The
Hollywood Economist
The numbers behind the industry.
Sony's
decision last week to delay the launch of its third-generation
game console PlayStation 3 until November 2006 sent shock
waves through the entire entertainment economy. The reason
why is that PlayStation 3 is far more than a child's toy.
It is a state-of-the-art home server that can play the next-generation
high-definition DVDs, wirelessly connect to the Internet,
and simultaneously support up to nine different operating
systems for consumer electronics that, for better or worse,
will further accelerate Hollywood's move from theaters to
home entertainment.
This
crucial shift, one that has changed the nature of the movie
business, has proceeded not from marketing decisions made
in Hollywood or New York but in Hollywood's other axis:
Tokyo. First, Sony enabled an entire new home market by
creating a VCR in the 1970s. The first video recorder had
been invented in the 1950s by an American company, Ampex,
but it weighed a half-ton, cost $50,000, needed a two-man
crew to operate it, and was designed for studio use. After
Sony ingeniously re-engineered it into an affordable device
called the Betamax, which was small enough to fit on top
of a television set and easy enough to be operated by the
proverbial child, the Hollywood studios sued to block Sony
from marketing it. Starting in 1977, in Universal vs. Sony,
Sony tenaciously fought the studios in court and, in 1984,
finally won in the Supreme Court. If the studios had prevailed,
there may have been no home market for movies, but they
had the good fortune of losing. This result led to the opening
up of a huge video rental market and turned out to be their
(unforeseen) salvation. (It was a bittersweet victory for
Sony—it won the court battle against the American studios
but lost the format war to its archrival Panasonic.)??
In
the 1990s, Toshiba, Sony and other Japanese electronic giants
made another decision that even more radically changed Hollywood:
substituting a digital platform for the video cassette.
Again the Japanese companies had to overcome the resistance
of Hollywood studios, who initially were concern the new
technology, the DVD, could jeopardize the video rental market
that had become their cash cow. By now, however, the two
leading proponents of the DVD, Toshiba, which had pioneered
the optical disc, and Sony, which had a patent (along with
its partner Phillips) on digital sound, had acquired powerful
positions in Hollywood. Toshiba was a part owner of Time
Warner Entertainment, and Sony owned the Columbia Tristar
studio. So Toshiba's Koji Hase persuaded his strategic partners
at Time Warner Home entertainment that the DVD, with its
superior quality, was needed to counter competition from
the newly-introduced digital satellite broadcasting, and,
after assuring them that an entire movie could be made to
fit on a CD-sized disc, got their backing, and access to
the huge Warner Bros library.
Meanwhile,
Sony also committed the Columbia TriStar library to the
DVD. After Sony and Toshiba (as well as other Japanese manufacturers)
agreed in Hawaii in August 1995 on a single format on which
they would all share the patents, the DVD launch proved
enormously successful. It quickly transformed movies into
retail products that could be sold by Wal-Mart and other
mass merchandisers, largely replacing the rental market
with an even more lucrative sell-through business. By 2005,
the revenue from DVDs for the major studios was three times
that of the revenue from movie theaters. Because the DVD
allowed for random access, it allowed studios to package
entire seasons of TV hits into boxed sets, and opened up
a rich new market for original TV products, such as The
Sopranos , Sex and the City , and 24 .
The
next Tokyo initiative in the war for the couch potato will
be raising home movies to a high-definition standard. High-definition,
which contains 5 times the picture elements as conventional
DVDs or television, was pioneered in Japan in the late 1970s
and allows home audiences to watch a movie-quality picture
on a much larger display. Toshiba and Sony, the same Japanese
companies that brought Hollywood the DVD, have now decided
to replace it with a high-definition disc, which Toshiba
calls “HD-DVD” and Sony calls “Blu-Ray.” Both companies
have machines that use a blue-laser to read the densely
packed data, can connect to the Internet, and produce the
same quality high-definition picture.
The
chief differences between them are price and storage capacity.
Toshiba's “HD-DVD” is less expensive to manufacture and
hold just enough data, 15 gigabytes, for a high-definition
movie (Toshiba assumes other features can be accessed over
the Internet).
Sony's “Blu-Ray” is more expensive to make but can hold
much more data. Its disc can be divided into as many as
eight wafer-thin layers, each of which can hold up to 25
gigabytes. In addition, some of the layers can be used to
record addition material downloaded from the Internet. The
Blu-Ray format, with is enormous storage capacity is backed
by all of the Hollywood movie studios.
One
reason for the studios' support is that the Blu-Ray technolgy
provides two separate “viewing planes” for a DVD; one for
the high-definition movie, the second for scene-specific
features such as commentaries, music videos, and games.
This opens the door to creating parallel universes, which
the viewer can navigate between with a click on the remote
control. Disney, for example, plans to put scene-specific
educational lessons on children's movies, while Sony plans
scene-specific games. The Internet would provide further
interactive material, including prequels, sequels, altered
endings, and additional action sequences, which can be downloaded
on the rewritable layers of their disc. When PlayStation
3 arrives next November, with its Blu-Ray technology and
super-realistic games, it will further blur the line between
movies and games. The hand of Tokyo may not always be visible
in the dazzling glitter of Hollywood, but it has enabled
it to re-invent itself.
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