Original URL: http://www.theregister.co.uk/2006/12/28/sony_video_store/

Sony preps video store to fill hole in PSP film revenues

What took it so long?

By Faultline

Posted in Financial News, 28th December 2006 10:21 GMT

Comment According to recent headlines, Sony is somehow going to challenge Apple iTunes with a film download service straight for the PSP. Instead those headlines should have asked why it has taken so long.

Sony is uniquely placed to offer a film download service in that it has a music download service in its Connect system, it has a perfect handheld video device in the PSP, and a High Definition device in the PS3, it makes PCs and it happens to have access to 8000 major motion pictures, and it has been promising to execute on online films for around 18 months.

It was a widespread fact in the Summer of 2005 that Sony had issued a new firmware upgrade that layered the H.264 codec onto the device, and it began experimenting with free video downloads as early as August last year in its native Japan, where it was being managed by its own ISP, So-net under the brand of Portable TV.

This system was put on trial, offering films in MPEG 4 (H.264) and using its own Atrac3 for the audio codec. Both MPEG 4 and Atrac3 were supported in a new PSP firmware issue, for the first time back when this service was first introduced, which is when the PSP was first able to play tracks downloaded from the Sony Connect music service.

This Spring it managed to get out a truncated version of the service, again in Japan only, and this time it only offering film rentals. There are no technical difficulties to speak of, and flash memory, although it is bigger and cheaper now, was cheap enough and came in large enough sizes before to make the proposition viable a year ago.

And anyway, as we know, people don’t tend to watch programming purely on the PSP, as they don’t on the iPod, they prefer to store it on the PC and view it that way, so memory was a non-issue.

Two years ago Sony had also promised to make its 500 most popular films available for download to a PC, but it never went ahead with its plan. It was in negotiations with ISPs throughout Europe, and a pricing schedule had been worked out, but then the initiative died. The question obviously is whether Sony goes with a non-branded ISP delivered option or a branded one, with software it had to write itself.

From a piracy point of view, managing multiple ISP delivery points would have been a nightmare, and why should Sony concede a huge margin to ISPs everywhere?

The Japanese trial offered films in H.264 using Atrac3 audio, and would communicate with the Connect Sonic Stage software on a PC, which sounds like the same system that has been launched now.

The original service that was launched in Japan was supposed to bypass the PC, and go straight to the PSP over a wi-fi link, but the US service is expected to use the PC, and the direct to PSP version to come out later.

What we suppose has happened is that Sony has wasted 18 months while it tried to push its Universal Media Disk, the tiny 1.8 inch miniature DVD format. These were massively overpriced by the studios, sold at a premium to a normal DVD.

While we agree that portability is a premium, in films, where you may watch the content on a smaller device than a TV, it makes little sense to charge more than a DVD. The more important premium is rapid availability, so the ability to download these films and see them quickly. The other premium is the one that Apple is investing in, and that’s making it possible, with a single click, to watch them on a TV.

What’s happened is that the pre-loaded UMB format, as a retail proposition, was supposed to give Sony an edge in this market, but at $30 a film, the kids market, so rife with piracy, that was never going to be biting. Which is perhaps why the company has experienced weakness in the PSP, cited in its recent figures, out in October, when lower than expected profits from its PlayStation Portable was one of its reasons for overall weakness.

The problem has been going on since February, when although the revenues from PSP sales and from game sales were strong, the anticipated demand in the UMD delivered content was seen to be weak with Paramount, Warner and even Sony itself dropping some of their UMD releases.

Some titles were managing 100,000 units, but most UMD titles were reaching just 50,000 units and saturating.

By the March annual Sony figures it was able to report that its PlayStation Portable had brought in more revenue at $1.6 billion, during 2005 than the both Xbox 360 and the Nintendo DS combined.

But then it said that in order to stimulate demand it was cutting the price by $50. Sony wouldn’t cut the price of things which are going well, and the complete absence of UMD sales is what this online delay was all about. It was obvious that customers would go straight for the online content and ignore UMDs if the service launched, so it has been fighting a rearguard action, terrified of losing UMD revenues and in the process killing what chances it had to dominate online film delivery.

Sony has now leaked the fact that the online service will move from Japan to the US and although no-one from Sony was talking, coverage suggests that it will be through a rental, as well as download to own model. The story broke in both the Wall Street Journal and in European newspapers and in fanzine web sites this week.

Sony will be in a very strong position to get the other major studios to put their films in the pot, and has VoD joint ventures around the world with Disney. It was known to already have other studios on board when it was planning an early launch of an unbranded services, so apart from the digitization effort of putting back catalog into digital format, the service should come pretty well populated. All Sony has to do now is avoid the trap of only pushing its major new titles and at least make these offerings in parallel with older, long tail content, and then it may have a chance at rectifying the huge delay.

The report said Sony executives plan to widen movie selections to offerings from other studios as well.

Sony is also known to be harnessing the service to work with Grouper, the social networking site that it bought a few months back, to offer a User Generated Content offering, also on the PSP.

Sony is more or less on track with PSP shipments, with over 20 million shipped globally. This makes it the mostly widely distributed portable video enabled device outside the cellular handset, as there are less than 20 million iPods that can handle video and Nintendo DS devices are hardly ever used for video.

The idea that Sony would be talking to Amazon, Movielink and CinemaNow for content was also raised in the US stories, and although this makes very little sense at all, it is feasible that Sony can get other studios films through such a license, in bulk, but we doubt it. Why not go straight to source. The service will be launched in Q1 say reports alongside a new 4 Gb Sony Memory Stick flash card that should store up to 10 feature films. Let’s see if it has the political will to actually launch it this time.

Copyright © 2006, Faultline

Faultline is published by Rethink Research, a London-based publishing and consulting firm. This weekly newsletter is an assessment of the impact of the week's events in the world of digital media. Faultline is where media meets technology. Subscription details here.