 5% penetration to “a mass market,” Lieberfarb said. But that shouldn’t be misconstrued as a “decline in the business” or deterioration of profitability, he said.

Fidler said “Sony and a number of other companies believe Blu-ray is the answer” to the question of what it will take to keep HD packaged media the “preeminent form of entertainment” in the market. With its capacity, Blu-ray can offer bit rates as high as 36 Mbps of MPEG-2 video, “still the gold standard in our industry,” and also the standard for ATSC high-definition broadcasts, Fidler said. Still, the Blu-ray camp continues to study alternative advanced compression codecs “that are starting to find their way into the marketplace,” Fidler said. “But most of these today are still immature and still require development work.” Nevertheless, the new advanced codecs “clearly will have applications as we look toward the requirements for more compressed content in the future,” Fidler said. He told us that the study of those advanced codecs had caused the latest holdup in release of the preliminary Blu-ray ROM specification. Release was set for 2003’s 4th quarter, then delayed to first quarter. Notwithstanding Lieberfarb’s 30-day release challenge, Fidler told us before the conference Blu-ray’s spec may not be available for publication until midyear.

Without “superior” content protection, Fidler said, none of Blu-ray’s attributes “means anything.” “Here, once again, Blu- ray prevails” over HD-DVD, Fidler said. Its “long list” of content and copy protection solutions includes 128-bit encryption, which “has proven its ability to withstand brute- force attacks,” he said. Fidler said Blu-ray has “learned lessons” from CD and DVD in “how we apply various elements of the security protocol,” including keeping the exchange of encryption and authentication keys “as close and as tight as we need to, and not expose them” as was done with DVD.

Lieberfarb shot back that anti-piracy security for HD-DVD will equal or exceed that offered by Blu-ray, “so I take copy protection off the table as a significant source of differentiation.” “Knowing what Toshiba and Microsoft are doing to secure” HD-DVD, “there’s a deep appreciation for the most advanced copy protection with the same or greater level of specificity” of Blu-ray, Lieberfarb said. He said studios, “in their normal concerns about their copyrights, get excessive because they dream up doomsday scenarios. Let’s be very clear: We would only have movies in movie theaters today if we followed the doomsday scenarios of the movie industry.”

Lieberfarb recalled “a conscious business decision” had been made made about the “tradeoffs” of launching the DVD with only 40-bit encryption -- so restricted because of import-export cryptology controls imposed during the 1990s by the National Security Agency. He said he believed then and now that piracy wouldn’t flourish if DVD’s “business proposition was right for the consumer.” That the growth rate in DVD software sellthrough “has mathematically traced the rate of growth in hardware” suggests no “widespread pirated product invading the commercial market,” Lieberfarb said. Nevertheless, he said agreed with Blu- ray that moving to a more “state-of-the-art” security system was enough reason to support introduction of a new physical HD format.

The only studio executive to speak at the IRMA conference, Danny Kaye, senior vp-business development, 20th Century Fox Home Entertainment, told us he disagreed with Lieberfarb’s contention that copy protection should be taken off the table as a differentiator. Executives and engineers meet monthly with both camps and neither has offered enough information on content protection to support one over the other, Kaye said: “It’s still just a proof of concept.”

HD content on optical disc “is looming ever closer,” Kaye told IRMA. But “the very real progress that will satisfy the studios to put their high-definition content on the disc has yet to be realized,” Kaye said. “I'm talking about the kind of secure system for both consoles and PC devices that will protect Hollywood from the rampant piracy that we all speak about and at the same time allows the consumer to maximize their entertainment choice and control.”

Optical disc will win out over other forms of HD digital delivery because of “the collectability” of the physical media and “the seemingly endless array of value-added materials and features that the high-definition disc hopefully will be capable of,” Kaye said. He said the home entertainment industry, “as we know it now, will thrive in the future if we're able to bring to market, in a reasonable timeframe, the next generation of media.”