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Scalers beat HD DVD and Blu-ray at CES 2007 - analysis

The impact of movie download services

At CES, outside of the folks that actually build DVD drives, the action was on movie downloads and the beginning of HD movie downloads. At the event, in the opening keynote, Bill Gates dwarfed a slight mention on HD-DVD and focused much more heavily on "Live," Microsoft's on-line service for entertainment. At the event that eclipsed CES, MacWorld, Steve Jobs, a Blu-ray supporter, didn't even mention Blu-ray and focused, with Disney, on content downloads to the iPhone and the Apple TV instead.

In fact there was vastly more activity surrounding on-line movie and TV content delivery at both shows than there was combined discussion on HD-DVD or Blu-ray. Download content is gated by two things, content access (what the studios make available) and band width. For instance it takes me about twelve hours do download a HD move on my DSL service, around four hours for a standard definition movie. As the industry gets better and better with regard to compression the extra capacity surrounding HD-DVD and Blu-ray may become less important.

More importantly, many of the people backing both standards are now switching to on-line delivery which could obsolete both offerings for much of the world by year end.

Porn industry tries a different approach

One of the interesting announcements at CES was that the porn industry was moving to HD-DVD because Blu-ray didn't want them. What many don't realize is that at the same time, CES runs the porn industry has their big show and, in many ways, that industry is actually more profitable.

While the Porn industry has also had massive piracy problems, they have focused their technical advancements on enabling a complex channel of on-line delivery outlets in what looks like a muli-level marketing format. People can, with little background, set up an on-line store to sell, legally, content from these studios. These stores specialize in their customers unique needs and, as we understand, can be very profitable while also providing strong revenue streams back to the studios producing content.

I often wonder what would happen if the MPAA, instead of treating every legitimate customer as if they were a criminal in waiting, focused on actually selling more stuff like the porn industry does. My sense is they probably would generate more profit and while piracy might also go up, their primary goal should be to increase profit not be another police force.

Higher capacity may actually be a disadvantage

In addition, last year, according to the studios, enhanced DVD packages (like collector's editions) actually sold better if they had more physical DVDs in them. In several cases, where a dual sided release was followed by a multiple disk single sided product with the same content, people actually returned the dual sided single disk packages for the multi-disk single sided (older technology) product. People felt that more was better and, even though there was no difference in the actual content, bought the older technology disks. The Blu-ray guys in particular really need to look at their own stats on this. If their big advantage is capacity and buyers don't care, that is going to be a problem. But, if we bypass disks entirely, capacity is the least of their worries.

Time Warner and LG get impatient

Time Warner announced a dual-format disk at CES. This disk, which has to be relatively expensive to make, has Blu-ray content on one side and HD-DVD content on the other. If every studio were to adopt this, it would be vastly better for retailers who currently have to split the content on two shelves and for consumers who will often find the movie they want doesn't run on the player they bought. However, this move would favor the lower cost player, so you would expect the HD-DVD camp will like it and the Blu-ray player buyers won't. If only the HD-DVD side moves to this format, it would actually favor Blu-ray, because it would make more content available for Blu-ray. The fact that the second alternative is the most likely makes this very interesting given Time Warner is generally thought to be in the HD-DVD camp even though they support both formats.

LG, on the other hand, announced the first HD-DVD/Blu-Ray combination player with an estimated price of $1200. While clearly expensive, this is some the Blu-Ray players started out and this price should drop. If these players catch on, it would make the whole battle pointless and studios would simply move to the least expensive format, which is HD-DVD right now.

Scalers: More convincing

Before CES, I had a chance to use a DVD player with a surprisingly good scalar. The Oppo DV-981HD provided an impressive picture on a HD display and I ran it against both Blu-ray (PS3) and HD-DVD (Xbox) content. While the true HD content obviously was a little better (except for some of the poorly done Blu-ray movies, which were actually worse), if you didn't have the displays side by side you likely wouldn't notice the difference. In effect, the Oppo is an expensive DVD player at $230, but an inexpensive alternative to the HD players which will cost you at least twice as much.

And don't forget, this DVD player makes all the DVDs you already have look better. At CES DVD players, TVs, and monitors with good scalers were all over the place. Gateway started selling monitors last year with a similar scaler to the one Oppo uses built in, Dell announced a 27" monitor with a very strong scaler built in as well, suggesting this trend is going well beyond just TVs and DVD players (scalers in monitors allow you to get better images from lower cost graphics cards and notebook computers).

One interesting fact is that the Xbox 360 has a built-in scalar, while the PS3 does not. As a result, DVD movies played on an Xbox 360 are likely to look better than if they were played on a PS3. While not in the same class as the Faroudja scalar used by Oppo, the Xbox 360 version does improve how a DVD or older game looks on an HD set and is one of the advantages the Xbox has and we don't talk about much.

With more and more content coming from services like YouTube scalers increasingly become important because, without scalers, these videos will look like crap on our HD TVs. In addition much of what we currently have is standard definition and no one really wants to re-buy all of their movies. Not if they have a choice and scalars give you that choice.

So, my view of CES is - regardless of HD-DVDs market leadership, and Blu-ray's better marketing - standard DVD with an up-converting scaler is the technology that makes the most sense right now.

Rob Enderle is principal analyst for the Enderle Group. He can be reached at