Does Blu-ray have a future?

Matt Richtel and Brad Stone had a great article earlier this week in the NYT about Blu-ray, timed to the opening of CES in Las Vegas. It could have been titled: “After crushing HD DVD, why aren’t Blu-ray sales booming?” After all, people said “confusion” prevented adoption of HD pre-recorded video, and there’s no confusion any more.

The reporters wrote about how digital downloads are looming if not already here, and how manufacturers used price cuts on players during the Xmas season to stimulate demand. They really summed it up nicely:

Andy Parsons, the chairman of the Blu-ray Disc Association, a consortium of the format’s backers [said] “We think this year we’ll start to see the format really take off into the mass market.”

But evidence exists that many people either do not know enough about Blu-ray to buy or do not think the more expensive players and discs are worth the extra investment.

Going from the whirring VCRs of yore to a DVD player was a big leap in picture quality and convenience, while the jump from DVD to Blu-ray is subtler, at least for those who do not have the latest and largest high-definition televisions.

The question I want to know is: why is there such a price premium for the discs, as much as $10 a disc? (Or, as the article says, $1/month for Netflix?) If people really wanted Blu-ray adoption, they’d lower the price of the media, which quickly adds up to more than the player cost.

Most of the cost of the disk is the IP, the materials, the packaging and the distribution. Yes the manufacturing cost is a little higher: by one estimate two years ago, about 80¢ a disc ($1.30 vs. $0.50). That gap will only narrow over time — unless of course the studios get too greedy at trying to extract a premium for the HD content. (The actual cost story for digital downloads is more convincing: 1080i is 6.5x as many bits as NTSC, while 1080p is 2x more than that).

Yes, I know the difference between value and cost based pricing. DVDs are a commodity and Blu-ray are the (relatively) new and cool thing. But as the NYT article reminds us, adoption of expensive HD gear is going to be slower than expected due to economic troubles — sales of electronic and electrical goods were down 21% for Xmas 2008 over 2007.

In the race between discs and downloads, the movie studios don’t care what format people buy (as long as they buy). Netflix would love to run a proprietary video download store that’s as successful as Apple’s music store. So an early shift from discs to bits would most hurt the disc stampers (who have little influence over the retail price) and the player manufacturers (who have none). I think Wal-Mart and Target would also like to keep the discs alive if they can, because they are likely to play a minor role in digital downloads going forward.

The choice of extracting rents from price insensitive early adopters vs. priming the pump for mass market adoption is always a dilemma. But in this case, the threat of digitization means that the window will be closed if they wait too long to offer mass market prices.