In an exclusive interview with BetaNews, Ken Graffeo, executive vice president for Universal Studios and also the co-president of HD DVD, provided a behind-the-scenes look at the high-def industry and said that, despite the rumors, HD DVD is here to stay. But he does leave the door open to ending the format war by coming to some sort of an agreement with Blu-ray.
Nate Mook: Let's start with a little background. You work for Universal, but you are also the co-president of the HD DVD Promotional Group. Does this create a conflict of interest?
Ken Graffeo: I am the executive vice president of high-def strategic marketing. So my role at Universal is in the high-def format, and being that we're in HD DVD exclusively, that's where I'm concentrated. We setup the Promotional Group in the early summer of 2006, and board members include Microsoft, Toshiba, HP, Intel, Paramount, Universal and Warner Bros. It's very similar to the Blu-ray Disc Association -- we have committees and our goal is to work together educating the consumer and our retailers on the format.
Nate Mook: How does it change things in the Promotional Group now that Warner Bros. has stated its intention to go Blu-ray exclusive once its contract obligations end?
Ken Graffeo: Well, we heard about the whole move when everyone else did -- when a lot of us were on planes flying to CES in Las Vegas. To be very honest with you, we have not addressed that yet -- Warner is still releasing HD DVD titles up until May. Warner has always been in two formats, and prior to Paramount's switch, they had been in two formats, so now that Warner is exclusive... we just haven't addressed it yet.
NM: There was a lot of surprise when you canceled the CES press conference and meetings after Warner jumped ship. It appeared to many that you were simply giving up. Two weeks after the fact, do you regret canceling everything?
KG: It's very easy to look back and say "I could have" because you always know the result. But at the time... imagine the orchestration of a press event with the presenters, the scripts, the entire presentation, videos that were produced -- everything. The crew was already setting up and we were on a plane on Friday, so not being able to get back to everyone to say "how do we make a change for Sunday" was very difficult. And what are the answers? We had no idea because we were reading and hearing about Warner's move the same time everyone else was.
If we had our press event on Monday, it would have been different, but because it was right there on Sunday and we heard Friday afternoon we couldn't even get to everybody. If I had to go back, it was probably the right thing to do. The entire flow of the presentation would have had to been changed. When we found out at the last minute, we had to regroup and say "Toshiba, what are you doing?" and we didn't have any answers. I hate to stand in front of someone and say I don't have an answer, I don't know what's going on.
At that time, not knowing and being so last minute, we had to make some changes. I will say that Toshiba went forward with their press event, which I applaud them for.
NM: After Warner essentially stabbed you in the back, speculation was rampant that Universal and Paramount would do the same, effectively killing HD DVD. There was also a lot of talk about the phrase "current" being used in the statements. Where does Universal stand on this -- are you willing to say you have an ongoing, future commitment?
KG: First of all, I want to say that none of those rumors were substantiated. Nobody ever talked to us. I know nobody talked to Paramount because Brenda, their PR person, sent out a statement immediately. This is business as usual for us and there are no plans to make any changes. We just made an announcement of our new HD DVD titles yesterday, with American Gangster. We also have a lot of other things planned. It's business as usual.
NM: Sony claims that the PS3 has given Blu-ray the market lead -- is this just posturing so Blu-ray can tout higher sales numbers? Is the PS3 really seen in Hollywood as a device that sells movies?
KG: I'll go back to what we've said over and over: the set-top player is the primary movie device. If you look at the attach rate of how many movies are bought for dedicated HD DVD players versus how many movies were sold for the PS3 and the Blu-ray set-top players combined, it's a 4 to 1 gap. Which says that people who own game machines are not buying at the same rate as someone who owns a set-top. And on the DVD side, your primary player is a set-top.
If you go to a store -- let's say a Best Buy or a Circuit City -- and buy an HDTV and then you want to get your movies to look better, you go to the DVD section -- you don't go to the game section. We have always been believers, not only historically but looking at a lot of recent research that has been done, that for the consumer their preference is a set-top.
The one thing that's different now compared with VHS is that when you bought a DVD player, you could not play your VHS on it. People didn't really have libraries in the days of VHS, because movies were really rented -- 80% of the business was rental. Today it's different because both Blu-ray and HD DVD are backwards compatible, so you have to take that into consideration. In turn, people want a set-top player that lets them play their current movies just as they do now, not on a game console.
NM: Price seems to be the major leverage HD DVD has, even with less studios than Blu-ray. Do you still believe other studios will come around if you sell enough players? This was the belief when we spoke to Microsoft's Kevin Collins 8 months ago.
KG: I can't speak for the other studios, because I don't know how they are thinking. But what was very encouraging is that when we were at CES we met with a lot of retailers. And the retailers openly said, that as much as they hate having two formats they are not making any changes, because they want to wait for what the consumer does. We've always said we want to follow the consumer.
Consumers right now are buying upconverting players -- they are outselling the next-gen players combined by 10 to 1 every month. They are affordable because they are under $200 -- the average price is $85 -- and consumers want to see their movies better. So pricing is very important. We saw that on DVD: as soon as price point went under $200 and as soon as it started getting close to $100 players really started taking off because you're hitting very consumer-friendly prices. If you want to hit the mass market, you have to be consumer-friendly in price. If you want to be a niche electronic, you're going to be high priced.
NM: From a strictly consumer standpoint, HD DVD seems to make the most sense: players are cheaper, combination discs are possible, which enables a smooth transition. Blu-ray players are still in flux and current models except the PS3 won't be upgradable to Profile 2.0. Blu-ray is pitching players that will be obsolete in a year, and discs that lack the interactivity found on HD DVD. Why hasn't there been more of a marketing message on this from HD DVD?
KG: The consumer today is very confused about HD. Only 12% of all households are getting HD programming, but 35% of households have HDTVs. We have spent a lot of time, and will continue to try to educate the consumer because there's a lot of confusion on what this means. When you're watching a TV show and the logo says in high definition and you don't have your source for high definition, it further adds to the confusion. People don't understand this.
People have a library of DVDs, people understand HD and know it looks better. But they're not thinking about it from a format perspective, they are thinking "I want my movies in high-def."
I think education has been very important and is something we have to continue doing. In Toshiba's recent press release, they said they will have an aggressive marketing campaign that will be launched very soon that will complement their new pricing strategy.
Nate Mook: Apple CEO Steve Jobs recently said that "clearly, Blu-ray won the format war," but noted that all next-generation physical media won't serve a purpose, because consumers will receive content digitally. What are your thoughts on this? NBC Universal is investing in online delivery of content and Hulu.com.
Ken Graffeo: First off all, the technology today is not ready to provide that full experience of getting the high-quality video instantaneously to the home. You've got broadband issues and things like that. Will that technology be there? Yes. Can I tell you when? It's not next year. I think you're beginning to see a lot more open systems and more collaboration, because right now you have so many unique systems and nothing is compatible. That's been the biggest problem, but you're beginning to see the walls break down.
I always look at VOD (video on demand) that goes right to the house, and DVD buy rates never change. I think what you have to do is look at the consumer today -- the younger consumer -- and say "where are they going," because that's going to be the future. Today when you look at who is purchasing movies, it's those 35 and older -- and they're not as savvy with technology as the younger audience is. The younger audience is the one that would be more comfortable with digital delivery.
The DVD player was the fastest selling electronics product ever. In 5 years, you had over 50% of the market. The reason why is because it was plug-and-play. You put a disc in and you pressed play. With HD DVD, the DVD Forum was looking at the future -- that's why you have an Ethernet and USB port mandatory, because they are thinking of the transition to the next generation.
But people collect movies like they did records, and share movies, which isn't possible in digital. And today, in order for the digital world to take off, it has to be very consumer friendly -- like plug and plug. As soon as you get complicated, you can't go after the mass market. Once it gets to being plug-and-play, you could see a shift. People once thought rental would always be the king, and now you have sell-through.
Over the course of the upcoming years -- the next 5, 8, 10 years -- physical media is still going to be dominant. That's not to say you're not going to have digital, because it's going to come, but it won't reach the masses very quickly.
Nate Mook: Is this format war going to be decided by the Hollywood studios and the manufacturers, or can the consumers have a voice? Over 1 million HD DVD owners is not a small number, and those consumers clearly don't want the format to go anywhere.
Ken Graffeo: Where the consumer has a say is what they do and what they purchase. That's probably the biggest statement that could be made. Word of mouth is the most powerful way to communicate. If you walk into someone's house and watch a football game on their HDTV, you'll want one. Most people are very happy with their DVD, but when they see a 1080p movie, it blows them away.
1 million units starts word of mouth -- people get exposed, people see it. When you're dealing with 200,000, you're at the early adopters and that's not really going to spread. That's why HDTVs finally started taking off, because consumers walked into their neighbors' houses and said "Look at that flat thing on the wall, that's great." You saw in November and December, everyone was aggressive with pricing. You could see how consumers are willing to buy HD movies when you get to an affordable price.
We released American Gangster and put it on combo disc (with DVD format on one side and HD DVD format on the other), because if there was confusion about the future, you don't lose an investment because you have both an HD DVD and a DVD. Look at how many machines exist with DVD. We don't want to limit our customers; we want to be as consumer-friendly as possible. It's hard to communicate everything, but once you start getting into the mass world, word of mouth is also very important.
NM: Is there any possibility of coming together with Blu-ray to unify the standards at this point, perhaps with hybrid players?
KG: Well, I'm never going to say it never can be done. I think everyone would like to see things work out, and I don't think anyone has any ill intention in this. It was a year and a half ago when we tried to put things together and it was unfortunate when it fell apart before. I think anything is possible, and again it comes back to the consumer who has the final voice.
NM: A recent report showed Blu-ray with 90% of the DVD recorder market in Japan. Does HD DVD plan to invest in this market? It seems there is little demand for DVD recorders in the States.
KG: DVD recorders are very big in Japan. In fact, I think the majority of DVD hardware in Japan is DVD recorders. There has never been a market here in the US, even though DVD recorders have been available. HD DVD does have recorders in Japan, but not in the United States, where most people have digital video recorders instead.
NM: What's the next step for HD DVD?
KG: I think Toshiba has put a very aggressive program in place not only with price, but also with marketing. We have been talking to the consumer, letting them make choices. We also had our big new release yesterday announcing American Gangster. The film has all of the interactivity and Internet features, and we're continuing to release titles. When I say business as usual, it's business as usual in releasing. But Toshiba has really stepped up with their campaign to the consumer.
NM: Where do things stand on CH-DVD, the Chinese format that's based on HD DVD. It seems to me that is a huge market with 2 billion people, and it's compatible with HD DVD. If studios want to sell in CH-DVD in China, wouldn't it make sense to also sell HD DVDs in the Unites States?
KG: Well, I know that CH-DVD players are in production and their date is in time for the Beijing Olympics. They are forecasting sales of somewhere around 8 million HDTVs because the Olympics are broadcast in high-def and the CH-DVD players are going to be launched in conjunction with that.
When you look at the Chinese market form a studio distribution standpoint, because of a lot of the past piracy issues it's not a developed market like most of Europe and US for the studios selling movies. Everybody is working to try to move forward with that, but I think it's further down the road. The more important issue than high-def in China right now is how to distribute without a fear of piracy.
NM: Will all future Universal HD DVD releases be combination discs?
KG: All of our new releases that Universal has made since last September have been combo discs [with standard DVD on one side]. We have no plans to change that, and our retail partners are saying if you want to go to the mass market, you don't want to limit consumers into only being able to play it on one device.
NM: Thank you for taking the time to speak with us today, Ken. We, and our readers, appreciate it.
that up unless they're complete morons.
