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EU Continues Probe of HD Video Formats

by July 09, 2007
EU Demands Accountability from HD formats

EU Demands Accountability from HD formats

A slowly simmering probe by the European Union into the format war has taken a new turn.

EU antitrust regulators have requested that a number Hollywood studios turn over information about their negotiations with electronics manufacturers involved in HD technology. Concerned about violations of European antitrust regulations and the anticompetitive nature of exclusive deals with technology developers, the European Commission has given until the end of last week for the studios to respond.

EU examines high-def DVD formats over competition concerns

The probe dates back to July of last year, when the EU sent letters to both Sony and Toshiba, manufacturers of Blu-ray and HD-DVD technology respectively, requesting information regarding licensing practices. At the time, the Commission would not say exactly what aspect of licensing was under scrutiny, only that the action was not yet a formal investigation and further action depended on the responses received.

Now, a year later, we see the nature of the probe taking shape.

The European Commission for Competition’s concern apparently is over movie studios taking sides thereby limiting consumer choice of format. Antitrust is regulated by articles 81 and 82 of the EC treaty; article 81 focuses on agreements between companies that limit competition while article 82 deals with abuse by companies with a dominant market position to the detriment of competition.

In particular, violations of article 81 would seem to be the most likely in question.

As much as the marketing types try to hype it and distract the consumer from the truth, the format war has really become a war between studios about favorite movies. To that end, developers of the competing technologies have attempted to stack the deck in their favor by limiting the amount of software available to the competition through exclusive deals. In execution, the format war is not about which way people prefer their ones and zeros encoded on physical media, with the studios taking sides, it is about which group of movies the consumer prefers more: the movies that can only be watched on Blu-Ray and the movies that can only be watched on HD-DVD.

What also is interesting is that one of the primary backers of one format, Sony Corporation, would seem to have a bit of a conflict of interest in marketing claims that Blu-Ray is an inherently superior format for HD media for consumers. Through subsidiaries, Sony Pictures Entertainment and Sony Computer Entertainment, Sony stands to gain on both the hardware and software fronts.

With luck, for consumers, these probes will blossom into full-blown regulatory action. It can only be good for consumers when they actually can decide which format they prefer and get any movie they want on either format.

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Professionally, David engineers building structures. He is also a musician and audio enthusiast. David gives his perspective about loudspeakers and complex audio topics from his mechanical engineering and HAA Certified Level I training.

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tomes posts on July 12, 2007 20:27
Also from a consumer perspective, without this “war”, hd players would not have become so cheap, this fast. It's a while ago DVD came out, but as far as I recall, it took longer for that hardware to go down in price. In the current scenario, Toshiba has been very aggressive with player pricing, and Sony has taken losses on getting ps3 out to the “masses” (with BR technology).

Also, someone earlier referenced Apple's allowing playback of both mp3 and apple's format. Well, I still can't playback apple's files on my non-apple player. Hmm..kind of like Sony ps3 games not being playable on xbox360. (sure it's great they allow other companies to make ps3 games, and also that those companies can make versions for xbox360, but I still have the same issue that any developer that does not release on both platforms is excluding me from playing their games, unless I buy both). So where is the difference?
BMXTRIX posts on July 12, 2007 15:17
I thnk what this boils down to is that a major advantage, at this time, for Blu-ray is the larger studio support it currently enjoys. HD DVD owners, some, may begrudge Blu-ray this support and wish for studios to be forced to release materials on all formats.

Yet, there is no proof that studios have entered into exclusivity agreements and when questioned, I have not heard of a single studio admitting to such an agreement… that I know of.

Yet, if the playing field is leveled for studio support, then that would likely force Samsung, Panasonic, Pioneer, Sharp, and other companies out of the HD player business, which is anti-consumer. With Toshiba currently manufacturing the only HD DVD stand alone players on the market, they have worked hard to gain market share by cost cutting and subsidizing players from the start. Their primary goal has been cost cutting measures, not necessarily quality improvement measures and no other CE company has joined them in HD DVD only production. Why? Most likely because there is no money to be had unless you hold all the royalty cards as Toshiba does.

Blu-ray has had much more accurate market pricing without a lot of cost undercutting and has had open competition between multiple hardware manufacturers. This cost remains significantly higher than HD DVD, but is likely maintainable because of the direct market competition of stand alone player pricing, and because the exclusive studio support, at this time, helps steer buyers towards their products.

Their product being players manufactured by numerous manufacturers, not just one. I would think that there would be some question out there as to why there is only one CE manufacturer exclusively supporting HD DVD and what anti-competitive measures might be taking place that makes this happen.

Yet, I just think that the govt. needs to stay out of things and that consumers will make their own decisions as they are doing with the real world attach rate figures that clearly indicates Blu-ray to have a higher per-player attach rate rather than the Toshiba fed numbers or the Sony fed numbers. Independent analysis using real world player estimates, show that Blu-ray is outselling HD DVD. Yet, HD DVD is still doing well - so I'm not exactly sure, still, what leads someone to call it anti-competitive.
krihanek posts on July 12, 2007 10:53
Unintended Consequences

The problem with the EU or any govenment regulation that would force a movie to be released in both formats is that less movie titles would be released at all. The studios will decide that the market isn't big enough to benefit from the cost of doing both so all you will get is standard DVD or nothing at all. Only the very largest titles will be released. That's exactly what they do now. You get “Pirates of the …” but not any low volume titles in high definition. Require them to do both and you will get even fewer titles.
sholling posts on July 12, 2007 01:33
David Waratuke, post: 284001
This discussion thread has been an interesting diversion from the point of what is going on or the economic theory involved.
Very well thought out and written. Thank you for your input.
Davemcc posts on July 11, 2007 23:37
David Waratuke, post: 284001
I hope you all recall who Adam Smith is?

The actions taken by the companies we are discussing do not satisfy the free market competition that various forum members have bandied about without full comprehension of the meaning or requirements to satisfy it. The fact of the matter is that exclusive agreements between format hardware manufacturers and content providers such as the studios do not satisfy many of the requirements of perfect competition. This leads to market failure and imperfect competition.

Perfect Competition, as is defined, is a theoretical construct of ivory tower academia. It cannot exist in the real world. Let's make this clear, by definition, all competition is imperfect. Exclusive agreements do not lead to imperfect competition because all competition is imperfect and the lack of perfect competition does not lead to market failure. I hope that you are not trying to interchange the terms free market and perfect competition, since they are very different concepts. Take note in the Wikipedia entry,

"However, while a free market necessitates that government does not regulate supply, demand, and prices, it also requires the traders themselves do not coerce or mislead each other, so that all trades are morally voluntary. This is not to be confused with a perfect market where individuals have perfect information and there is perfect competition."

David Waratuke, post: 284001
The most ironic part of this discussion is that it is circling around: no government intervention let the free market operate. But the conditions do not satisfy free market competition; therefore the market is not operating as a free market.

Quite a conundrum, isn’t it?

Take note of the Wikipedia entry on free trade. I see no part of these exclusive agreements that violate any part of the requirements for free trade. agreements are voluntary, there is no coercion and no intent to defraud. That consumers don't like these agreements and can force lawmakers to criminalize such voluntary agreements would violate the requirements for free trade.

David Waratuke, post: 284001
The market in question is distorted as it currently operates and is not competitive by definition. Limited government intervention to nudge the situation towards properly functioning competition is not a bad thing, as long as it does not go beyond those requirements.

Let's be clear again, properly functioning competition is when there is voluntary agreement without coercion or fraud, but most of all, without government intervention. When the government intervenes, it is a controlled market and it is not properly functioning competition. It is allowed competition according to an arbitrary third party standard that limits the aforementioned voluntary agreements.

David Waratuke, post: 284001
As I said, Sony is an interesting case because they have a conflict of interest, having expanded to owning interests in both hardware sales and software sales. But as the instigator to step away from the DVD Forum and develop Blu-ray while still participating in the forum after Blu-ray was rejected makes their motives a bit dubious.

How is it that owning hardware and software is a conflict of interest.
Sony is a purveyor of goods, both hard and soft, physical and intellectual. There is no inherent conflict in Sony packaging these commodities in any combination of formats they choose.

Further, it only makes sense to me that Sony would keep one foot in the DVD business while looking to the future with Blu-Ray.

David Waratuke, post: 284001
Please note the comments by Steve Heckler, Senior Vice President of Sony Pictures:

“The industry will take whatever steps it needs to protect itself and protect its revenue streams…It will not lose that revenue stream, no matter what…Sony is going to take aggressive steps to stop this. We will develop technology that transcends the individual user. We will firewall Napster at source - we will block it at your cable company, we will block it at your phone company, we will block it at your ISP. We will firewall it at your PC…These strategies are being aggressively pursued because there is simply too much at stake.”

How much more anticompetitive can you get? Do the other commentators here really want this guy and his mentality unchecked in its legality?

Please tell me you just didn't write this. You are an editor at an online magazine that relies upon intellectual property protection to prevent its content from being used illegally by others. But, in such sweet irony, you are using this protected intellectual property to advocate that Sony cannot protect it's own intellectual property. Napster has been ruled to be illegal and Sony is clearly stating that it will protect itself and its revenue stream from such illegal activity. Until the law is changed, Sony has every right to pursue its legal rights.

David Waratuke, post: 284001
While there are arguments for and against government intervention, the fact of the matter that too little or too much of either Laissez-faire or government intervention are both bad. And that is a shortcoming of human nature, whether a part of private companies or part of the government, people will take advantage of the system to their own benefit.

But at least the interaction of both represents a form of checks and balances.

Companies left to themselves do not always follow the ideals of the free market, and the government often loses its way as champion of the people and is operated by the same imperfect human beings.

Many of the ‘Well, what about…?’ arguments do entail other possible violations of free market behavior by companies, but limited resources and/or the inability of those in responsible positions to recognize the questionable behavior has lead to these omissions.

Thank you for your opinion on the matter, but unless a company operates by fraud, force or coercion, they are not violating the principles of the free market.

David Waratuke, post: 284001
But if we are going to have a meaningful discussion about free market economics and competition, lets all make sure we understand the full meaning of the terms first, rather than just say them by rote.

I agree and I hope I have helped clarify some of your terms.
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