Clockspeed Boundary Modularity: A Novel Approach to
Architect Digital Cinema System
by
Sridhar Sadasivan
Submitted to the System Design and Management Program
in Partial Fulfillment of the Requirements for the Degree of
Master of Science in Engineering and Management
at the
Massachusetts Institute of Technology
January 2003
2003 Sridhar Sadasivan. All rights reserved. The author hereby grants to MIT
permission to reproduce and to distribute publicly paper and electronic copies of this
thesis document in whole or in part.
Signature of
the Author
Sridhar Sadasivan
System Design and Management Program
January 2003
Certified By
Prof. Charles H. Fine
Chrysler Leaders For Manufacturing Professor
MIT SJloan.School of Management
'hesis Supervisor
Certified By
Pr4. Fiona L\Murray
A'gisnt _Pofessor
MIT Sloan School of Management
Thesis Supervisor
Accepted By
GM LFM Professo
Prof. Steven D. Eppinger
Co-Director, LFM/SDM
Management Science and Engineering Systems
Accepted By
Professor of Aer nauticskAtrn
MASSACHUSETTS INSTITUTE
OF TECHNOLOGY
APR 17 2003
LIBRARIES
Prof. Paul A. Lagace
Co-Director, LFM/SDM
nd Engineering Systems
BARKER
Sadasivan, SDM Thesis
2
Clockspeed Boundary Modularity: A Novel Approach to
Architect Digital Cinema System
by
Sridhar Sadasivan
Submitted to the System Design and Management Program on January 15, 2003
in Partial Fulfillment of the Requirements for the Degree of Master of Science in
Engineering and Management
Abstract
Digital cinema brings to the motion picture industry a rate of change it has never
seen before in its history. This work presents a unique view of architecting Digital
Cinema system taking into account the fast-changing nature of the technology and
dynamics between key players in motion picture industry. This approach for architecting
involves strategically controlling the interface, i.e., the "clockspeed boundary" between
slow and fast clockspeed elements within the system. It is believed that such an approach
may provide essential market survival competency to the firms in the digital cinema
value chain. The use of standards to control this boundary is also articulated.
To provide a basis for this work, dynamics in the motion picture value chain and
economics of standards are analyzed. The value chain analysis of the current motion
picture industry is performed to understand the power and structure of the industry. The
transition from analog to digital cinema seeks to alter the power distribution and
dynamics in the industry. The issues involved in creating compatibility standards in
digital cinema are also discussed. It is suggested here that the motion picture value chain
will ultimately be defined by the product architecture decisions and standards decisions
of new entrants and incumbents. Two alternate scenarios for value chain have been
proposed. If standards efforts lead to open standards, the studios may still be powerful
and the resultant value chain may look very similar to the current one. If system
integrators maintain control over the architecture and standards, the resultant value chain
may look very different. In such a case, these system integrators can potentially extract
value from the studios. Given the importance of standards, a hybrid strategy for setting
standards that combines market-oriented process along with committee-oriented process
is suggested here.
Finally, concurrent design of product architecture and value chain design is
proposed because value chain and product architecture decisions interact and ultimately
define various players' ability to capture value and maintain flexibility. To that extent,
the product architectures of three system integrators are analyzed to understand the
leverage these three firms have over the digital cinema value chain. The product
architecture reflects each firm's core competencies, its relationships in the industry and
their view of how value can be extracted.
Thesis Supervisor(s): Professor Charles H. Fine and Professor Fiona E. Murray
Sadasivan, SDM Thesis
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Sadasivan, SDM Thesis
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Acknowledgments
I am truly indebted to my thesis advisors, Professors Charley Fine and Fiona Murray, for
their time and energy in guiding me through this process inspite of their numerous other
commitments.
Special thanks to Glen Pearson, Karen Gleasman and Michael Schrader for facilitating
my participation in this program. Thanks to my supervisors Bradley Coltrain and Peter
Makarewicz for being very supportive during these two years. Many thanks to Les Moore
for his support of this work.
All my colleagues in the SDM program deserve to be commended. Their diverse
viewpoints and wealth of experience provided me with a unique learning opportunity.
The faculty and staff of this program deserve particular recognition for creating such an
incredible learning environment. Many thanks to Ben Koo and Nathan Everett for their
contribution to this work and Thomas Mackin, Jacqueline Tyson and Charles Hura for
helping me maintain perspective through this program.
Last but not the least, I am very grateful to my wife, Shuba for her support throughout
these two years.
Sadasivan, SDM Thesis
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Sadasivan, SDM Thesis
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Disclaimer
The views expressed in this work are solely those of the author and are neither endorsed
by, nor reflect, the views of any firm discussed herein.
Sadasivan, SDM Thesis
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Sadasivan, SDM Thesis
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Table of Contents
ABSTRACT ..................................................................................
3
ACKNOW LEDGMENTS .................................................................
5
DISCLAIMER .................................................................................
7
TABLE OF CONTENTS.................................................................9
FIGURES AND TABLES ............................................................
11
CHAPTER 1: INTRODUCTION ....................................................
15
1.1 M otivation and Context.....................................................................................
1.2 Thesis O utline ..................................................................................................
15
17
CHAPTER 2: BACKGROUND....................................................
2.1
2.2
2.3
2.4
2.5
19
H istory of C inem a ..............................................................................................
Analog Cinema Technology..............................................................................
History of Digital Cinema................................................................................
Digital Cinema Architecture ...........................................................................
Resolving Differences: Evaluating Analog and Digital Cinema Technologies ...
19
24
26
27
40
CHAPTER 3. CLOCKSPEED BOUNDARY ANALYSIS.............. 43
3.0
3.1
3.2
3.3
3.4
C hapter Sum m ary..............................................................................................
Introduction to Clockspeed .............................................................................
Introduction to Clockspeed Boundary..............................................................
Clockspeed Boundaries in Digital Cinema ......................................................
Modularity at Clockspeed Boundary................................................................
43
43
45
50
52
CHAPTER 4 STANDARDS ANALYSIS....................................... 55
4.0
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
C hapter Summ ary..............................................................................................
55
Introduction ......................................................................................................
. 55
Standards D efinition.........................................................................................
57
Economics of Standards - Benefits and Costs ..................................................
59
Key Elements of Standards Strategy ................................................................
62
Standards Policy and Regulation.......................................................................
68
Combining Market and Official Standards - Hybrid Policy............................. 71
Value of Standards in Digital Cinema..............................................................
72
Standards Activities in Digital Cinema: Status and Issues .............................. 73
Standards in Digital Cinema: Strategies and Recommendations..................... 78
CHAPTER 5: VALUE CHAIN ANALYSIS..................................... 81
5.0
5.1
5.2
5.3
C hapter Summ ary..............................................................................................
Introduction ......................................................................................................
Motion Picture Industry Overview..................................................................
Motion Picture Value Chain..............................................................................
Sadasivan, SDM Thesis
9
81
. 81
84
87
5.4 Value Chain Dynamics in Analog Cinema ......................................................
5.5 Potential Digital Cinema Value Chains ..........................................................
89
91
CHAPTER 6: PRODUCT ARCHITECTURE STRATEGY............ 99
6.0 Chapter Summ ary.............................................................................................
6.1 Concurrent Engineering in Three Dimensions.................................................
6.2 Emerging Product Architecture Strategies.........................................................
6.3 Evaluation of Emerging Product Architecture Strategies ..................................
99
99
103
107
CHAPTER 7: CONCLUSIONS.........................111
APPENDIX A......................................113
Sadasivan, SDM Thesis
10
Figures and Tables
Figures
Figure 1. Cumulative digital movie releases since 1998 ...............................................
15
Figure 2. Magic lanterns with hand painted glass slides used to create early slide shows 19
Figure 3. Limelight burner. A hydrogen-oxygen burner used with calcium oxide to create
19
"lim e ligh t". ................................................................................................................
Figure 4. Thaumatrope. A card with a picture of bird on one side and a cage on the other.
Twirling the card quickly with strings attached to either end creates an illusion of
bird in the cage ......................................................................................................
. 20
Figure 5. Phenakistoscope. A toy that gets its name from the Greek words meaning "to
trick," the earliest form of cinematography. .........................................................
20
Figure 6. A Zoetrope that uses persistence of vision to create illusion of motion........ 21
Figure 7. A published collotype from Muybridge's animal locomotion studies .......
21
Figure 8. Academy mono-optical soundtrack ...............................................................
22
Figure 9. Optical Dolby stereo soundtrack .................................................................
23
Figure 10. Optical Dolby digital track .........................................................................
24
Figure 11. Schematic of analog cinema technology ....................................................
25
Figure 12. Schematic of digital cinema architecture ....................................................
28
Figure 13. Digital cinema distribution system architecture ...........................................
33
Figure 14. Fluorescent Multi-layer Disc (FMD) - ROM hard disk drive technology ...... 35
Figure 15. Digital Micromirror Device (DMD) with 848 x 600 mirrors. The central
reflective portion of the device consists of 508,800 tiny tiltable mirrors. ............. 36
Figure 16. DMD light switch that has been fabricated over a CMOS substrate by CMOS
type processes.............................................................................................................
37
Figure 17. A three-chip DLP® projection system.........................................................
38
Figure 18. Schematic of digital cinema projector with D-ILA* technology ................ 39
Figure 19. Typical architecture of digital still camera .................................................
48
Figure 20. Roadmap of D-ILA development ...............................................................
51
Figure 21. Schematic representation of lock-in cycle..................................................
60
Figure 22. Schematic representations of standards dynamics ......................................
60
Figure 23. Digital cinema architecture used by SMPTE working groups for coordinating
standards developm ent ...........................................................................................
74
Figure 24. Schematic of scope of SMPTE's standards activities .................................. 75
Figure 25. Double helix illustrating how industry/product structure evolves from
vertical/integral to horizontal/modular and back ....................................................
83
Figure 26. Comparison of theater openings and closings in U.S. (2001 vs. 2000)..... 85
Figure 27. Distribution of revenue in motion picture industry ...................................... 86
Figure 28. Current players in the motion picture value chain....................................... 87
Figure 29. Motion picture industry's double helix experience ...................................... 89
Figure 30. Pre and post consolidation market share and box office revenues.............. 91
Figure 31. Key links in analog capture chain ...............................................................
93
Figure 32. Firms that are part of Thomson Multimedia involved in digital cinema
activ itie s .....................................................................................................................
94
Figure 33. Potential motion picture supply chain .........................................................
95
Sadasivan, SDM Thesis
11
Figure 34. Kodak digital cinema mastering process architecture ................................... 104
Figure 35. Kodak digital cinema exhibition process architecture................................... 104
Figure 36. Technicolor digital cinema product architecture........................................... 105
Figure 37. Boeing digital cinem a....................................................................................
106
Figure 38. Mapping Kodak's architecture to generalized architecture. Green shaded areas
denote areas of control and dotted lines indicate points of modularity.................... 108
Figure 39. Mapping Technicolor's architecture to generalized architecture. Green shaded
areas denote regions of control and dotted lines show points of modularity........... 108
Figure 40. Mapping Boeing's architecture to generalized architecture. Green shaded areas
denote regions of control and dotted lines show points of modularity. ................... 109
Figure 41. Digital cinema architecture used by SMPTE working groups in coordinating
standards developm ent .............................................................................................
113
Figure 42. Schematic of scope of SMPTE's standards activities ................................... 114
Figure 43. DC 28.3 functional block diagram showing the different interfaces............. 117
Figure 44. Functional block diagram showing the different interfaces for conditional
access sy stem ............................................................................................................
118
Figure 45. Functional block diagram for DC 28.5 working group showing the different
interfaces ..................................................................................................................
1 19
Figure 46. Functional block diagram of various interfaces in theater management system
..................................................................................................................................
12 0
Sadasivan, SDM Thesis
12
Tables
Table 1. Key milestones in the development of digital cinema system........................ 27
Table 2. Uncompressed movie sizes .............................................................................
30
Table 3. Clockspeeds of a few representative industries .............................................
44
Table 4. Evolutions of home video game systems from 1982-1996.............................. 48
Table 5. Smallest diagonal format sensor introduced in a digital still camera by
resolution and year of introduction .........................................................................
49
Table 6. DLP chip resolutions and their year of introductions ...................................... 50
Table 7. Classifications of standards .............................................................................
57
Table 8. Compatibility standards distinction ...............................................................
57
Table 9. Elements of standards strategy ......................................................................
62
Table 10. Strategic positioning decisions ......................................................................
63
Table 11. Strategic positioning: costs and benefits.......................................................
64
Table 12. Strategic positioning selection factors ...........................................................
65
Table 13. Examples of strategic positioning..................................................................
65
Table 14. Policy intervention scenarios .........................................................................
69
Table 15. Effectiveness factors for market versus committee standards processes.......... 70
Table 16. Different digital cinema working groups.......................................................
76
Table 17. Firms in current value chain ........................................................................
89
Table 18. Incumbents and new entrants providing digital cinema products or services .. 92
Table 19. Alignment of product and supply chain architectures. ................................... 102
Table 20. Different digital cinema working groups........................................................
115
Sadasivan, SDM Thesis
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Sadasivan, SDM Thesis
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Chapter 1: Introduction
1. 1 Motivation and Context
"Any sufficiently advanced technology is indistinguishablefrom
magic".
-
Arthur C. Clarke
It has been three years since the long-awaited prequel "Star Wars Episode One:
The Phantom Menace" debuted in theaters across the country during the summer of 1999.
The movie signaled the debut of the new "Digital Cinema" technology into the market
place. Since then, 22 movies have been released in digital format and the number
continues to grow every year. Figure 1 shows the number of movies that have been
released in the digital format since Phantom Menace.
30
-
--
---------
1A
- 25
0
20
15
o10
0
1998
1999
2000
2001 (1Q)
Year
Figure 1. Cumulative digital movie releases since 19981
The number of screens with digital projectors currently is about 150, less than 1% of the
total screens in the U.S. The adoption rate continues to be slow despite optimistic
projections.
No one in the movie business has pushed harder for digital technology than
George Lucas and Lucasfilms Ltd. His recently released "Star Wars Episode II: Attack of
the Clones" is the highest profile film ever created with digital cameras, and it
incorporates cutting-edge, computer-generated imagery in every shot, says Anna Wilde
"Digital Cinema: Year Two- Getting Down to Business," April 2001, http://www.screendigest.com
Sadasivan, SDM Thesis
15
Mathews in a March 28, 2002 article for the Wall Street Journal.2
"When the film rolls out to theaters on May 16, all that digital wizardry
will be transferred to low-tech rolls of celluloid that run through oldfashioned film projectors. Indeed, after years of hype surrounding the
high-tech future of motion pictures, there still are only 27 U.S. theaters
where moviegoers can see a film that's projected digitally, though
industry officials say there may be more digital screens in operation by
May."
Meanwhile, the health of cinema exhibitors is hardly robust. General Cinema and
Loews Complexes, two of the major eight movie exhibitors, have filed for Chapter 11
bankruptcy reorganization in the past year3 . While the studios/distributors seek to benefit
from the digital cinema transition, the cash-strapped exhibitors are expected to pay for the
transition, which has significantly slowed adoption. Given this issue of capital outlay, it is
also being argued by a few industry analysts that movies may not be the ideal choice of
application for digital cinema. Interestingly, Michael Karagosian, a motion picture
industry consultant says4,
"Despite the attentionpaid in the press, major motion pictures are not the
killer applicationsfor digital cinema... While the industry waitsfor digital
movies to make better economic sense, the infrastructure for digital
cinema will be built, but not in the order that one might expect."
Karagosian further asserts that exhibitors will more likely use digital cinema
infrastructure for other electronically projected entertainment and may eventually use it
for digital cinema.
Despite the early overenthusiasm and most recent pessimism on digital cinema
adoption, digital cinema is an exciting new technology that promises to truly change the
paradigms of entertainment. The digital cinema technology provides a substantial number
of capabilities over existing analog cinema. These capabilities are set to transform the
2 Who
will pay for the next wave of Theater Technology: Star Wars forces the issue," Anna Wilde
Mathews,
Wall Street Journal, March 28, 2002.
3 "Financial Straits Hit Majors' Screen Count," April 2001, http://www.screendigest.com
4 "Backing into Digital Cinema," Michael Karagosian, MKPE Consulting, http://www.mkoe.com/library/
Sadasivan, SDM Thesis
16
entire existing motion picture industry. However, many key questions remain to be
explored including:
u
What are the ramifications of digital cinema capabilities to the motion picture
industry value chain?
Li
How will the standards shape the market opportunities in movie industry?
o
How do product architecture decisions affect the movie industry value chain?
This work attempts to answer these questions. In addition, digital cinema brings to the
motion picture industry a rate of change it has never seen before in its history. It seeks to
disrupt businesses, their practices and relationships and attempts to create a fast-changing
environment. Every firm, whether an incumbent or a new entrant, wonders if a
sustainable competitive advantage can be created in such a fast changing environment.
This work suggests a unique way of creating sustainable competitive advantage by
appropriate design of product architecture. This work further highlights the merits of
strategically managing interfaces in product architecture with a view toward creating and
capturing value.
1.2 Thesis Outline
A brief history and description of analog cinema technology is presented,
followed by the history of digital cinema in the second chapter. The digital cinema
architecture and the technologies that comprise the architecture are discussed in sufficient
detail to highlight the capabilities of digital cinema technology.
The concepts of "technology clockspeed" and "clockspeed boundary" are
introduced and elaborated in the third chapter. Examples of clockspeed boundaries in
common systems are provided to explain these concepts further. The implications of
clockspeed boundaries in a system or a subsystem are elaborated. It is argued here that
unique, competitive advantage can be achieved by strategically managing clockspeed
boundaries. Modularizing along the clockspeed boundary and standardizing the interface
is also proposed. In addition, the merits for standardizing the interface are discussed in
this chapter.
Sadasivan, SDM Thesis
17
The dynamics of standards in digital cinema, particularly along clockspeed
boundaries, is discussed in the fourth chapter.
The standards add value by indirect
network effects working through the demand for the product.
A brief taxonomy of
standards and a brief overview of key concepts in standards strategy are presented here.
The overview summarizes economics of standards benefits versus cost, and key elements
of standards strategy. It is claimed here that positioning decisions (open vs. proprietary)
pertaining to a standard should be made strategically because the value a company can
expect to obtain from the standard is determined by degree of openness of the standard.
The value chain analysis of the motion picture industry is presented in the fifth
chapter. In particular, the dynamics in the existing value chain is discussed, since
adoption of digital cinema is dependent on the dynamics between key players in the
chain. Moreover, new opportunities created by digital cinema technology are presented. It
is suggested that the motion picture value chain will ultimately be defined by the product
architecture decisions and standards decisions of new entrants and incumbents. Two
alternate scenarios for value chain have been proposed. If standards efforts lead to open
standards, the studios may still be powerful and the resultant value chain may look
similar to one that exists currently. If system integrators maintain some control over the
architecture and standards, the resultant value chain may look very different from today
and the system integrators could potentially extract value from the studios.
Finally, the need for concurrent design of product architecture and value chain is
elaborated in the sixth chapter. Standards, value chain and product architecture decisions
interact and may ultimately define various players' ability to capture value. The
architecture strategies of three system integrators, Eastman Kodak Company, Technicolor
and Boeing, are analyzed on several fronts, including integrality/modularity decisions in
their architectures, location of modularity relative to clockspeed of different technologies,
alignment of supply chain and product architectures and the extent of architectural
control.
Sadasivan, SDM Thesis
18
Chapter 2: Background
2.1 History of Cinema
Cinema dates back to the 14th century, having spread from India or Java through
Middle East, when shadow plays, involving projection using a lantern and animated
puppets, became popular in Europe.
Figure 2. Magic lanterns with hand painted glass slides used to create early slide shows.5
A shadow play theatre was very successful in Versailles in 1776, which survived
the French Revolution and ran until the 1850s. By 1800, traveling showmen were using
lanterns with a lens and illuminated by oil to provide entertainment.
The development of large-scale entertainment soon became possible when Hare
invented the hydrogen-oxygen blowlamp in 1802; this led to Drummond's signal light of
1826, shown in Figure 3, which used calcium oxide to produce the "lime light."
Figure 3. Limelight Burner. A hydrogen oxygen burner used with calcium oxide to
create "lime light." 5
s "A Centennial Salute to Cinema", Smithsonian Institution Website,
httD://Dhoto2.si.edu/cinema/cinema.html
Sadasivan, SDM Thesis
19
The thaumatrope, shown in Figure 4 relies on the persistence-of-vision principle to create
illusions of motion. Persistence-of-vision is the eye's ability to retain an image for
roughly 1/20 of a second after the object is gone.
Figure 4. A Thaumatrope. A card with a picture of bird on one side and a cage on the
other. Twirling the card quickly with strings attached to either end creates an illusion of
bird in the cage.6
Joseph Plateau in Belgium and Michael Faraday in England developed the
phenakistoscope, shown in Figure 5. The phenakistoscope also uses the persistence-ofmotion principle to create an illusion of motion.
Figure 5. A Phenakistoscope. A toy that gets its name from the Greek words meaning
"to trick", the earliest form of cinematography. 7
The phenakistoscope has two discs mounted on the same axis. The first disc has
slots around the edge, and the second disc contains drawings of successive action, drawn
around the disc in concentric circles. As phenakistoscope's discs spin together in the
same direction, and when viewed in a mirror through the first disc's slots, the pictures on
the second disc appear to move.
6
http://www.scu.edu .au/schools/hmcs/media/video/SCUsite/lessons/history3. html
7 http://www.mtsu.edu/~english/367/367images/phenakistoscope.jpg
Sadasivan, SDM Thesis
20
In
1867,
Michael
Bradley
(England)
and
William
Lincoln
(America)
independently developed the zoetrope shown in Figure 6, which used 13 slots and 13
pictures spinning around in a metal cylinder. By varying the number of pictures, relative
figure movement was simulated. The device was cheaper to produce, ran more smoothly
and for longer than the phenakistoscope, and could be viewed by several people at once.
Figure 6. A Zoetrope uses persistence of vision to create an illusion of motion.8
The first successful device to use sequence photography to create moving pictures
was Edward Muybridge, who took photographs of a horse in 1878 and demonstrated how
this represented a mere half second of motion with his zoopraxiscope device.9 Inspired by
Muybridge's work, Etienne-Jules Marey analyzed high-speed motion in the early 1890s,
(helped by developments such as sensitized paper superseding glass plates and general
improvements in the equipment available), produced photographic-sequence cameras and
demonstrated the principles, which formed the basis of cinematography.
Figure 7. A published collotype from Muybridge's animal locomotion studies.
9
The first commercial transparent roll film, developed by George Eastman, was
available for sale in 1889. The availability of this flexible film made possible the
development of Thomas Edison's Kinetoscope in 1891. Four years later, the Lumiere
http://www.disneylandtoday.com/CaliforniaAdventure/HollywoodPictures/zoetrope.htm
9 "A Centennial Salute to Cinema," Smithsonian Institution at http://photo2.si.edu
8
Sadasivan, SDM Thesis
21
brothers presented the first moving images to a paying audience. The first films were
very short, sometimes lasting only a few minutes. They were shown at fairgrounds, music
halls or anywhere a screen could be set up and a room darkened.
By 1914, several national film industries were established in Europe, Russia and
Scandinavia. As more people paid to see movies, the industry that grew around them was
prepared to invest more money in their production, distribution and exhibition - large
studios were established and special theatres built.
Color was first added to black-and-white movies through tinting and stenciling.
By 1906, the principles of color separation were used to produce "full color" moving
images. Early processes were cumbersome and expensive and color was not widely used
until the introduction of the three-color Technicolor process in 1932.
While the introduction of color was a great technical leap for cinema, it was the
invention of synchronized sound that many consider the most important development in
motion picture technology. The 1926 release of "The Jazz Singer," featured a sound
technology called Vitaphone, which employed a separate disk to replay the sound.
During the 1930s, soundtrack on film became the norm. A sliver of space on the
side of the picture frame was allocated for an optical track, as shown in Figure 8. The
sound signal was written on this track. During projection, the light was passed through
this track and picked up by a photo sensor. By varying the width of the opening, the
amount of light delivered to the photocell was varied, creating varying voltages in the
sensor, and a soundtrack was created. The basic architecture of the soundtrack as a part
of the film is still employed today.
Figure 8. Academy mono optical soundtrack 1
10
Brian Florian, "Learning from History - Cinema Sound,"
http://www.hometheaterhifi.com/volume 9 2/feature-article-curves-6-2002.html
Sadasivan, SDM Thesis
22
Thomas Edison had used 35 mm film in his kinetoscope and in 1909; this film
size became the industry standard. The picture had a height-to-width relationship known
as the aspect ratio, of 3:4 or 1:1.33. Although there were many experiments with other
formats, there were no major changes until the 1950s. The introduction of television in
America prompted a number of technical experiments designed to maintain public
interest in cinema. In 1952, the Cinerama process, using three projectors and a wide,
deeply curved screen was introduced. It created a sense of greater involvement and
proved extremely popular. However, it was technically cumbersome and wide screen
cinema was not extensively used until the introduction of the Cinemascope in 1953,
which used single projectors. Cinemascope had optically squeezed images on the 35mm
film, which were expanded laterally by the projector lens. By the end of the 1950s, the
shape of the cinema screen had effectively changed, with aspect ratios of either 1:2.35 or
1:1.66 becoming standard.
In 1977, along with "Star Wars," a new sound format was introduced. Dolby
created a way to deliver four channel soundtracks optically on the film. Through their
experience with noise-reduction technology, two optical channels were placed on the film
in the space previously occupied by the single track. A center and surround channel was
folded into the left and right optical tracks. When "decoded" in the theater, the system
yielded three screen channels and one surround. By the mid 1980s, virtually every
commercially released film featured four-channel Dolby Stereo sound.
Optical Dofb Stirv
Stoundirack
Figure 9 Optical Dolby stereo soundtrack.
"1 Florian, 2002
Sadasivan, SDM Thesis
23
In 1992, Dolby introduced the next generation of motion picture sound known as
Dolby Digital. Dolby Digital features three front screen channels, two rear surrounds,
and one Low Frequency Effect (LFE) track. The sound is digital and all channels are
discrete, meaning that each channel is a separate track in the recording, rather than the
rear channel and front-center channel having to be extracted from two stereo channels. It
is optically printed between the sprocket holes on the 35 mm release prints, utilizing the
Dolby compression technology. It fits on the film without taking space away from either
the existing Dolby stereo optical soundtrack or the picture itself. Today, just about every
commercial movie release features a Dolby digital soundtrack.
Figure 10. Optical Dolby digital track. 12
Large-format cinematography has seen something of a revival in recent years.
Specialist large-screen systems using 70 mm film have also been developed. The most
successful of these is IMAX, which had 200 permanent theatres around the world by
2001.
2.2 Analog Cinema Technology
The schematic of analog cinema technology is shown in Figure 11 below.
12
Florian, 2002.
Sadasivan, SDM Thesis
24
Film
1
C.G. Graphics
Video cameras
Telecines
Traditional
Production
Negtive
Color Time
Inter Positives
Dupe Inter Negatives
Archive Prints
10
Archive Prints
Film Projector
Release Prints
Figure 11. Schematic of analog cinema technology.
The movie production begins by capturing the content on film or videotape.
Recording of the content on videotapes started in the 1970s, with the arrival of SONY
Betamaxe on the scene.
The film content is edited by cuts and splices.
The video
content, either videotapes or computer-generated graphics, is edited and transferred onto
the film using a Telecine (television to cinema conversion) device. These inputs (which
are color negatives), along with audio and subtitles, if any, are combined to form the
"Master"(which is called color positive). The audio tracks are highly compressed and
written on the Master. The narrow tracks on the Master allocated for sound have limited
bandwidth. The Master is typically archived.
The Master (which is also called Color Timed Inter Positive) is used to create a
number of Duplicate (Dupe) Inter-Negatives. The inter-negatives are used to produce the
thousands of film projector release prints that are then sent to the exhibitors. The
distribution copies are sent to the exhibitors (i.e., movie theaters) through normal
shipping channels (FedEx or private courier). Theaters typically receive movies in 2000'
reels. The film in the reels is spliced together along with industry and in-house trailers to
form a continuous program. Special cues or pieces of metallic tape are placed on the film
Sadasivan, SDM Thesis
25
to automate the display. The theater automation system picks up these cues and operates
projection equipment, controls theater lightings and the sound system.
The
traditional
approach
to
motion
picture
projection
involves
an
electromechanical transport mechanism that moves the film past an illuminated projector
lens at a fixed rate of 24 frames per second.
The distribution prints tend to degrade over time as a result of color fading,
scratches and dirt and usually have to be replaced after 6-8 weeks. However, as the
movie moves to second run theaters, the quality issues are generally ignored.
The current architecture has been in place for over a century, but elements of the
architecture have been evolving slowly. As mentioned previously, the sound technology
has improved steadily with the introduction of Dolby Digital® and Dolby Stereo*.
Similarly, because of the ubiquitous presence of 35 mm film cameras, the options
available for transferring film-originated images to digital for color-correction and other
digital intermediate work and transferring those images back to 35 mm have been
increasing lately. Digital mastering has found favor with filmmakers because it offers a
level of image control impossible to attain with traditional photochemical processes.
2.3 History of Digital Cinema
Digital cinema is not just replacement of films and cinema projectors with a
digital file and digital projectors. Rather, it is a series of technologies and solutions that
are capable of capturing, processing, transferring and projecting an image file in an alldigital format. At the heart of the digital cinema is the digital projector technology.
Currently, there are two competing technologies. The first was developed by JVCHughes and Texas Instruments developed the other. Table 1 presents major milestones in
the development of digital cinema system.
Year
1987
1988
1990
1992
Milestones in Digital Cinema Development
Researchers in Hughes Aircraft Corporation develop a liquid crystal valve
capable of displaying video and high-resolution graphics, a forerunner to
current Image Light Amplifier (ILA) technology.
Texas Instruments demonstrates Digital MicroMirror Device (DMD)
technology for display applications
Hughes Aircraft and Japan Victor Company (JVC) create a joint venture to
commercialize light valve technology for large screen display markets.
JVC-Hughes demonstrates the Image Light Amplifier (ILA) projection
Sadasivan, SDM Thesis
26
1993
1994
1995
1999
1999
2000
2001
technology
Entertainment Technology Center (ETC) set up at University of Southern
California to examine emerging technologies and their impact on motion
picture industry
Grated Light Valve (GLV) projection-display company, Echelle (now "Silicon
Light Machines") founded.
Echelle/Silicon Light Machines obtains DARPA contract to develop Micro
Electro Mechanical System (MEMS) based on low power and portable display
technology.
Texas Instruments showcases the digital cinema projector known as Digital
Light Projector (DLP) based on Digital MicroMirror Device (DMD)
technology.
Two digital theaters in Los Angeles and New Jersey screen "Star Wars:
Episode 1 - The Phantom Menace" using TI's DLP projector.
Technicolor and Qualcomm create a joint venture Technicolor Digital Cinema
to develop end-to-end digital cinema systems. TDC and TI announce new
installations of DLP projectors bringing the world wide digital screen count to
30.
Kodak unveils plans for creating end-to-end Kodak Digital Cinema System
using JVC's D-ILA technology.
Table 1. Key milestones in the development of digital cinema system.13
2.4 Digital Cinema Architecture
The digital cinema system, like analog cinema with its elements of capture,
distribution and display is shown in Figure 12. This section will focus on the different
technologies (or subsystems) that form the digital cinema system.
13
"Digital Cinema, A Screen Digest Report," http://www.screendigest.com/
Sadasivan, SDM Thesis
27
Conditional Access Security Infrastructure
Content Owner/ Distributor Conditional Access
mp.
CpCo
Imap
y
omp.
Sound
T
Transport
Subtitle
Subtitle
Projection
-~DeConip.
magemayImage
Comp.
Sound
omp.
Sound
--
Exhibitor Conditional Access
-p
Comp.
Sound
System
DeComp. __
ojAudio
Sound
System
SutteSog
-~
System
utte~Subtitle
Auxiliary
Auxiliary
Auxiliary
Auxiliary
-
Auxiliary
-
System
--
a
Auxiliary
Encryption
Decryption
Capture
Prouction
Production
Theater Management System
Disribution
Display
Figure 12. Schematic of digital cinema architecture. 14
Capture
There are currently three modes of capturing and creating images that form the
starting point for the digital cinema. The predominant mode of capturing action today is
by recording the action on film. An alternative to this approach includes creating movies
in a cameraless digital environment. Popular animation movies such as Disney and
Pixar's Toy Story and A Bug's Life are representative examples of such an approach. The
third and increasingly popular mode is through all digital capture by Digital Videos (DV).
Star Wars Episode II - Attack of the Clones was shot with a specially made highdefinition DV camera (with 1920 x 1080 lines of resolution) made by Sony and
Panavision. This mode of creating movies is still not prevalent. The resolution of the
state-of-the art DV cameras is about 2M, while the film cameras provide resolutions
greater than 4M. The DV cameras with 4M resolutions may be available in near future,
but the adoption of these cameras may be slow until the reliability of mobile data storage
devices improves.
1
"DC 28, SMPTE Digital Cinema Study Group Interim Report," 2001.
Sadasivan, SDM Thesis
28
Until reliable high-density storage of digital data is available at an affordable cost,
capturing images through film and converting them into a digital file will be the
predominant mode for creating digital cinemas.
Digital Mastering
The Digital film mastering process starts with the digitizing (scanning) of select
or entire original film negatives or with loading digitally captured images or computergenerated images.
Telecines and scanners are used to digitize images from film. Telecine plays the
role of transferring films from physical entity to digital files. Telecines, originally
designed for transferring movie content to video, have the ability to transport film and
convert images to digital data in real time. The demand for telecine has grown in the past
few years with the arrival of DVD and digital television - in particular HDTV- and as a
creative tool during post production for special effects. Scanners are designed to capture
each frame of film as a data file.
The digitized images from telecines and scanners are edited, combined and color
corrected frame by frame. Special effects are added and the final image manipulation is
also done to enhance contrast, sharpness and grain to create the Digital Source Master
(DSM). The DSM can be output to three different formats via. film, video or digital.
The DSM file can be recorded to a film InterNegative (IN) or InterPositive (IP)
using laser film recorders. This IN and/or IP will retain all the scene-to-scene color
grading made on the digital file. The DSM can be also reformatted to create the various
masters for HDTV and DVD. The DSM file can be further processed to create Digital
Cinema Distribution Master (DCDM) that forms an integral part of the digital cinema
architecture, which will be discussed further in this section.
Post Production
Encoding - Compression and Encryption
DSM cannot be transported as such because of its large size and security
concerns. It needs to be compressed and encrypted before it can be transported.
Compression reduces transport bandwidth and storage requirements.
Sadasivan, SDM Thesis
29
Compression
Compression algorithms search for and remove redundancy in information.
Compression techniques incorporate either intraframe or interframe compressions. In
intraframe compression information within a single frame (spatial redundancy) is
eliminated. The popular JPEG format is a well-known example of intraframe
compression. Interframe compression algorithms rely on comparisons with preceding or
subsequent frames to eliminate redundant data (temporal redundancy). These algorithms
analyze the image file by breaking down each frame into blocks or sections (such as
stripes) and identifying the frequency components within each. Superfluous information
carried over between one block and the next is eliminated. The data is then recreated at
the other end using algorithms before the picture is shown. The process drastically cuts
down the number of full-image frames, leaving only data about the changes between each
full frame.
Table 2 shows the amount of data to present a digitized movie in an
uncompressed format, assuming 24 bit pixels.
Frame Size
& Depth
One Frame
(Bytes)
1280 x 1024
1920 x 1080
3000 x 1500
4000 x 2000
3,932,160
6,220,800
13,500,000
24,000,000
Table 2 Uncompressed movie sizes.
One Second
(Mbytes)
94.37
149.30
324.00
576.00
One Hour
(Gbytes)
339.0
537.0
1166.0
2073.0
Two Hours
(Tbytes)
0.68
1.07
2.33
4.15
15
The compression schemes can be classified as either "near lossless" or "lossy." In
near lossless algorithms, data is compressed in ways that are imperceptible to human
vision, but may require an electronic tool to determine specific differences at the bit level,
when comparing input to output. Near lossless compressions can be achieved at really
low compression ratios such as 2:1 or 3:1.16 In lossy compression algorithms, data is
SMPTE DC 28.3, Digital Cinema Compression Study Group Report, 2001.
A compression ratio of 3:1 indicates that for every bit of data transmitted,
three
bits are thrown away and have to be restored.
15
16
Sadasivan, SDM Thesis
30
altered in ways that may be perceptible to human vision. Typical compression ratios used
in such algorithms vary from 5:1 to 20:1.
Lossy compression manifests as image artifacts such as blocking or picture
freezing. Maintaining fidelity of the image has been a critical requirement for digital
cinema. Hence, a compression ratio as low as 4:1 is typically used, while television,
Internet and DVD applications entail compression by a magnitude of more than 10:1.
Conditional Access System
The protection of content is one of the biggest concerns with digital cinema. The
conditional access system provides the basis for protecting the content in the Digital
Cinema System, as shown in the architecture schematic in Figure 12. Recent cracking of
DVD content scrambling system encryption code keys, leading to wide distribution of
pirated first-run films on the Internet, has even more raised the need for security.
Widespread availability of new movies in countries where the movies are yet to be
released, as a result of massive disabling of regional DVD blocking schemes, is creating a
huge panic within the already worried movie community. In general, the intent of the
encryption system is to secure content as early in the digital mastering process as possible
and to validate and release content for display as late in the system as possible.
Two different modes of piracy have been prevalent with analog cinema. The
predominant mode of pirating a first-run movie is by recording the content within a
movie theater through camcorders and the like. Estimates suggest that about 80% of
movie piracy occurs this way.' 7 The least common method of pirating analog cinema is
stealing the entire set of film reels for duplication. Digital cinema may very well change
this pattern. Technologies such as watermarking and frame rate alteration seek to
eliminate today's common method of pirating content. But the risk of the entire content
being pirated has increased significantly with digitization.
To trace the origin of pirated material, such as those pirated using camcorders or
digital video cameras, imperceptible visual digital watermarking techniques have been
developed. These watermarks bear the signature of the theater and the timing of the show
such that pirated movies can be traced back to their original location.
17
"Digital Cinema: Screen Digest Report," www.screendigest.com
Sadasivan, SDM Thesis
31
Another suggested solution to prevent off-screen tapings by handheld video
cameras is to screen films electronically at higher and variable frame rates rather than at
conventional 24 fps. This on off over sampling would render any video recording of film
unwatchable. This method has been proposed by Silicon Light Machines, whose chip can
offer up to 97 MHz refresh rate.
To prevent piracy of the entire movie, encryption/decryption of the content is
considered. Regulating access to the decryption keys controls right to exhibit the content.
The conditional access system will provide the decryption keys to the exhibition system
upon verification of the system. Such a system is also expected to enforce policies that
reflect currently established business practices regarding exhibition of the content. The
policy elements, in currently established business practices, require a minimum number
of showings per day with specific start and end times/dates, with continuous exhibition of
the content without any alteration.
Current business practices may also limit movie
presentation to particular days or hours and to a specific screen at a specific theater.
Moreover, current agreements prohibit making copies or allowing others to make copies
of the content. The conditional access system in digital cinema architecture is expected to
provide means for enforcing these policies. An effective closed loop encryption system
that can track the content and keep it encrypted until it reaches the projection system is
necessary. Such a control and monitoring element of the closed-loop encryption system
would shut the exhibition system down at the first sign of tampering.' 8 An encryption
system similar to the e-commerce encryption system is also being developed to distribute
digital cinema content over secure channels on the Internet.
Transport or Distribution
The next challenge is in the transportation or transmission of the compressed and
secured DSM called DCDM to exhibition sites around the world. Two different types of
delivery systems have been proposed:
Ideas here have been gathered from different sources including Morley's talk
in
Montreaux Symposium "From Studio to Theater: Delivering the Movie Electronically",
Michael Karagosian's article, " Demystifying Digital Cinema" at www.mkpe.com and
18
SMPTE DC28.5 working group Interim Report at www.smpte.org.
Sadasivan, SDM Thesis
32
(i) Physical media based methods where the content is stored on the magnetic
media or optical media, such as DVD-R or hard drives and transported to the destinations
through FedEx or other courier services.
(ii) Electronic transmission methods where the content is distributed through
satellites, high-speed communication lines or the Internet.
Figure
13
shows digital cinema distribution system architecture,
which
incorporates both conditional access and distribution system. Three key components of
the distribution system include the distributor gateway, theater gateway and the
distribution system itself. The gateways not only provide a means of sending and
receiving the content, but also provide a means of securing content.
iia
Satellite Delivery
IP, ATM
IP, ATM
IP,
High-speed
_1P
SON ET
ATM.
h
SONET
I/O and
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)
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Buffer Storage
TerrestriaA~
Network
IEEE 1394
andlor
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POTS
POTS
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9
Low-Speed
Date
FAir and Land
IEEE 1394
andor
Dockable SCSI Shuttles
Airand Land
Courier
Distributor
Gateway
Contracted
Transport Service
Providers
Theater
Gateway
Figure 13. Digital cinema distribution system architecture. 1 9
This system architecture proposes high-speed network and satellites to send the
content to theaters, while it uses a low bandwidth network to authenticate the content and
provide conditional access. While satellite and high-speed, network-based distribution
'9 SMPTE DC 28.5, Digital Cinema Transport Study Group Interim Report, 2001.
SMPTE members can find this report in the online library at www.smpte.org
Sadasivan, SDM Thesis
33
may become prevalent, physical media based distribution may be the norm in near future.
The architecture has provisions to incorporate transportable physical media-based
distribution until electronic transmissions become the norm.
The demand on this system includes system reliability, bandwidth scalability,
time sensitivity and security. The DCDM will be transmitted to theaters over a relatively
high bandwidth channel to a single or multiple destinations. The conditional access
information may be sent over a lower bandwidth channel and would be a two-way
interaction between the content owner or distributor and the exhibitor.
Theater Systems
The theater system architecture brings together elements needed for display
(operation) and maintenance of a digital motion picture theater. The theater system
architecture as shown in Figure 12 includes: (1) storage and playout subsystem for saving
content received electronically or on physical media; (2) exhibition subsystem which
houses the digital projector for displaying the movie in the auditorium; (3) theater
management subsystem for coordinating the operational activities of the theater; (4)
conditional access key management subsystem that interfaces with the distributors'
conditional access system so that the access can be verified and the movie can be
decrypted for display.
(1) Storage
The content received electronically or by physical media is stored in either hard
drives or optical drives in theaters. The hard disk drives used to store content (known as
Redundant Array of Inexpensive Disks (RAID)), consist of an array of inexpensive small
disks arranged together such that they appear as a single storage device to the processor.
Episode 1 used twenty 18 GB hard drives made by Pluto Technologies to store the movie
during play back. These devices can be designed to provide redundancy against hardware
failure.
The optical disks, such as DVD-R, are much more scalable than RAID, with films
written in multiple discs requiring a jukebox type device for play back. Beyond 2-D
conventional optical disks, research efforts have focused on ways to develop 3-D storage
Sadasivan, SDM Thesis
34
including holographic techniques and multi-layer storage, as illustrated below in Figure
14.
Laser
Incoherent Light
Fluorescent
Dye
Figure 14. Fluorescent Multi-layer Disc (FMD) - ROM hard disk drive
technology.
The concept of multi-layer reflective optical discs originated in the early 1990s, but has
met with little success. The limitation of multi-layer reflective optical discs arises from
the combination of interference, scatter and intra-layer crosstalk of the signal with the
probing laser beam leading to very low signal-to-noise ratio. The multi-layer fluorescent
disks, shown in Figure 14, eliminate this problem by providing a fluorescent material
rather than a reflective material in each layer. When the laser beam hits a pattern on a
particular layer, fluorescent light is emitted. This emitted light has a different wavelength
from the incident laser light and is incoherent in nature. Furthermore, it is unaffected by
the patterns in the adjacent layer. The emitted light is picked up by a reader that filters the
laser light and reads the signal contained within the emitted fluorescent light. As
discussed earlier, research has shown that fluorescent material media containing up to a
hundred layers are feasible, thereby increasing the potential capacity of a single card or
disk to hundreds of Gigabytes. The use of blue lasers would increase the capacity
potential to over one Terabyte.
(2) Projection System
This technology was introduced by Constellation 3D Inc., which disappeared in
Aug. 2002. The material for this section, including Figure 14, were based on
information from now defunct website http://www.c-3d.net/. Interestingly, Sony
licensed the technology from Constellation 3D before its demise in 2001.
20
Sadasivan, SDM Thesis
35
The majority of the digital cinema projection applications have their genesis in
military applications developed in the 1980s and early 1990s. The requirements for
projection demand are much more stringent in military applications than are needed for
digital cinema. At the core of the projection system is a device that converts digital
signals into a visual image for projection on a screen. Each device is supported by a set
of optical components: a lens, duplexing or beam splitting, prisms, and a light source
typically a high-intensity xenon arc lamp. Texas Instruments (TI) uses the Digital
MicroMirror Device (DMD) chip, JVC uses the Digital-Image Light Amplifier (D-ILA)
chip, Silicon Light Machine uses Gratings Light Valve (GLV) - a MEMS chip and IBM
uses a High Definition Light Valve (HDLV) chip to convert signal to visual image. In
this section, the projection schemes of the two leading contenders, TI and JVC will be
discussed in detail.
Digital MicroMirror Device (DMD) Technology
A DMD is a sophisticated semiconductor light switch. TI's Digital Light
Projectors (DLP) DMD chip shown in Figure 15 is an 848 x 600 DMD chip with 508,800
tiny tiltable mirrors.
'
Figure 15. Digital Micromirror Device with 848 x 600 mirrors. The central reflective
portion of the device consists of 508,800 tiny tiltable mirrors.2
This array of tiny mirrors, fabricated on hinges on top of a static random access
memory (SRAM), is a Micro Electro Mechanical System (MEMS) structure consisting of
a mirror that is rigidly connected to an underlying yoke. Two thin, mechanically
compliant torsion hinges, in turn, connect with the yoke. Electrostatic fields developed
L.A. Yoder, "Introduction to Digital Light Processing (DLP)* Technology,"
http://www.ti.com/dlp/
21
Sadasivan, SDM Thesis
36
between the underlying memory cell and the yoke and mirror cause rotation in a positive
or negative direction. The rotation is limited by mechanical stops to +10 or -10 degrees.
Each mirror is capable of switching a pixel of light. The hinges allow the mirrors
to tilt between two states, +10 degrees for "on" or -10 degrees for "off' as shown in
Figure 16. When the mirrors are not operating, they sit in a "parked" state at 0 degrees.
Mirror -10 degrees
Mirr+10 degres
Landing
tip
CMOs
substrate
Figure 16. DMD light switch that has been fabricated over a CMOS substrate by CMOS
type processes.22
The bit-streamed image code entering the semiconductor directs each mirror to
switch on and off up to several thousand times per second. Each pixel of information is
mapped directly to its own mirror in a 1:1 ratio. Hence, the resolution of the DMD chip
shown in Figure 15 is 848 x 600. The resolution of the recently introduced DLP* System
is 1280 x 1024 discrete pixels. When a mirror is switched on more frequently than off, it
reflects a light gray pixel; a mirror that is switched off more frequently reflects a darker
gray pixel. The mirrors in a DLP* projection system can reflect pixels in up to 1,024
shades of gray to convert the video or graphic signal entering the DMD into a highly
detailed grayscale image.
Two variations of the DLP* color projection system can be found. In the first
variation, the white light generated by the lamp in a DLPO projection system passes
through a color wheel as it travels to the surface of the DMD panel. The color wheel
filters the light into red, green, and blue, from which a single-chip projection system can
create at least 16.7 million colors. The three-chip system, as shown in Figure 17, is
L.A. Yoder, "Introduction to Digital Light Processing (DLP)® Technology,"
httD://www.ti.com/dID/
22
Sadasivan, SDM Thesis
37
capable of producing no fewer than 35 trillion colors.
Color splitting
/
0MV
(R)
TIR prism
pnsms
DAD
(G)
Projection
DMD
-ens
Light Input
Figure 17. A three chip DLP 0 projection system.23
As shown in Figure 17, in a three-chip system, the white light generated by the
lamp passes through a prism that divides it into red, green and blue. Each DMD chip is
dedicated to one of these three colors; the colored light that each micromirror reflects is
combined and passed through the projection lens to form a single pixel in the image.
Current systems can produce up to 3100 lumens, 1280 x 1024 resolution with 240:1
contrast.
Digital Image Light Amplifier (D-ILA)* Technology
Image Light Amplifier (ILA) Technology was originally developed by Hughes
Aircraft, which was later, sold to JVC. With D-ILA, JVC has combined the liquid crystal
design, which forms the basis of ILA with active matrix direct addressing. D-ILA is a
reflective-mode, active-matrix liquid crystal display commonly referred to as Liquid
Crystal on Silicon (LCOS).
The X-Y matrix of pixels of a D-ILA chip is configured on a CMOS (expansion)
substrate. Each pixel has an aluminum-reflective pixel electrode connected to a driving
transistor. The homeotropic (vertically aligned) liquid crystal is sandwiched between the
reflective pixel electrode and a continuous transparent ITO electrode. The thickness of
W.B.Werner, D.S.Dewald, "Application of DLP@ Technology
to Digital Electronic
Cinema - A Progress Report," http://www.ti.com/dlp/
23
Sadasivan, SDM Thesis
38
the liquid crystal layer is about three microns. When a voltage is applied to the selected
pixel of the matrix, the liquid crystal changes birefringence and modifies the polarization
state of the projected light in the D-ILA.
C
7
RV
C.MMN
ONVEN UIJ
W9C
OE
N6
[EU9LENS
LAZrzk 9
PP E,
NTE GMATCM
Il
Figure 18. Schematic of digital cinema projector with D-ILA" technology. 2 4
The digital cinema D-ILA projectors have three D-ILA chips for each of RGB
color components as shown in Figure 18. The light from the arc lamp is split into RGB
components in a dichroic splitter and is sent to respective D-ILA Chips. The D-ILA chip
modulates the incoming light based on the bit streamed imaging code, which is then
combined by a crossed dichroic prism, which transmits the full color image to the
projection lens for imaging on the screen.
In summary, DLP chip uses MEMS technology, while D-ILA chip uses LCOS
technology. Both technologies are evolving in a rapid pace and are expected to match
film quality in few years. DLP technology has a head start over D-ILA technology in
that cinema projectors with DLP chips have been installed in several digital cinema
theaters. For a given chip with similar performance, D-ILA chips are expected to become
cheaper than DLP chips due to ease of manufacturing. But the manufacturing cost is also
R.D. Sterling and W.P. Bleha, "D-ILA* Technology for Electronic
Cinema,"http://www.ivcdig.com/digital cinema.htm
24
Sadasivan, SDM Thesis
39
dependent on the chip volumes.2 If DLP chips become popular D-ILA (JVC) chips may
not realize this advantage.
While projection system is clearly the most important part of digital cinema
theater, theater management system controls and monitors the entire system for seamless
operation, which will be discussed in the next section.
(3) Theater Management
Theater Management Systems control and monitor the activities in a digital
theater. It is the central console where shows are assembled and show-control automation
is programmed and monitored. The user interface of the theater management system
allows for creating a play list (includes trailers and feature presentations). For example,
Kodak's digital cinema system features the Cinema Operating System, a software
solution that supports the loading, scheduling, control and playback of feature
presentations, trailers and other pre-show content on multiple digital cinema screens.2 6
Kodak's Cinema Operating System has been designed to download decryption keys from
studios upon verification. The system also controls automated theater operations such as
lighting and sound systems.
2.5 Resolving Differences: Evaluating Analog and Digital Cinema
Technologies
Proponents of analog cinema technologies cite its impressive image resolution,
ubiquitous presence and low cost of production and distribution as chief reasons for its
continued success and prevalence. However, there are glaring insufficiencies with this
technology including:
(i)
Image quality degradation as a result of repeated screening and
(ii)
Limited bandwidth for digital sound and other auxiliary features.
While bandwidth limitation cannot be addressed with any advances in analog technology,
image quality degradation is being addressed. For example, Kodak is working with
This comment is based on the assumption that as the
pixel density increases,
MEMS based DLP chip will be more difficult to manufacture relative to LCOS chip.
26 See Description of Cinema Operating System
under Kodak Digital Cinema
Operating System http://www.kodak.com/US/en/motion/digital/cineOpSys.shtml
25
Sadasivan, SDM Thesis
40
projector manufacturers and screening companies to minimize film degradation through
its Kodak ScreenCheck program. 2 7
Digital cinema technology can eliminate these issues and provide additional
benefits. The key benefits of the digital cinema technology include:
(i)
Consistent image quality
(ii)
Greater bandwidth, resulting in better sound, interesting auxiliary effects,
etc.
(iii)
Simplified and streamlined duplication and distribution
Consistent image quality in digital cinema arises from lack of image degradation
with time. The picture and sound quality are not subject to the deterioration that plagues
35 mm film as it is run repeatedly through the projector.
Digital Cinema technology can accommodate additional bandwidth resulting in
improved sound quality, enhanced experience for impaired viewers and general audience.
Sound quality can be improved by including six, eight or more channels sound tracks
without compression. Additional specialized tracks to assist hearing and sight impaired
moviegoers can be added to the data tracks of the digital movie. It is also possible to send
special time tracks along with the program to cue special effects such as smoke, odors,
and laser effects etc., for new theatrical capabilities.
Duplication costs disappear with the introduction of digital cinema technology.
Currently, film duplication costs as much as 10% of the total cost of a movie.2' The
flexibility of distribution increases with digital cinema.
While digital cinema can provide substantial new benefits, it still lags behind
analog cinema in the primary criteria of image quality, but is improving fast. The metrics
based upon which image quality is measured include image resolution at a given
brightness, brightness and color gamut.
Some of the incumbents in traditional cinema are "fighting back" and have been
shifting their focus to defend their market. A few of the incumbents' approach to and
http://www. kodak.com/US/en/motion/screencheck/evaluation.shtml
Christie et al.,"Digital Cinema Analysts Report", SRI International, page 10, 2000.
This number seems to be varying from analyst to analysts. CSFB in its 2002 digital
cinema report, "Digital Cinema: Episode II," states that the cost of duplication to be
27
28
around 4% of the total cost.
Sadasivan, SDM Thesis
41
acknowledgement of digital cinema is embodied in the two following quotes by the
digital cinema program manager at Kodak:
"It is to our advantage and the customer's to ensure that digital
projection does not degrade image quality. Basically, we want the
digital images on screen to look like Kodak Vision printfilm when it is
projected under best conditions. There are other crucial factors
including retainingthe contrast, color gamut and tonality captured on
the originalnegative. It is importantto retain subtle details."
"We believe there are significant advantagesfor originating on film
today, including image quality, creative latitude, and archiving, and that
there is significant headroom for continued progress. The advances in
hybrid technologies, including digitalfilm mastering, also amplify the
advantages of originatingon film. There will also be advances in digital
imaging technology. Film,
digital and hybrid motion imaging
technologies will co-exist and advance on parallelpaths deep into the
foreseeablefuture." 29
It is clear from these quotes that incumbent film companies like to raise the bar on
digital cinema quality to ensure slow adoption of digital cinema. Despite these
significant advantages, digital cinema technology has not found widespread
acceptance because of issues related to cost of conversion and fears of rapid
obsolescence. This work presents a unique way of architecting the digital cinema
system that can help mitigate the fears of obsolescence. This approach for
architecting the digital cinema system is explored in detail in the next chapter.
"Interview with Glen Kennel," Kodak digital cinema program manager, October
2002, http://www.kodak.com/US/en/motion/digital/kennelInterview.shtml
29
Sadasivan, SDM Thesis
42
Chapter 3. Clockspeed Boundary Analysis
3.0 Chapter Summary
This chapter introduces the concept of clockspeed boundary and modularity along
clockspeed boundaries. This work extends the clockspeed concept introduced by Charles
Fine to product architecture. This work argues that the critical points in the architecture
are the boundaries between fast clockspeed elements and slow clockspeed elements to be
called as "clockspeed boundaries." Further, this work proposes a new concept of
modularity in the architecture: design modularity at the clockspeed boundary with
appropriate standards. By isolating the fast clockspeed components in a system and
modularizing those elements, one can reduce the risks associated with clockspeed
boundaries. While modularizing at clockspeed boundaries is critical, the function and
form of the system should appear integral to the customers.
Two different examples have been used to highlight the nature of clockspeed
boundaries. The home video game system is used to show the alignment of clockspeed
boundary with an existing clearly defined interface. The clockspeed boundary in this case
is controlled by the makers of slow clockspeed elements with appropriate standards. The
digital camera system is used to show the alignment of clockspeed boundaries within the
internal interfaces of the system, controlled by one firm. Other examples, such as PC are
used to indicate how multiple firms can control the interface. Finally, the clockspeed
boundaries in digital cinema have been highlighted with a view toward potential issues
involved in clockspeed boundaries.
3.1 Introduction to Clockspeed
Clockspeed is defined as the evolution rate of a product, technology, and
industry. 30 For instance, in the case of automobiles, new models are introduced about
every 3-5 years, which is the clockspeed of automobiles. In contrast, the clockspeed of
Intel microprocessors is about 1-2 years. The clockspeed of commercial jet liners is about
One could also use the rate of introduction of new process technologies or changes
in organizational structure as a metric for "clockspeed" to be called as "process
clockspeed" and "organizational clockspeed" respectively.
30
Sadasivan, SDM Thesis
43
10 years, several orders of magnitude slower than microprocessors. The clockspeed of
few sample industries is shown in Table 3 below.
Industry
Personal Computer
Software Engineering
Semiconductors
Pharmaceuticals
Commercial aircraft
Product Clockspeed
6-12 months
6-12 months
1-2 years
7-15 years
10-20 years
Table 3. Clockspeeds of a few representative industries"
The need for identifying and understanding clockspeed arises from evercompetitive nature of fast clockspeed industries. Charles Fine compares such industries
to fruit flies (Drosophila).Just as fruit flies have an extremely short life span so do the
products in these industries. By observing the rapid evolution of high clockspeed
industries, Fine says, the lessons learned can be applied to other industries.
To be competitive in fast clockspeed industries (i.e. those firms that develop fast
clockspeed products), a firm has to develop capabilities in short time scales.
changing
environments
may provide fleeting
competitive
advantage
Fast-
to firms.
Accordingly, the need to choose capabilities that provide competitive advantage wisely
becomes crucial. Fine, calls this the "ultimate core-competency" of any firm:
" The overriding competency is the ability to determine which of
those capabilities are going to be the high value added capabilities and
which will be commodity abilities-andfor how long. The greatestrewards
go to the companies that can anticipate, time after time, which capabilities
are worth investing in and which should be outsourced."
The clockspeed of an industry or a firm is not a static measure; rather, it is dynamic
depending on the nature of the technology and its context. Arrival of a new technology
in a mature market can dramatically increase the clockspeed of an industry. For example,
the arrival of digital imaging has increased the clockspeed of the imaging industry. Fine
says:
Charles Fine, "Clockspeed: Winning Control in the Age of Temporary Advantage,"
Perseus Books, Appendix A, p 239, 1998.
31
Sadasivan, SDM Thesis
44
"Digital image processing technology will likely be governed by
Moore's law ratherthan incremental advances in a comparatively mature
area of chemistry"
Recently, an in-depth study of the dynamics of innovation in digital photography
indicated that increasing number of firms are introducing ever-increasing numbers of
digital cameras, spanning a whole range of product features at increasingly faster rates. 32
The resolution of digital still cameras, first introduced in 1995, ranged between 0.3- 0.5
megapixels. In fewer than two years, in 1997, 0.5-0.9 megapixel cameras were
introduced. In the four years since then, the resolution of digital still cameras has gone
up and beyond 3 megapixels and the price of the lower resolution cameras has gone down
significantly. Recently, several 4 to 6 megapixel cameras have been introduced that
claims to have surpassed film cameras in quality.
Clockspeed acceleration may also occur as a result of product demand.
For
instance, high clockspeed of anti-virus software products are driven by demand for these
products. The number of virus attacks has increased significantly since the dawn of the
Internet era in the mid 1990s. Because software viruses have managed to bring operations
of several corporations to a grinding halt, there is a demand for the antidotes to keep pace
with the viruses themselves. Similarly, increased adoption of high-speed broadband
Internet access has brought with it increasing hacker attacks on computers. This has
increased the clockspeed of anti-hacker software products. Last but not the least, everchanging smart tactics of email spammers has increased the clockspeed of anti-spam
software products. The clockspeed of these industries can be measured in months rather
than years.
3.2 Introduction to Clockspeed Boundary
Traditionally, clockspeed has been used as a metric to measure of the everchanging dynamics in a sector or an industry. The clockspeed concept has much broader
applicability. This work introduces the application of clockspeed to product and value
Peter Zelten, "Digital Photography and the Dynamics of Technology Innovation",
System Design and Management Thesis, MIT, 2002.
3 See for example announcements of several 4 to 6 megapixel camera introductions
at Photokina 2002. http ://www.direview.com/articles/Dhotokina2002/
32
Sadasivan, SDM Thesis
45
chain architectures concurrently. Fine suggests that firms in high clockspeed industries
develop product, process and value chain architectures concurrently to keep pace with
others in the industry. This work presents a unique view of how to accomplish this.
Just like identifying industry clockspeeds, one can also look at clockspeeds of
components or subsystems within the architecture of a system or a product. Such a study
would find different subsystems evolving at different rates due to technology evolution or
customer demand. For the purpose of this work, two technologies that evolved at least a
year apart are termed as "substantially different." The interface between a slow and fast
clockspeed component or sub-system is defined as clockspeed boundary. The clockspeed
boundary can be technologically, organizational or market bounded. The interface is
called a boundary because it poses knowledge and learning barriers to firms.
Clockspeed boundaries can be observed in several familiar systems. It can be
observed in several systems across different industries including videogames, PC, digital
copiers, airplanes and automobiles. Telematics in automobiles provides a great example
of this boundary. In this case, the clockspeed boundary lies along the interface where the
.
electronics sub-system interfaces with the mechanical assembly in an automobile 4
The locations of clockspeed boundaries vary from system to system. The
clockspeed boundary may align itself within an existing, clearly defined interface. The
clockspeed boundary may be located along the interface between two subsystems. A
single firm or multiple firms may control these sub-systems and the interface.
As such, the clockspeed boundary can create a potential opportunity or a problem.
First and foremost, rapid evolution of one subsystem within a system can create fears of
obsolescence and reduce early adoption, which has been evident with digital cinema
adoption. The high cost of projectors have made this problem much more severe.
A
digital cinema projector currently costs approximately $150,000 to $200,000 with a life
span of 2-4 years at best 5 . In comparison, film projectors cost approximately $25,000 to
$30,000 with a life span of 15 years 36. Despite very optimistic projections, these issues
See for example discussion of clockspeed boundary in automotive telematics in
Nathan Everett, "Automotive Telematics: Colliding Clockspeeds and Product
Architecture Strategy," System Design and Management Thesis, MIT, 2003.
35 "Adoption of E-Cinema", SRI Consulting Business Intelligence Report, 2001, page
11
36 ibid, page
13
3
Sadasivan, SDM Thesis
46
have led to digital cinema deployment in only about 100 screens, with a penetration rate
of about 1% in 2 years.
In other cases, clockspeed boundaries can create difficulties in the product
development process. For example, in the case of automotive manufacturers, the product
development process requires extensive verification and validation of the system leading
to a development time between 3-5 years. But the evolution time of electronics is in the
order of 1-2 years.
A scenario wherein the evolution of automotive development
matching the electronics evolution is very hard to foresee. In the absence of such a
scenario, integration of these technologies becomes a challenge. To explain these
concepts further, a few examples are presented here. First, the clockspeed boundary in a
home video game system is presented, followed by the clockspeed boundaries in a digital
camera.
A home video game system consists of three components: a console, a controller
and a cartridge. Table 4 shows the evolution of the consoles from early 1982 to late 1996.
The clockspeed of the home video system has dramatically increased since 1989,
accelerated by product demand. During the same time, the number of cartridges (or
games) for each of these consoles increased with increasing popularity of the video game
systems. There were 94 different games developed for Atari 5200, but that number
increased to about 900 for the Nintendo Entertainment System and it further doubled with
Sega Genesis System 37. The clockspeed of the game cartridges seems to be in the order of
months compared to 1-2 years for the game systems. For this system, the clockspeed
boundary exists at the point where cartridge interfaces with the console.
Here the
clockspeed boundary aligns itself with an existing, clearly defined interface. Moreover,
the firms that make the system like Sony, Nintendo and Sega control this interface.
This is not an exhaustive list. This information is used to indicate qualitatively that
the lifecycle of a video game is much shorter than the life cycle of a game console.
Classic Home Video Games Museum website lists partially various cartridges released
for various home video games systems at http://members.tripod.com/~qames
museum
3
Sadasivan, SDM Thesis
47
Introduction
Date
1982
1983
1989
1989
1990
1995
1995
1995
1996
Atari 5200 Super VCS
Nintendo FAMICON / NES
Nintendo Game Boy
Sega Genesis
Super Nintendo
Sega Saturn
Sony PlayStation
Nintendo Virtual Boy
Nintendo Ultra64
Data Width
(# of bits)
8
8
8
16
16
32
32
32
64
Microprocessor
Clockspeed (MHz)
1.8
4.0
4.0
7.6
3.6
28.8
33.0
10.0
93.75
Table 4. Evolutions of home video game systems from 1982-1996.38
A series of clockspeed boundaries can be observed in digital camera assembly. A
digital camera consists of an assembly of mechanical, optical and electronic elements or
sub-systems. The schematic of digital camera architecture as depicted in Figure 19
adapted from an earlier work, shows the various sub-systems, the most relevant ones for
this discussion being optical, electronics, CCD sensor, memory and mechanical
assembly.
Digital Still Camera - Product Form
r--------------------------------------------------------Ul A L CD dimlay
viewfinder i revieow
I
widr
cs
image formation
CPU
el ec tro nj
timi ng tirningUl
clack drivers
---
clc d r
signal conditioning
e>Tsga
odiinn
AA) conversion
photons
I "digital film'
external communicotion interface
computer
zoom, focus. flash
pixel processing
printer
network
TP
camera control
m rcnrl
power management
communication
.........
image correction &compression imaci storage media
file/storage management
platform for software
& standards
'
I rem
vable &expandable
'sneaker net
----.-------
power source
batteries
charger
(removablerechargeable)
--
-1"0
image path
minrot path
memory
DRAM for scratch pad, fast store
FLASH for code &calibration
(and image storage at low end)
Important wncep: mihvysmems and drchitecralinterfaces
Importancv and eohitfin of core & peripheraI subhystems
Figure 19. Typical architecture of digital still camera. 39
See for example, the history of home video game systems
in
http://www.hut.fi/~eye/videogames/console.html. Also see
http://www.videotopia.com for a detailed history of the home video game systems.
38
Sadasivan, SDM Thesis
48
The CCD sensor, which is the key component of any digital camera, is a high
clockspeed element, as evidenced by rapid new introductions with either higher
resolutions or smaller size appearing every year as shown in Table 5 below.
M ixels
Year
1995
1996
1997
1998
1999
2000
2001
0.3
0.8
1.0
1/2"
1/3"
1/4"
1/3"
1/2"
1/3"
1.3
2.0
3.0
4.0
5.0
1/1.8"
1/2"
1/1.8"
2/3"
2/3"
1/3"
1/2"
1/2.7"
Table 5. Smallest diagonal format sensor introduced in a digital still camera by resolution
and year of introduction. 0
Similarly, the memory in a digital camera is a high clockspeed element. But subsystems
such as optics and mechanical assembly subsystems evolve much slowly than the CCD
sensors and memory. The interface between these fast clockspeed elements and the slow
clockspeed elements define the clockspeed boundaries in this system.
In the case of the digital camera, the clockspeed boundaries are aligned within the
internal interfaces of the system. For example, if we analyze SONY's digital cameras, the
CCD sensors and the mechanical assembly is manufactured by SONY, while the lenses
are mostly made by Carl-Zeiss to the specifications created by SONY. SONY integrates
the different subsystems, verifies and validates the performance of the camera. Clearly, in
this case, a single firm controls the clockspeed boundaries in the system.
When IBM introduced PCs in early 80s, it created a modular architecture with
open standards to counter the threat from Apple, which had a modular architecture with
closed standards. Without intending to do so, IBM established the modular interfaces at
the clockspeed boundaries, and established open standards at those boundaries.
Even
today, operating systems evolve at different rates than keyboards, which evolve at
Peter Zelten, "Digital Photography and the Dynamics of Technology Innovation,"
System Design and Management Thesis, MIT, 2002.
40 Zelten, 2002.
3
Sadasivan, SDM Thesis
49
different rates than network card, which evolve at different rates than processors, which
evolve at different rates than display devices, and so on and so forth. By creating open
standards, IBM captured only a portion of the value it created. Meanwhile Intel and
Microsoft captured a huge share of value created by IBM by integrating microprocessor
and operating system and controlling the clockspeed boundary.
3.3 Clockspeed Boundaries in Digital Cinema
Several different technologies are integrated together to form the Digital Cinema
system, as discussed in the previous chapters. Each of these technologies evolves at a
slightly different rate, relative to others, creating a series of clockspeed boundaries within
the digital cinema system.
One of the clockspeed boundaries lies within the digital projection system. The
key elements of the digital projectors include the projection chip, optical elements, lamp
housing and mechanical assembly. The popular projection chips include TI's Digital
Light Processing DLP chip and JVC's Digital Image Light Amplifier D-ILA chip. While
these two technologies are very different in many respects, they share chips that are the
fast clockspeed elements in the projection systems.
The DLP chip with 640 x 480 resolution was first developed in Texas Instruments
in 1987. Since then, seven different chips have been introduced each with increasing
resolution, shown below in Table 6.
Year of Introduction
1987
1992
1994
1999
2000
DLP Chip Resolution
640x480
768 x576
800 x 600
848 x600
1024 x 768
1280x720
1280x 1024
Table 6. DLP Chip resolutions and their year of introductions.4 1
41
Information in this table has been collected from TI's website http://www.dlp.com
Sadasivan, SDM Thesis
50
,
Similarly, JVC's roadmap of the D-ILA chip shown, in Figure 20, further
demonstrates that the lifecycle of projection chips are on the order of 1-2 years. JVC's
1.3"QXGA chip with resolution of 2048 x 1536 is currently the highest resolution chip
available for digital cinema. JVC plans to introduce a higher resolution chip (3840 x
2048) in 2003. JVC is also planning to create smaller, lower cost versions of the D-ILA
chips to be used in home theaters and palm top applications.
m
'ooi
2000
2002
JXI x QJ(.
crusma
Muller WTsohtio
& Brightness
Figure 20. Roadmap of D-ILA development for different applications. 4 2
While these chip are evolving faster, the mechanical and optical elements in a digital
cinema projection system evolve rather slowly creating a clockspeed boundary within the
display subsystem.
The encryption element of digital cinema has the potential to be yet another high
clockspeed subsystem. If recent events, such as cracking of DVD content scrambling
systems and disabling of regional DVD blocking schemes are any indications, firms will
be forced to update and upgrade their encryption schemes periodically to prevent movies
being freely distributed through the Internet, prior to release.
The conditional access
United States Display Consortium's High Resolution Displays Working Group
Road map can be found at http ://www. usdc.orgi/technical/tech road. html
42
Sadasivan, SDM Thesis
51
subsystem, which contains the encryption, is likely the highest clockspeed element in
digital cinema. This element interfaces with all the remaining components, creating a
series of clockspeed boundaries in the system.
3. 4 Modularity at Clockspeed Boundary
This work argues that firms can achieve competitive advantage by strategically
managing clockspeed boundaries by creating advantage at the architectural level. This
work proposes a new concept of modularity in the architecture: design modularity at the
clockspeed boundary with appropriate standards. By isolating the fast clockspeed
components in a system and modularizing those elements, one can reduce the risks
associated with clockspeed boundaries. While modularizing at clockspeed boundaries is
critical, the function and form of the system should appear integral to the customer.
Standardizing the interface between the clockspeed boundaries is critical if
different firms develop the slow and fast clockspeed components.
The firms developing
fast and slow clockspeed components benefit from such a strategy. For the slower
clockspeed entrant, it provides a stable platform on which its profit and business models
are based. For the faster clockspeed entrant, this supports the need to introduce products
fast enough to keep pace with market demands for new designs at an affordable cost.
Moreover standardizing clockspeed boundary can provide unique benefits for a
product with "network" effects. Creating standards along the clockspeed boundary should
be a strategic decision; the pros and cons of such a decision will be discussed in the
following chapter. Nevertheless, any firm that controls the clockspeed boundary interface
may gain significant competitive advantage. In the case of video games, the video game
makers such as Nintendo, SEGA and SONY control the clockspeed interface to varying
degrees. Nintendo had complete control over this interface in its Nintendo Entertainment
System and, thus, appropriated a significant amount of value from the cartridge makers.
While complete control is no longer the case, the video game makers still exert
significant control over this interface. Unique leverage at the clockspeed boundary helped
Intel and Microsoft vertically integrate other elements in the personal computer industry,
further controlling the PC chain and capturing further value.
Sadasivan, SDM Thesis
52
Recent work on the DSC architecture also observes this principle in practice. The
author states that,
"While the products are not typically manufactured in a modular
fashion, the interfaces between the subsystems arefairly well standardized
so as to permit modular design, and rapid renewal and upgrade ofproduct
lines to incorporate the annual performance improvements in each of the
availablesub-systems."4 3
In this case, modularity at the clockspeed boundaries does not remove fear of
obsolescence. Rather, rapid introduction of new generation sensor element enables firms
to lower the price of previous generation sensors, strategy similar to one used in the PC
industry.
As observed in the previous section, TI and JVC control the high clockspeed
element in the digital projectors. TI does not build digital cinema projectors, rather it
licenses the technology and sells DLP chips to a few select OEMs, who integrate the chip
in a projection system. Along with this strategy, TI is attempting to modularize along the
clockspeed boundary in the digital projector. Included with the DLP chip is a controller
ASIC chip that manages color correction, image enhancement and other control
functions. The DLP Composer, a suite of software tools that is included in the ASIC
chips allows OEMs to more easily design products using the DLP technology. Thus, TI
has modularized the clockspeed boundary and controls the interface. JVC's strategy with
the D-ILA chips is unclear. If JVC prefers to sell projectors, it may control the entire
subsystem.
Standardizing the clockspeed boundary eliminates some of the issues with
clockspeed boundaries. But the standards strategy will ultimately decide the value
captured by any firm. The pros and cons of standardizing in digital cinema and
clockspeed boundaries, in particular, will be discussed in the next chapter.
Peter Zelten, "Digital Photography and the Dynamics of Technology Innovation,"
System Design and Management Thesis, MIT, 2002.
4
Sadasivan, SDM Thesis
53
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Sadasivan, SDM Thesis
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Chapter 4 Standards Analysis
4.0 Chapter Summary
This chapter explores the dynamics of standards in digital cinema, in general, and
modular clockspeed boundaries, in particular.
Standards define interface requirements
between content, distribution and display in digital cinema. The standards add value in
digital cinema by indirect network effects working through the demand of content.
A brief taxonomy of standards and a brief overview of key concepts in standards
strategy are presented in this chapter. The overview summarizes economics of standardsbenefits versus cost and key elements of standards strategy, including positioning,
enabling and continuation strategies. A key aspect of the positioning strategy for every
firm is to strategically decide on the openness of the standard.
The pros and cons of two distinct modes of establishing standards (defacto versus
de jure) are analyzed and a hybrid strategy that utilizes committees to drive the marketfocused process is proposed for digital cinema. The rationale for using hybrid strategy
arises from the nature and number of interfaces in digital cinema and the unique power
structure and distribution within the motion picture industry. To that extent, the different
interfaces in digital cinema, based on architecture proposed by an industry consortium,
SMPTE, are explored. The issues in the standards process arising from the existing
analog cinema and power of incumbents, is explored as well.
4. 1 Introduction
Standards have played a key role in some of the most innovative products in
recent years. Products such as Video Cassette Recorders (VCRs), Compact Discs (CDs)
and Personal Computers (PCs) have been largely successful because of the adoption of
common standards across the industry. During the same time, several other products
such as Digital Audio Tapes (DATs) and Video Discs, have been largely unsuccessful as
a result of fractious industry participants failing to set common standards.
Standards do not just apply to (or are restricted to) high-technology products but
also apply to simple items in everyday life, such as razor blades, electrical voltages,
Sadasivan, SDM Thesis
55
electrical sockets, etc. Household appliance makers prefer to have houses equipped with
standard sockets, so any and all appliances could be used. Railway networks require same
standard gauge lines across a nation to be useful. Standards not only affect the
manufacturers and service providers but also users, none of whom prefer to be left
supporting or using an obsolete standard. Moreover, standards enable products to be used
with complementary goods and services. Computers need software, VCRs need tapes,
video games need games and televisions need programs.
The main characteristic of a standard is that the larger the network of users
adopting the standard, the more valuable it is to belong to that standard. A technically
inferior standard with an installed base (i.e., relatively small advantage in early stages)
can still win against a technically superior standard. This is most apparent in the case of
the personal computer. Although many have argued that Apple presented a technically
superior standard in its Macintosh computers, IBM was able to out-compete Apple
because it presented a common standardized platform for development of complementary
software products.
The strategy employed by a company attempting to encourage adoption of a
standard is markedly different from a conventional product strategy. The conventional
wisdom suggests that the firm should introduce differentiated products to the market,
protect it from the imitators and charge high prices to extract value from the product (or
innovation). Firms that have created successful standards have followed a very different
strategy than the one described above. Because the size of the installed base is very
critical in establishing standards, some of these firms have lowered prices to maximize
early sales. In the case of VCR, JVC released the VHS format openly to other
manufacturers very early on in the process. These strategies benefit from the so-called
"network effects." Network effects arise from being part of a network of users, the value
of connecting to a network depending on the number of users already in the network.
A standards strategy involves making several key decisions including how to
establish standards, how to extract value from the standards and how to compete
effectively once the standards are established. In some cases, governments or committees
have been involved in setting standards. In such cases, understanding the role of markets
and committees is crucial.
Sadasivan, SDM Thesis
56
4. 2 Standards Definition
Standards define a common set of features of a system. The standards can be classified
into two broad classes: "quality standards," which define the characteristics of systems or
sub-systems and "compatibility standards," which define specifications for interfaces
between sub-systems. A few examples are shown in Table 7.
Category
Quality
Examples
Picture Quality, Resolution
Health and Safety
Type
Minimum Attributes
Regulatory
Compatibility
Complementary Products
Complementary Services
Table 7. Classifications of standards. "4
VCR tapes, software
User training, maintenance, service support
This chapter will focus only on compatibility standards because the discussion in this
chapter does not apply to quality standards. The compatibility standards can be further
categorized based on how deeply the standard is embedded in the design, different market
segments adopting the standard, control over the standard and the process by which it is
established, as shown in Table 8.
Category
Product Scope
Market Extent
Positioning/Control
Process
Dimension
Degree
Level
Means
Group
Fragmentation
Access
Leadership
Method
Property
Significance of standard features
Functional layer(s) standardized
Built-in (or) "Gateway" converter
Multi-product, multi-generation, multi-firm
Monolithic or fragmented
Open or proprietary
Develop or adopt
Market (defacto) or official (de jure)
Table 8. Compatibility standards distinction.4 5
The degree of standardization defines the extent to which the product features are
covered by the standard. The greater the degree, the less scope remains for product
differentiation. Some standards define all the relevant features while others define the key
44
4s
Peter Grindley, "Standards Strategy and Policy", Oxford University Press, 1995
Grindley, 1995
Sadasivan, SDM Thesis
57
interfaces. For example, the octane ratings for gasoline completely define a product. In
contrast, automobiles are partially standardized on a few subsystems such as tires, but not
on key sub-systems, such as engines.
different "levels".
The standards may be built into a product at
Some standards may just require a standard interface or some may
require incorporation at the system level. Data communication standards may specify
transmission formats and may treat the rest of the system as a "black box." However,
such standards decisions may have an impact on the design of hardware and software.
Standards can be either built into the system (plug and play) or can use a converter or
adapter to achieve compatibility.
Standards apply to different product or firm groups. Firms producing similar
products may choose to adopt multi-firm standards. Multi-product standards apply across
products from the same product line within a firm. One "monolithic" standard may
dominate an entire industry. For example, the film format (35 mm) is used by the entire
movie industry. Alternatively, there may be several different standards in the same
market. For example, several transmission standards for cellular telephones, such as
CDMA, TDMA and GSM, co-exist.
Each firm developing a standard has to decide whether to make a standard
proprietaryor open. Developing proprietary standards involves protecting the intellectual
property by patents, copyrights or trade secrets. A firm that controls a proprietary
standard can extract value from others for using the standard through royalty fees or other
means of compensation. With open standards, no restrictions are placed on firms
adopting the standard. Firms can also choose between "lead in" the development of a
standard, or "follow in" by adopting an established standard. The pros and cons of each
of these positions will be discussed in the later section on standards positioning.
The method by which the standard is determined may be by market forces (de
facto) or mediated by official standard bodies (de jure). The official standard bodies
include government legislation (for the cellular telephone, HDTV standards) and industry
committees (Society of Motion Picture and Television Engineers, SMPTE). The pros and
cons of each method will be discussed in the later section on market standards and
regulated standards.
Sadasivan, SDM Thesis
58
4.3 Economics of Standards - Benefits and Costs
To understand the benefit of standards, one has to understand the benefits of
"network", well articulated by economist Duncan and physicist Barabisi 46 . The networks
have a fundamental economic characteristic: the value of connecting to a network
depends on the number of other people already connected to it. The value increases
tremendously with the number of users in a network. The often-quoted Metcalfe law
states that, " The value of a network goes up as the square of the number of users." This
fundamental value proposition goes by a number of names: network effects, network
externalities, and demand-side economies of scale. All these terms refer to the fact that,
all things being equal, it is better to be connected with a bigger network than a small one.
As one gets connected to a bigger network, it increases the network benefits further
prompting more to join the network, creating a positive feedback.
Standards add value by providing positive network externalities. Externalities
arise when one market participant affects others without compensation being paid.47 By
adopting a particular standard, the user not only reaps benefits for himself but all the
other users of that standard. Standards enlarge the markets for complementary goods and
services in two ways:
Increase in the number of complementary product and service
providers leads to greater variety of products and services, increased competition leads to
lower prices.
Standards reduce switching costs. Switching cost refers to the notion that users
are locked in a cycle as shown in Figure 21 made from previous investments and needs
realized at different points in time. Lock-in also arises as a result of the fact that the cost
of replacing investment
8
deters them from switching to a new system. Switching costs
can increase or decrease with time. Switching costs arise from being locked into a
particular product or service. Lock-in can also arise from using products and services
from a particular vendor. Open standards reduce the switching costs (and, therefore, lockin) by increasing the number of available complements and also by reducing the
Albert-Lasz16 Barab6si, " Linked: New Science of Networks," Perseus Publishing,
2002.
47 C. Shapiro, H. Varian, "Information Rules: The Strategic Guide to the Network
Economy," 1999.
48 The cost of investment may include
retraining costs.
46
Sadasivan, SDM Thesis
59
retraining or conversion cost. Users are less likely to be locked into a particular vendor
as well.
Selection of a
+ Product/Service
Trial Use of the
Product/Service
+
Lock-in
+
Increased use of
Product/Service
Figure 21. Schematic representation of lock-in cycle. 49
The dynamics of standards reinforced by positive feedback is shown below in Figure 22.
Positive feedback makes the strong get stronger and the weak get weaker, leading to
extreme outcomes. A small initial advantage over another standard may lead to a slightly
larger installed base over that standard.
Larger Installed
Base
Increased
Adoption
Increasing number of
complements
Improved
Credibility
Reinforces value
to Users +
Figure 22. Schematic representation of standards dynamics.5 0
The larger the installed base of users, the more complementary products and
services are developed. This leads to an increased credibility of the standard and makes it
Shapiro and Varian, 1999
s0 Shapiro and Varian, 1999.
4
Sadasivan, SDM Thesis
60
more attractive to new users. This leads to further adoption, which further increases the
installed base. The positive feedback from this loop can increase the share of the leader at
the expense of other standards to an extent that the market can tip to a particular standard.
The other remaining standards can survive only if they have established a significant
installed base and they are strongly differentiated from the leader. The case of VHS
versus Betamax is a good example of the standards dynamics. VHS gained the lion's
share of consumer market as a result of positive feedback, relegating Betamax to a niche
market. Betamax is still used by creators in the motion picture industry.
Another
example can be seen in the case of HTML standards, which were created by committees.
Now Microsoft has taken over as the arbiter of new HTML standards as Microsoft's
Internet Explorer became the dominant browser.
The standards dynamics suggest that the critical period of setting standards will be
in the very early phases. Early adoption decisions depend on expectations if a standard is
likely to succeed. Hence, the credibility of a standard is crucial in the early stages. Users
prefer to select the right standard to avoid being stranded with a minority-unsupported
standard. Manufacturers of complements prefer to choose the standard with the highest
potential.
If the product is new, information on the standard will be very limited and
most of decisions may be based on expectations. Expectations can be self-fulfilling to
some extent. Firms influence expectations with pre-announcements (e.g., Microsoft's
Vaporware), user education, showing commitment by building manufacturing capability,
complementary support, etc. The firms have a narrow window of opportunity during
which they may influence the standards process, from the time a system has been
developed to the time that an installed base is formed. The standard dynamics then takes
over, leading to one dominant standard.
The cost of the standards setting process includes cost of development and
coordination. The standard setting is essentially a coordination problem between the
manufacturers, producers of complements and users. Each group makes its own choices
and prefers not to be stuck with the wrong standard and, hence, prefers to wait or hold
back until someone else makes the first move. One way to mitigate this effect is to make
initial investments in complements and subsidize early users. There may be other costs
because of congestion if too many people try to use a limited resource. There may also
Sadasivan, SDM Thesis
61
be indirect costs of being tied to an obsolete standard and also a possible loss of variety.
If these costs increase more quickly than the benefits provided by the standard, the size of
the network may be limited.
4.4 Key Elements of Standards Strategy
The key elements of standards strategy include how to establish standards, how to
extract value from the standards and how to compete effectively once the standards are
established.
The aim of strategy should be to ensure that the standard is established
ahead of its competition.
Therefore establishing standards not only includes
understanding how to position the standard, but also pursuing supporting activities to
build an installed base and credibility ahead of the competition. Concurrently, a firm
should be strategizing to capture maximum value given a standards strategy.
Once a standard has been established, the scope of the competition shifts to
working within the bounds of the established standard. Competition is focused more on
product price, quality and service rather than on features.
However, establishment of
standards could open up opportunities for complementary products and services.
Continuation strategies aim to compete in the established marketplace and to participate
in new markets as they appear. The key elements of standards strategy are summarized in
Table 9.
Strategy
Positioning
Enabling Strategies
Capturing Value
Continuation Strategies
Key Elements
Lead or follow (develop or adopt)
Open or proprietary
Build installed base early
Build credibility
Alliances and sponsorships
Managing expectations
Degree of openness
Degree of openness
Super compatibility
Complementary assets
New standards products
Vertical integration
Table 9. Elements of standards strategy. 5 1
5
Grindley, 1995
Sadasivan, SDM Thesis
62
Positioning Strategies
The positioning decision determines the market control every firm is likely to
have on a standard. The positioning strategy involves two decisions: (1) leadership of the
standard - whether a firm develops its own standard or adopts one from outside and (2)
the access to the standard - whether the standard it chooses to develop is proprietary or
open. The four options shown in Table 10 are:
Access
Leadership
Lead
(Develop)
Follow
(Adopt)
Proprietary
Open
Sponsor/Defend
Give away
License in
Clone
Table 10. Strategic positioning decisions.
"
Sponsor/Defend: Develop a proprietary standard and restricts its use by
competitors, besides charging significant license fees.
" Give Away: Encourage competitors to use an open standard developed by the
firm, without any restrictions.
" License In: Adopt a proprietary standard developed by a competing firm.
" Clone: Adopt an open standard, without any restrictions.
The leadership decisions depend on whether a firm is technically and financially able to
develop and introduce a standard. It also depends on the strength of the competing
standards and their timing of introduction. The access decisions depend on the market
power that the firm is able to exert via the standard. This depends on the appropriability
of the firm and the ability of the firm to establish the standard with or without the help of
outside support.
The positioning strategy of the firm should be based on tradeoffs between the
chances of being adopted as a standard against the likely returns in each case. The
benefits and costs of each positioning strategy are shown below in Table 11.
Sadasivan, SDM Thesis
63
Proprietary
Lead
Follow
Open
Protected market
+ High margins/ share
+ High license earnings
- Low chance of winning
+ High chance of winning
+ Large market
+ Broad external support
+ Shared costs
- Little external support
- High cost
- Small niche market likely
- Low share/margin
- High competition
- Low license earnings
+ Proven market
Possible alliances
+ Equalized competition
+ Low license fees
- Secondary position
- High license fees
- Timing issues
- High competition
- Undifferentiated product
- Timing issues
Table 11. Strategic positioning: costs and benefits.52
The magnitude of these costs and benefits, based on the selection factors shown in Table
12, determine a firms' positioning strategy. The more advanced the development of a
competing standard and the stronger the complementary assets of the rivals, the harder it
gets for a proprietary standard to win a contest. Similarly threat of a strong proprietary
standard increases the attractiveness of an open standard to the weaker players and raises
its chances of recruiting enough support to win a contest.
52
Grindley, 1995
Sadasivan, SDM Thesis
64
Open
Proprietary
Lead
Follow
Proprietary
Strong appropriability
Technical leadership
Time lead in development
Presence of complementary
assets
Established standard
Possibility of a niche market
Competitive cost position
Open
Weak appropriability
Leadership potential
Speed
Limited resources
Need for support (complementary
assets)
Ability to differentiate product
Dominant proprietary standard
Late entrant to a market
Limited resources
Competitive cost position
Table 12. Strategic positioning selection factors. 53
Examples of positioning strategies used by various firms for various products are shown
below in Table 13.
Lead
Follow
Proprietary
VCR Sony (Betamax)
PC Apple (Macintosh)
Mainframe Computer IBM (S/370)
PC-O/S Microsoft (Windows)
Open
VCR JVC (VHS)
PC IBM (DOS)
Operating System AT&T (Unix)
CD Philip. & .Sny
VCR Sanyo (Betamax)
Mainframe Fujitsu (S/370)
VCR Matsushita (VHS)
PC Compaq, Dell (DOS)
O/S IBM (Linux)
Table 13. Examples of strategic positioning strategies. 54
Successful positioning strategy can reap a windfall for the winner. The magnitude of
these decisions can be understood from the battle between Sony and JVC in creating
VCR standards. In 1976, Sony introduced Betamax and for the next year or so, it was the
lone player in the market. By 1981, JVC controlled 80% of the market, while Sony's
market share steadily eroded. By 1981, cumulative units of VHS VCRs sold in U.S.
exceeded 2.3 millions compared to 1.2 million for Betamax, i.e., double the installed
base. 5
s3 Grindley, 1995.
54 Grindley, 1995.
ss M.Cusumano, Y.Mylonadis and R. Rosenbloom, "Strategic Maneuvering and Mass
Market Dynamics: The Triumph of VHS over Beta," The Business History Review, pp
51-94, 1992.
Sadasivan, SDM Thesis
65
Enabling Strategies
The aim of enabling strategies is to establish a particular standard ahead of the
competitors. The leadership and access decisions are preliminaries to the enabling
strategies discussed in this section. The main elements of the enabling strategies are
discussed in Table 9 and below. These elements are well discussed in technology strategy
literatures and are listed here as a brief review. Strategies specifically related to digital
cinema are addressed in a later section
(i) Building an installed base: The main initial goal of any standards effort is to
build a critical mass of users ahead of the competition. This includes achieving a bigger
market share and higher cumulative sales than the competition.
Methods to encourage early adoption would include strong promotion, display of
commitment to create a winning standard, penetration pricing, forming strategic alliances
with distributors and manufacturers, leveraging brand name and other existing installed
bases. The concept of penetration pricing is different from that of 'price skimming' in
that the product prices are not high initially to promote adoption.
(ii) Building credibility:
Early adopters buy a system/product before the
standards are typically decided. One of the motives for a prospective buyer is not to be
stranded with a losing/unsupported standard. This is true not just for buyers but also for
manufacturers and producers of complements. One of the biggest concerns is convincing
these groups to buy in to the standard early on.
Methods to build credibility include building alliances with producers of
complements and displaying a commitment to users and others of being able to win the
standards war. Open standards provide assurance to users and others that they will not be
locked into the standard once they have invested in complementary goods and services.
(iii) Alliances and Sponsorships: Creating alliances provides a support base for
the standard. Alliances help to spread standard development costs, besides removing
potential competing standards and the extent of standards contests. The broadest
coalitions emerge typically against a powerful standard consisting of firms, which do not
have capability to fight the standard individually.
(iv) Managing Expectations: Managing expectations is critical in any standards
battle. Product preannouncements are one way of influencing expectations. These may
Sadasivan, SDM Thesis
66
reduce the impact of a competitive standard or at least confuse the market, especially as
expectations are partly self-fulfilling.
Capturing Value
(i) Degree of openness: The value a firm can expect to obtain from standards is
determined by degree of openness of the standard. At one extreme a firm with a fully
proprietary standard can expect to reap significant profits at the expense of being a
standard in a niche market. On the other extreme, a firm with an open standard can
establish the standard in the market and may create a large market but with high
competition, low margins and market share. The optimal position may be somewhere in
the middle, with a moderately open standard which has a good chance of being
established and still allows the leader enough control to retain significant market-share
and margin.
The tradeoff every firm faces is between the size of total market and
individual market-share. The more open a firm's strategy, the larger the total market, but
smaller its share and the margin is lower.
Continuation Strategies: Competing within a Standard
Once a standard has been established, the scope of the competition shifts to
working within the bounds of the established standard. Competition is focused more on
product price, quality and service than on features. However, establishment of standards
could open up opportunities for complementary products and services. Continuation
strategies aim to compete in the established marketplace and to participate in new
markets as they appear.
(i) Degree of openness: The market-share of a leader tends to gradually erode
after the standard is established. The strategy of "closing" an open standard may look
appealing but is rarely successful. The firm may lose its sales and market-share in trying
to close the standard. By the time, a particular firm tries to "close" its standard there may
be several alternate suppliers and lower price manufacturers. In such a scenario, the users
may prefer the alternate lower price manufacturers with an open standard. IBM's failure
in introducing the proprietary PS/2 operating system is one such instance. Rather
than
'closing' a standard, the leader should try to make the product super compatible with the
standard by creating complements, which are compatible with the product. This
encourages users to prefer the complementary products created by the leader to the
Sadasivan, SDM Thesis
67
competing suppliers of complementary products. Rather than trying to create a product
with non-standard features, firms should concentrate on technological development of the
standard. The firms in the PC industry that have embraced open standards as fully as
possible, such as HP and Dell, have been more successful than the firms that have
embraced proprietary standards such as IBM and DEC.
(ii) Technical Leadership: Once the standard is established, a firm can choose to
extend its technical leadership by enhancing the standard or by creating advanced
features outside the standard. A tempting, but failure prone strategy, is to create new
proprietary features outside the standard. Other manufacturers with the same standard
technology may readily copy most enhancements, as appropriability with incremental
innovations is rather weak. The greatest risk of creating proprietary enhancements is that
it may create incompatibilities with the original standard and may alienate a firm from its
installed base. A firm can still maintain leadership position by enhancing the standard and
using the timing to its advantage, since the competitors will have an emulation lag.
(iii) Complementary Assets: With the establishment of standards, the competition
tends to be focused on quality and price. Under these conditions, the capabilities of the
firm in manufacturing, marketing and distribution, called "complementary assets," can be
very valuable.
Complementary assets and technical leadership is key in controlling
market share, and the complementary assets can help a firm in establishing
improvements/enhancements to the standard, if needed.
(iv) Vertical Integration: Once a standard has been established in a subsystem,
the manufacturer may try to vertically integrate backward in the value chain. Microsoft
has leveraged its strength in operating systems to integrate Internet Explorer and Media
Player into its operating system.
4.5 Standards Policy and Regulation
An individual firm, and the industry as a whole may choose to decide on a
standard either by market forces (de facto), or by official standards and committees (de
jure).
Markets work by competition between alternate designs. In some cases, the
standards war may be prolonged, expensive and may end up with fragmented standards.
Sadasivan, SDM Thesis
68
They may also result in stranding users locked into minority or unsupported standards.
There is also a significant risk that the standard may be technically inferior. As a result
there have been suggestions in some cases for policy intervention in deciding standards.
Table 14 outlines the possible scenarios when policy intervention is needed.
The choice of policy intervention depends to a large extent on the likelihood of a
market contest and the importance of public interest. When public and private interests
are both relatively low, setting standards is typically left to the government. This is
typically the case of quality standards set by official standards bodies. When there is a
strong private interest and little or no public interest over a standard, the standard is
essentially a private good, and it is usually decided by market-based competition. Policy
intervention in such a case is desired only when the market power of the firm becomes an
issue.
Public Value of Standards
High
High
Private
Official committees
e.g., HDTV, wireless
standards
Low
Proprietary standards e.g.,
VCR, PC standards
value of
standards
Low
Agreed standards e.g.,
driving standards
Public standards e.g., safety
standards
Table 14. Policy intervention scenarios. 56
The most pertinent scenario here is when the public and the private value of
standard is high, a policy intervention is desirable. HDTV and cellular telephone
standards are two instances where standards are being decided by government policy
because of the high public and private value.
56
Grindley, 1995
Sadasivan, SDM Thesis
69
While in some cases, policy intervention may be necessary, in most other cases
the choice between the official and market standards depends on the effectiveness of the
two mechanisms in setting standards quickly and effectively. The pros and cons of these
decisions are shown in Table 15 below.
Factors in favor of the market are that they usually set standards quickly and
efficiently. Some degree of duplication of effort, market fragmentation, user isolation,
and technical obsolescence may be part of the bargain in new technology products. The
powers of proprietary standards are well understood.
However, as support for open
standards has increased in recent years, proprietary standards have almost become a
rarity. In particular, the open source software movement has become a force to contend
with in the software world.
Market
Favoring
markets
Favoring
Committees
Committees
+ Clear decision
+ Fast
+ Open process
+ Product focus
+ Commercial goals
-
-
Agreement difficult
Slow
Technical bias
Remote from market
Covert lobbying
External policy agenda
+ Orderly process
+ Unified standard
+ Provision for losers
+ Technically superior
-Standards war
-Fragmented standards
-Stranding
-Locked in obsolescence
Table 15. Effectiveness factors for market versus committee standards processes.57
Even so, there may be conditions where the costs of being stranded are almost too
high for individuals to bear. The potential problems because of market fragmentation by
standards can be high.
Confusion in the use of the radio spectrum with several
transmission standards makes broadcasting difficult for everyone. There are also some
standards that are beneficial for everyone and have to be overseen by a central authority.
To change the side of the road in which a nation drives has to be clearly arranged by
government ruling. In such scenarios, policy intervention by a standards authority may
be the better alternative.
57
Grindley, 1995
Sadasivan, SDM Thesis
70
An official standards authority typically aims to set a standard outside the market
before the products are launched. This can be achieved by negotiation and selection using
committees representing manufacturers, complementary product makers, users and the
government. Standards bodies can vary from being voluntary industry associations with
no direct power to authorities with strong enforcement capability. A distinction can be
made here between standards that are mandated through policy and others that are
developed by consensus. Unfortunately, in either case, the process does not work as well
as intended. There are inherent difficulties in using official standards bodies in making
decisions concerning new technologies.
Typically, standards policy is developed and regulated by government agencies
such as Federal Communications Commissions FCC or private bodies including trade
organizations such as IEEE standards committees.
4.6 Combining Market and Official Standards - Hybrid Policy
Hybrid policies attempt to utilize the merits of both market and official standards.
Two aspects of hybrid policies are considered here. First is the combination of committee
negotiation coupled with market competition as complementary ways to reach agreement.
Second is providing regulation to market competition to address major public policy
concerns. The distinction between the two is the nature of the power behind coordination.
In the first case the coordination occurs via voluntary committees, while the coordination
occurs via organizations with legal or economic powers in the second case. In either
case, hybrid policies involve market forces to decide the standards in some way.
As a first step, the standards body may maintain its role in setting standards but
not participate in the selection process. Market forces may improve selection leaving the
final decision to the standards body. The authority may invite proposals from the market,
setting broad guidelines for the bids, and then evaluates independently to decide the
winner. The Federal Communications Commission (FCC) has taken this approach for
setting US HDTV standards. The FCC has set a policy of declaring the winner by a
deadline date, for any standard to surpass a performance threshold first or establish a
clear lead first.
Sadasivan, SDM Thesis
71
A second option is for the regulatory authority to set the ground rules for new
standards but let the market decide the design and establish the detailed standards on its
own. This moves the boundary further toward the market.
The third option is to use fully market-determined standards within a minimal
regulatory framework. A good example of this option is the case of US AM stereo radio
wherein the regulatory authorities allocate the radio spectrum band for broadcasting or
satellite transmission and leave the nature of products and services to the providers.
4. 7 Value of Standards in Digital Cinema
Standards define the interface requirements between complementary goods and
services. In digital cinema, three groups of products and services are required for the
system to work: content creation, content distribution and content display. Interface
standards are required between creation and distribution, and between distribution and
display. Moreover given multiple outlets for content in digital cinema, one can envision
the need for a uniform standard across different outlets. Currently, analog cinema is being
converted into different formats such as video, DVD and such. Such conversions are
expensive and time consuming.
Standards add value to a system or a product by network effects, working through
the demand of content. In the content creation end, ease of distribution and display may
lead to increased content availability. In the distribution end, the more theaters that can
receive standard digital cinema content the more there will be demand for the content,
and hence lower the cost of distribution. Having a uniform standard in creation and
distribution saves the cost and quality reduction involved in converting from one format
(or standard) to another. With a single standard, there may be economies of scale in
manufacturing for theater equipment, and storage equipment resulting in lower prices.
Provided there is open access to these standards, increased competition can further lower
prices.
Although one can see the merits of national standards in digital cinema, there may
be significantly more value by creating global standards. Digital cinema provides
capabilities to produce movies in multiple languages with the same video content but
with several versions of audio content in different languages without additional costs of
Sadasivan, SDM Thesis
72
recreating a master with overdubbing. Because digital cinema has capabilities for
delivering live events, the advantages of having a single worldwide standard is
particularly appealing. On the supply side, a regional market in Europe or the U.S. may
not be large enough to achieve full-scale economies in equipment production. But the
combined markets may be enough to bring down cost of production.
4.8 Standards Activities in Digital Cinema: Status and Issues
The description of standards activities in Digital Cinema would be incomplete
without including the role played by the Society of Motion Picture and Television
Engineers (SMPTE). SMPTE is a trade organization representing the technical aspects of
television, film production and display. SMPTE has focused on developing quality
standards (35 mm movie film has been a standard for over a century), and it has very
rarely ventured into developing interface standards until recently.
SMPTE not only coordinates the standards activities with its industrial members,
it also attempts to coordinate the activities amongst several standards bodies such as the
National Association of Theater Owners (NATO), the Motion Picture Association of
America (MPAA), the Information Technology for European Advancement (ITEA), the
Motion Picture Experts Group (MPEG) and the Audio Engineering Society (AES).
SMPTE working groups have over 250 representatives from 100 different member
organizations and standards bodies.
Sadasivan, SDM Thesis
73
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Figure 23. Digital cinema architecture used by SMPTE working groups for coordinating
standards development. 58
Figure 23 shows the system architecture, the information flow and various
interfaces in the digital cinema system. For instance, SMPTE uses a unique number to
define each interface and create a standard across that interface. The color coding
indicates how SMPTE has divided the task of creating system standards across several
working groups, which will be described shortly. Detailed description of these SMPTE
defined interfaces is given in Appendix A.
58 R.M.Rast, "SMPTE Technology Committee
on Digital Cinema - DC28: A Status
Report", SMPTE Journal, February 2001.
Sadasivan, SDM Thesis
74
It is clear from Figure 23 that SMPTE is seeking to create modularity
along technology boundaries or organizational boundaries. In a few cases, the existing
boundaries coincide with clockspeed boundaries. In general, the intention of SMPTE is to
create a modularized, interoperable digital cinema system. This gives enough room for
firms in the industry to create architectures modularizing along clockspeed boundaries
while still complying with SMPTE mandates.
SMPTE has created a DC28 technical committee to coordinate standards activities
in the entire system with a focus on creating standards to ensure interoperability,
compatibility, performance and extensibility. SMPTE's charter in digital cinema is to,
"Provide industry technicalforum for Digital Cinema, identify key systems
& technology issues, develop a recommended approach to standards,
identify, establish and coordinate necessary groups to achieve overall
objectives and in future, write the standards."5 9
The SMPTE DC28 committee is focused on creating digital movie masters,
distribution of the digital movie and playback. It is not focusing its efforts on issues
involved in the image capture and production. The schematic of the scope of DC28 is
shown in Figure 24.
Figure 24. Schematic of scope of SMPTE's standards activities 60
59
60
Rast, 2001.
Rast, 2001.
Sadasivan, SDM Thesis
75
The SMPTE DC28 committee has created working groups with a broader charter
of assessing issues in key sub-system and technologies. These groups have been formed
with a broader charter such that they are not working groups for creating standards, but
may evolve to creating standards. The different working groups and their descriptions are
given in the Table 16.
Committee
DC 28.1
DC 28.2
DC 28.3
DC 28.4
DC 28.5
DC 28.6
DC 28.7
DC 28.8
Description
Overall System Issues
Digital Master
Compression
Conditional Access
Transport
Audio
Theater Systems
Projection
Table 16. Different digital cinema working groups.61
The multiplicity of interfaces and the potential downside of fragmentation created
by multiple incompatible standards across the entire system indicate the value of a
standards authority to coordinate establishing compatibility standards across the entire
system. The unusual power wielded by the movie studios and their insistence on using
trade organizations such as SMPTE in creating open standards may be yet another
important reason why standards activities will not be just market-determined in digital
cinema. The industry organization, SMPTE, is attempting to prescribe minimum
acceptable quality standards and guidelines for compatibility standards as described in
the section above. The Entertainment Technology Center (ETC) at the University of
Southern California does the performance testing of various technologies. However,
endorsement or approval from ETC and SMPTE alone cannot lead to a standard. Hence
firms in digital cinema do not get the benefits of intervention by SMPTE, as it does not
mandate standards, but accrue the costs of negotiation in the process. A firm that leads
the standards process can win the standards contest directly by going to the market. But
here it has to negotiate with SMPTE and still win the open contest.
61
Rast, 2001.
Sadasivan, SDM Thesis
76
As described in the previous section, there are other potential downsides in using
official standards bodies in making decisions concerning new technologies. The variables
are numerous and fast changing and the outcomes are crucial to firms' commercial
interests, so it may not be surprising if consensus is hard to achieve. Even if a consensus
is reached, it may not be upheld unless backed by market forces. Firms are bound to
compete by introducing products while standards are still being developed and possibly
trying to pre-empt the decisions. In some cases, standards may be worded ambiguously
and effective standards may still have to be determined de facto by market competition.
In some cases, the difficulty in reaching agreements is partly due to the design of the
committee itself. Organizations such as SMPTE have focused solely on quality standards
where commercial interests are well settled and issues are primarily technical. The
processes for consultation and consensus work well with quality standards, but may not
be so effective for interface standards for new technology such as digital cinema, where
more complex commercial interests are involved.
Another problem is that the committee approach introduces an additional player
in the game, in the form of the standards body itself. This changes the focus of
competition from the product itself to influencing the standards authority. Firms spend
time in thinking about how to influence the process to their advantage thus changing the
nature of the game from purely economic to one that has political undertones. Moreover,
there may be national interests involved that make the standards game even more
political. It is hard to resist the temptation to use standards to promote a national industry.
In particular, there are other issues that are slowing the standards process in
digital cinema. Digital cinema is trying to replace analog cinema with a strong installed
base. Replacement of a standard with an installed base is more difficult than establishing
a new standard in a new market. The new standard has to offer sufficient improvement
over the existing standard to justify new investment but also to overcome the network
externalities of the established standard. This "excess inertia" makes it hard to establish
standards when there are large investments made in movie theaters, equipments and such.
For the moviegoers, the quality of experience from the digital cinema should be
significant enough to warrant additional spending over analog cinema. Lack of sufficient
Sadasivan, SDM Thesis
77
interest amongst the moviegoers may further delay establishment of digital cinema
standards.
The dynamics in the value chain further delays initial adoption.
Currently the
studios that distribute content have considerable clout over the theater chains. Most of the
exhibitors, who would normally be the adopters of this new technology, are currently in a
bad financial condition. Several years of massive capital spending to replace multiplexes
with megaplexes have left exhibitors with no ability to fund the conversion to digital
cinema. The slim share of box revenues to exhibitors does not much help the cause.
Digital cinema seeks to provide cost savings to studios by eliminating film reproduction
and distribution costs but offers little incentives for exhibitors. The "Paramount decree" 62
restricts studios from owning a significant part of theater chains, thus restricting the
ability of studios to fund the conversion to digital cinema. Several intermediaries have
stepped in to fund the conversion, but fear amongst studios of losing control over the
value chain has made such scenarios infeasible. This issue of who benefits versus who
pays is delaying initial adoption significantly and is prolonging the standards war.
4.9 Standards in Digital Cinema: Strategies & Recommendations
While it is clear that industry organizations such as SMPTE will have a
significant role in setting digital cinema standards, the market may still decide who the
ultimate winner will be.
>
Follow a hybrid strategy mixing elements of market focus and committee
focus for creating digital cinema standards.
A successful hybrid strategy from the firms' point of view should involve typical
elements of a market-focused strategy coupled with successful negotiation with the
standards committees. Firms that are taking leadership roles in setting digital cinema
standards could potentially use the standards body as a forum for discussion and
information sharing and as a facilitator of an essentially market-oriented process. Firms
that are followers can prevent monopolistic control over the standards by ensuring that
the final standard be licensed at a reasonable cost or made open.
62
Paramount vs. U.S. Proceedings
Sadasivan, SDM Thesis
78
Positioning decisions should be made strategically.
The critical strategic decision for every firm involved will be to decide the
openness of their standards. Studios prefer open standards to maintain their control.
SMPTE wants to create open standards. To increase adoption, a few firms may create
open standards, but the extent to which the standards will be kept open is yet unknown.
The standards decision has far-ranging implications including potentially altering the
value chain, therefore firms must make their choices strategically.
The depth to which the standards are built into products may be used to gain
advantage. It may be necessary to standardize only the interface rather than going deeper
into system architecture in some cases. These decisions may have hardware and software
implications for designing the system. Several key players in the industry are architecting
their systems to accommodate any standards ruling/decision by SMPTE.
>
Creating an installed base ahead of competition is essential for creating
winning standards.
There are about 100 cinema theaters that deploy digital cinema. Several firms
including Technicolor digital cinema and Boeing digital cinema have already deployed
systems and have an advantage over others. Eastman Kodak Company is planning to
deploy the Kodak digital cinema system beginning early 2003. Technicolor systems have
a combination of in-house technologies and externally acquired technologies. In contrast,
Boeing's system is built with interoperability as the main goal, hence, with open
standards. Some of these systems have already become obsolete as a result of dramatic
improvement in technology.
Technicolor digital cinema and Boeing digital cinema currently use projectors
made with TI's DLP technology of 1.6 M resolution. Kodak has recently demonstrated
digital projectors with JVC's D-ILA chip with 3 M resolution.
One important questionable strategy witnessed in the very nascent standards war
has been TI's in licensing its digital projection technology DLP. TI has been the market
leader in introducing to the market its DLP digital projection technology well ahead of its
rival JVC. The digital cinema DLP chip was introduced into the market late in 200163
whereas JVC's product has not yet been introduced commercially.
63
http://www.dIp.com
Sadasivan, SDM Thesis
79
Despite its timing
advantage, TI has chosen to restrict its licensing of DLP technology to three projector
manufacturers, while JVC has been open about its licensing arrangements. TI clearly has
the ability to build an installed base and make its product the de facto standard in the
market. With Kodak aligning with JVC in introducing a rival product, it is no longer clear
that TI will reap the benefits of being first to market in establishing standards.
>
Building credibility, managing expectations and creating alliances and
sponsorships are critical.
Early adopters make decisions based on their expectations of which standard will win,
making the credibility of the standard very important. Even though SMPTE will provide
recommendations, it is most likely that the standards will be decided based on the market
power. The incumbents in the movie industry such as, Kodak and Technicolor already
enjoy enormous credibility within the industry based on their ongoing relationships.
Technicolor and Kodak are utilizing their close alliances with the studios while defining
their product strategy.
Managing expectations is a critical part of the standards game. Key tactics such as
product preannouncements and creating alliances have been often used to frighten off
competitors or to gain time until a defending product is ready. Such tactics have confused
the market significantly in some cases.
Creating alliances provides a support base for the standard. Alliances help to
spread standard development costs, besides removing potential competing standards and
reduce the extent of standards contests. Several alliances have formed or are in progress
of forming in digital cinema. Technicolor has teamed up with Qualcomm in creating the
Technicolor Digital Cinema. Kodak has partnered with IBM and JVC in developing its
digital cinema system. Several new partnerships between incumbents and entrants are
being formed to leverage both the new technology that the entrants have and the
credibility and relationships the incumbents have.
In summary, standards provide means of controlling modular clockspeed
boundaries. The standards decisions made in the context of product architecture may
affect dynamics in the value chain. To gain further insight, the current motion picture
value chain and potential value chains for digital cinema will be explored in the next
chapter.
Sadasivan, SDM Thesis
80
Chapter 5: Value Chain Analysis
5.0 Chapter Summary
The value chain analysis of the current motion picture industry is performed in
this chapter. The dynamics in the motion picture industry is explored to understand the
power and structure of the industry. The transition from analog to digital cinema seeks to
alter the power distribution and dynamics in the industry. To that extent, the shape of
future value chain based on digital cinema capabilities is explored.
It is implied here that the shape of the motion picture value chain will ultimately
be defined by the actions of new entrants and incumbents alike. The value chain will be
decided by the product architecture and standards decisions. If the efforts by the studios
to create open standards prevail, the value chain will be very different than if the system
integrators maintain control over the architecture and standards.
5.1 Introduction
The value chain as an assessment tool proposed by Michael Porter was originally
designed for a firm to understand how it should position itself amongst its suppliers,
buyers and existing and future competitors. Porter defines the value chain as,
"[Competitive advantage] stems from the many discrete activities a firm
performs in designing, producing, marketing, delivering and supporting
its product... All these activities can be represented in a chain... The value
chain is not a collection of independent activities but a system of
interdependent activities."64
Porter suggests that by looking at discrete activities, relative to an external environment
on cost and other metrics, one can understand a firms' competitive position (or
advantage) in the marketplace. Moreover, Porter indicates that such an analysis could be
used as a basis for identifying core competencies of a firm. This form of analysis, has
been used by firms to:
Michael E. Porter, "Competitive Advantage: Creating and Sustaining Superior
Performance", The Free Press, 1985.
64
Sadasivan, SDM Thesis
81
u
Identify activities and analyze value created by those activities a firm performs in
bringing product and services to the market;
u
Map flow of information and goods in and out of a firm; and
L3
Identify strategic activities for a firm and perform resource allocation in such a
way that it can strengthen the strategic activities, while constraining resources
from activities that are less critical.
Porter cautions against using this analysis at too high a level in the organization or at
industry or sector levels because such a value chain may be too broad and may obscure
important sources of competitive advantage. 65 While this is true given Porter's original
intent for value chain assessment tool, such an analysis seems to work well in
understanding the relationships between the different participants in an industry, as seen
by the popularity of this tool in the business press.
Nevertheless, such an analysis falls short of capturing the dynamics created by
entrance of a new technology in a very mature market, which may lead to continuously
altering value chain relationships. Another reason for understanding value chain
dynamics arises from the fact that sometimes the technological innovation may
dramatically decrease the life cycle of a product or a system. Fine's "Double Helix
Lifecycle" theory 66 is used to evaluate and understand the dynamics of value chains
under such conditions.
As mentioned previously, technology can increase the clockspeed of a product.
Since value chains are designed to bring products to markets, one can envision that
dramatic changes in product clockspeed can bring about changes in the value chain. Such
value chain dynamics can make the competitive advantage fleeting. New technologies
may cause product architecture to change from being modular to integral or vice versa.
Correspondingly, an industry may have vertical or horizontal structure depending upon
the product architecture being integral or modular.
In vertical markets, competitive advantage arises from economies of scale in
manufacturing, control over the supply chain, quality and rates of technical change,
suppliers and an efficient flow of information. Vertical markets have very limited
Porter, 1985
Charles Fine, "Clockspeed: Winning Control in the Age of Temporary Advantage",
Perseus Books, 1998.
65
66
Sadasivan, SDM Thesis
82
competition and competitive threats are at best limited. However, adoption is slow due to
limited competition for creating complementary goods and services.
In horizontal markets, competition is intense. Competitors enter the market freely,
expanding the market while reducing the margin significantly. Complementary goods
and services become available at an affordable cost created by the price wars leading to
increased adoption.
Fine's Double Helix Model, shown in Figure 25 illustrates the extent to which
periods of vertical and horizontal industry structure determine the fates of products,
companies and industries.
INTE GRAL PR OD U CT
VER TIC AL IND US TRY
PR OPRIE TARY STANDARD S
NIC HE
COMPETITORS
M 0DULAR PR OB UC T
HO RIZ ON TAL IND US TRY
OPEN STANDARD S
TECHNICAL
ADVANCES
HIGH-
SUPPLI
MARK
MENSIONAL
)MPLEXITY
POW3
L
ORGANIZATIONAL
PRE SSURE TO
DIS-]NTEGRALTE
IN CENTIVE TO
INTEGRATE
Ar-
RIGIDI TIES
PR OPRIE TARY
SYSTEM
PROFITABILITY
Figure 25. Double Helix Model illustrating how industry/product structure evolves from
vertical/integral to horizontal/modular and back.67
The
transition
from
vertical
to horizontal,
in
general,
increases
the
competitiveness of the market. The firms may choose to modularize products to create
new outsourcing opportunities. Niche competitors provide incentive for firms to
modularize/disintegrate and give up pieces of production that increases the power of
suppliers and creates opportunities for new entrants. Higher dimensional complexity
arising from integration limits the economies of scale and reduces the ability of a firm to
67
Fine, 1998.
Sadasivan, SDM Thesis
83
easily respond to threats from outside.
Organizational rigidities arising from the
integrated structure reduce the flow of information, still further reducing the advantages
arising from a vertical structure. These factors increase the pressure to disintegrate and
increase competition.
As firms create significant advantage in one subsystem in a horizontal industry,
they leverage their advantage in another to bundle other sub-systems and gain control and
potentially add more value to customers. Such bundling activities encourage integration
of subsystems to create proprietary integrated solutions.
This further increases the
market power of integrating firms while reducing the power of suppliers leading to
reduced competition.
These frameworks and concepts will be used as a basis for discussing the motion
picture industry, its current value chain and the dynamics that have been set in motion
with the introduction of digital cinema.
5.2 Motion Picture Industry Overview
The motion picture industry has two of the worst attributes of any business: high
investments and unpredictable returns. The average cost of a Hollywood movie in 2000"
was $55.5 million, plus $26.0 million for promotion, advertising, and distribution. From
1992 to 2000, each year has produced a new record in U.S. box office sales, culminating
in $7.67 billion revenue in 2000, and closing at over $8 billion year in 2001 .69 This eightyear period is the longest record-breaking stretch in the history of cinema operation.
In spite of the growing domestic box-office revenues, only 92 of the 487 films
released in the U.S. in 2000 earned a positive return on investments.
The increasing
costs of production and distribution and unpredictable returns have presented a high
barrier that has kept many potential competitors (independent filmmakers) away from the
business.
At the exhibition end, the health of major players is hardly robust. The number of
screens in the U.S. is about 37,396 in 2000.70 In spite of the revenue growth, 11 major
cinema operators filed for bankruptcy between April 2000 and January 2001. It is
68
69
7
MPAA reports www.mpaa.com
Hoover Reports on Movie Industry at http://www.hoover.com.
"Adoption of E-Cinema", SRI Business Intelligence Report
Sadasivan, SDM Thesis
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believed that several more can be expected to file for Chapter 11 bankruptcy protection
before the end of 2002.
These filings follow a five-year boom in the construction and acquisition of new
megaplexes. These new theaters have been readily adopted by the public, making older
ones obsolete. It is estimated that about 27% of theatrical screens are running at a loss.
Burdened by operating costs from under-performing theaters and the debt assumed to
fund new sites, many cinema operators have been forced into bankruptcy. Most notable
among those that have declared bankruptcies recently include General Cinema and
Loews Complexes, two of the major eight movie exhibitors.71 Figure 26 shows the
number of screens that have gone dark in the US in the past two years. Recent estimates
by movie theater analysts indicate that the US market alone has on the order of 10,000
too many screens, suggesting more closures to come.
Theaters
Screens
189
Featers
104 45%
381
281 -26%
1,15 ~2%2,002 1,561 -22%
ens
02002 ACNielsen EDI. Inc.
Figure 26. Comparison of theater openings and closings in the U.S. (2001 vs. 2000).72
The woes of the exhibitors can be partly related to the revenue sharing scheme in
the industry. A typical contract includes an upfront nonrefundable payment along with an
agreement of box-office, revenue-sharing scheme for a specified period of exhibition. A
typical revenue sharing scheme reads as, "90/10 over the approved house allowance for
the first week with a minimum of three weeks at 70%, two weeks at 60%, two weeks at
50%, one week at 40%, balance at 35%.",73 For example, if a movie makes box office
revenue of $10,000 in the first week, the negotiated house allowance74 is $5,000, then the
distributor gets 90% of the remaining $5000, while the exhibitor gets the 10% of $5000.
"Financial Straits Hit Majors' Screen Count," April 2001, http://www.screendigest.com.
http://www.nielsen.com.
73 Jason E. Squire, "The Movie Business Book," Second edition, page 346, March
2001.
74 House allowance also called a "nut" in the industry is a negotiated amount
between an exhibitor and a distributor and is typically a fraction of the overhead
expenses involved in operating a theater.
71
72
Sadasivan, SDM Thesis
85
In the following week, if the box office revenue is again $10,000 the distributor gets
$7,000 and the exhibitor gets $3,000, which is less than the expenses involved in
operating a theater. In short, a distributor gets the benefits if the movie is a hit, but the
best an exhibitor can do is about 10% over expenses for a hit picture. If the movie is a
flop, the exhibitor does not even recoup the costs involved in operating the theater.
Moreover, these figures do not include the advertisement costs spent by an exhibitor. It is
fair to say that the exhibitors' primary source of profit comes not from the movie
screening, but through the concession sales. Figure 27 shows the revenue distribution for
a movie amongst several outlets. The domestic exhibitors make a paltry 20% of the entire
revenues made from exhibition.
M Domestic Exhibitors
5%
6% 2%
UInternational
Exhibitors
J Domestic Home Video
19%
7%
17%
19%
4%
21%
E Domestic pay TV
U Domestic PPV
l International Video
U Other
ODomestic TV
N International TV
U Domestic TV
Second Cycle
Figure 27. Distribution of revenue in motion picture industry. 75
To be in a better position to absorb the idiosyncratic demand shocks, multiplexes
have become the norm where the negative shocks on one movie can be balanced against
positive performance of others. In a multiplex, relocation of movies to auditoriums of
different sizes is possible based on demand. Scale economies in running the box office
and the concession stand can be obtained by staggering the shows, such that the staff and
others can be continuously employed. The MPAA reports that in the U.S. in 2000, there
"Unreeling Digital Cinema: What will it take to tip the market," Lazo and Mackin,
2000.
75
Sadasivan, SDM Thesis
86
were 7,421 theaters; 2,368 had single screens, 3,170 had two to seven screens, 1,478 had
eight to fifteen screens and 405 had sixteen or more screens. 76
5.3 Motion Picture Value Chain
The current motion picture industry value chain is compact and fairly simple. As
in the case of other mature technologies, the large numbers of firms present during the
industry's growth stages have dwindled to a powerful few that compete on ever dwindling
profit margins.
In particular, the current value chain shown in Figure 28 is structured to
manage the high risks associated with this industry. With an average cost of making and
distributing a movie being close to $85 million, the cost of failure in the industry is high,
and few players can afford to take such risks. The result is a compact, well-defined value
chain with a few powerful players in each segment.
Will pay for entertainment
Consumers
Projector Makers
e.g.: Christie
Exhibitors
Provide Primary
Avenue
For exhibition
Service Providers
Distributor (Studios)
e.g.: Technicolor
Provide
distribution
channel for movies
Film Stock
Producers
e.g.: Kodak,
Equipm ent Makers
Create content for
Fuj
~Content
Creators
entertainment
...................... 0
e.g.: Sony,
Figure 28. Current players in motion picture value chain.
Filson et al., "Dynamic Common Agency, Vertical Integration, and Investment: The
Economics of Movie Distribution." htt://fac.cou.edu/~filsond/Darers/main.htm
76
Sadasivan, SDM Thesis
87
The role of key players in the value chain is discussed in the following section.
The content creators generate the idea that will become a motion picture. They identify
the market to which the movie will appeal and pull together the necessary contacts to
make it happen. In some cases, a major Studio/Distributor may step into finance the
movie. Included is the negotiation of distribution rights to all exhibition markets
(including foreign release, pay-per-view, cable, rental, etc.) so that the studio can
estimate expected revenue.
In contrast, the independent distributors acquire completed
movies made by independent moviemakers. These independent distributors focus on
niche markets not catered by major studios or distributors. The profit margin for such
independent or indie films tend to be low, but the risk is smaller as well. Thus
independent filmmakers rely on these select few distributors, hence compete to showcase
their products in film festivals such as Sundance, New York, Cannes and Toronto. The
channels for distributing indie films tend to be very limited at best. 77
With the current 35mm film format being such a worldwide standard, the film
stock producers receive a good stream of revenue from its sale. As an example, Kodak
commands more than 80% market share for origination films and more than 75% market
share for print films, generating about $500 million annually for the company. 78
Exhibitors primarily comprise the theater owners where first and second-run
movies are shown.
Second-run movies include exhibiting through pay-per-view and
other cable entities, and rental and consumer sales such as VHS/DVD. In the case of
theater owners, they typically pay a percentage of box-office revenue to the
studio/distributor, according to an agreement based on the revenue potential of the film as
discussed earlier. Similar agreements are reached with secondary exhibitors relating to:
what percentage of revenue goes to the studio/distributor for each pay-per-view order,
how often the cable system can show the movie, percentage of VHS/DVD sales revenue
that goes to the studio/distributor, etc. Table 17 summarizes the firms involved in the
different links of the current value chain.
77
78
Squire, 1992.
Digital Cinema: Episode II, Credit Suisse First Boston Analysts Report, 2002
Sadasivan, SDM Thesis
88
Studios/Distributors
Disney
Warner
Fox
Columbia Pictures
Vivendi Universal
Paramount
Metro-Goldwyn-Mayer
Film Stock Producers
Kodak
Fuji
Exhibitors
Loews Cineplex
General Cinema
Regal Theaters
AMC Theaters
Projector Manufacturers
Sony
JVC
Table 17. Firms in the current value chain 79
5.4 Value Chain Dynamics in Analog Cinema
In early 1930s and 1940s, powerful studios such as Warner Brothers and MetroGoldwyn-Mayer (MGM) dominated the movie business. They controlled every aspect of
moviemaking from film production to exhibition. The artists (directors and actors) were
under contracts with the studios. The Supreme Court's Paramount Decree in 1948,
effectively forced studios to divest themselves of the exhibition business. A decade later
in late 1960s, the studio system collapsed, as more control found its way into the hands of
independent artists.
Trend towards Integration
Trend towards disintegration
1950s: Anti-trust Problems
Leading to breakup of exhibition
From distribution
Early 30s-40s: Mighty
MGM and Warner Bros.
1970s:
Independent Talent Agencies
Collapse of Studio System
1980s:
DOJ'sPermissionfor
forwardintegration
e. Soy's acquisition of
Loews Theaters
Late 80s -early 90s:
Mighty Entertainment
Conglomerates
2000s
Arrival of DigitalCinema?
Figure 29. Motion picture industry's double helix experience.
79 "Digital Cinema: Year Two- Getting Down to Business," April
2001,
htto://www.screendigest.com.
Sadasivan, SDM Thesis
89
In the 1980s, the U.S. Department of Justice permitted studios to forward
integrate again. Sony bought Loews Theater chain during this period. Rising costs from
the increased actors' and directors' fees, despite being able to produce and distribute the
movies, almost drove most of the studios out of business. Cash starved studios became
targets of acquisition by media giants beginning in the late 1980s to mid 1990s 0 . News
Corporation acquired
2 0
th
Century Fox (renamed it as Fox Entertainment Group), Time
bought Warner Brothers (called Time Warner), Viacom bought Paramount Pictures and
Seagram bought Universal Studios, which was later acquired by Vivendi Universal.
Disney changed the trend by making itself a media giant rather than being acquired by
one. The few remaining media giants today include AOL Time Warner Inc., The Walt
Disney Company, Viacom, Vivendi Universal and News Corporation. Hoovers Inc., a
market intelligence company calls these media giants,
"The souped up, hot rod version of the vertically integrated movie
studios of the 1930s and 1940s. Today's media conglomerate has taken that
model of vertical integration and pushed it to levels that could never have been
imagined before. Digital technology, the rise of the Internet, and years of
consolidation have created an atmosphere in which just a few players control
tremendous numbers of media properties, as well as the means to distribute and
promote that content to a global audience".8 1
In the meantime, a small number of buyers have acquired several large theater
chains that have declared chapter 11 bankruptcy recently and in the process gaining
control over nearly a third of the nation's 35,000 screens-and 44 percent of the boxoffice revenues, as shown in Figure 30. More consolidation is likely to occur creating
mega theater chains with sufficient clout to change the dynamics in the industry.
Hoover defines the Media sector as those companies involved in sectors including
radio and TV broadcast; motion picture, movie theater, and music; newspaper,
periodical, and book publishing; and Internet service and content.
http://www.hoover.com.
81 "Entertainment En Masse: An Overview of Media Conglomerates" Hoovers Report
http://www.hoover.com.
80
Sadasivan, SDM Thesis
90
Box-office revenues
Total screens
Top3 Chaie
Top 3 chans
29
31
AN othem
M others
Prconsoidatio
(1997Y
2
Post-
consolidation consolidation
Conso malion
(2001)
PPost(1997(
2001)
'PreConsaIaibn Wp 3 =
ORmgo
Criin&,AMC utcrtaiv8,nLLws Theatres: pnIiabolidatft tm3 = AndhwIt (Efdarcds
Theomes. Regal CaUnbded ArtlsUs Theaes), AMC Enrtanmet, Ooex (LoeW Onepex Enterlmnmenq.
Figure 30. Pre and post consolidation market share and box office revenues.
The arrival of digital cinema technology threatens to alter the current business
relationships in the industry.
Hollywood studios, which are part of the media
conglomerates, fear that the price advantages of digital cinema in creating and
distributing movies may threaten their control, which remains to be seen. The exhibitors
are not in a financially viable situation to make the switch over to digital cinema for
reasons discussed earlier.
5.5 Potential Digital Cinema Value Chains
As discussed before, digital cinema architecture strings together a series of
technologies to deliver digital motion pictures to the theaters. A number of new entrants
who develop different aspects of the emergent technology will sell their products and
services in this new marketplace, thus defining the new value chain. Table 18 provides a
brief glimpse of who's who in digital cinema value chain.
Derek Alderton, Jeffrey Karish, And Roy Price, "Revenge of the Multiplex," Media
and Entertainment Report, The McKinsey Quarterly, 2002 Number 4,
httD://www. mckinsevauarteriv.com
82
Sadasivan, SDM Thesis
91
Capture
Product or
Service
Digital Video
Makers
Description of Service or Product and Who's Who
&
Developers of digital video cameras to be used to
capture action digitally. Key Players: Sony/Panavision,
Lockheed-Martin ARRI
Telecine Makers Makers of equipments used to convert images captured
in film to digital data. Key Players: Cintel, Innovation
TK, Philips, Sony
Production
Provide services ranging from high resolution scanning
Services
from film to digital, laser recording from digital to
film, digital editing, creating visual effects, animation
to create digital masters. Key Players: Christie, eFilm,
Sony Pictures Image Works, Industrial Light and
Magic, Laser Pacific Media, Pixar, Rhythm and Hues,
Cinesite
Audio
Developers of digital audio technology Key Players:
Technology
Dolby, Sony, Lucas Films
PostEncryption
Developers of encryption technology used to protect
production
Water marking
digital cinema content from piracy. Key Players: Cinea,
Qualcomm, Boeing, Kodak
Compression
Compression technology developers used to create dcinema distribution masters. Key Players: MPEG,
Qualcomm, Sarnoff Corporation
Storage
Makers of servers used to store digital cinema data
Equipment
during post-production and in digital movie theaters.
Key Players: QuVis, Grass Valley Group, Digital
Vision, Pluto Technologies, IBM, Sun Microsystems
Distribution Content delivery Content can be delivered through fiber optic, cable or
satellite. Key Players: Satellite companies including
Boeing, Loral Cyberstar, Eutelsat; Telecom providers
including France Telecom, British Telecom, Qwest
Communications, Pacific Bell
Display
Projection
Developers of digital projection technology. Key
Technology
Players: Texas Instruments, JVC, Silicon Light
Machines
Projector Makers OEMs who integrate projection chips with optics and
mechanical elements to make projectors Key Players:
Barco, Christie Digital, JVC, NEC, Panasonic, Philips
System
Provide an end-to-end digital cinema system Key
Integrators
Players: Kodak, Thomson Multimedia, Boeing
Table 18. Incumbents and new entrants providing digital cinema products or services.
Sadasivan, SDM Thesis
92
These incumbents and new entrants, alike, are reshaping the motion picture value
chain. To illustrate these attempts, activities along the capture value chain will be
described here in detail.
The key links in the capture value chain as it exists are shown in Figure 31.
Film Stock
Providers
Equipment
Makers
Equipment for
Digitization, film
reproduction
Analog
Cameras
Origination
films
Print Films
Production
Services
Animation
Content Creators
Services
Figure 31. Key links in analog capture chain
This capture segment of the chain has already begun migration to digital. The
digital processing of movies by combining action captured on film and computergenerated graphics has increasingly become popular. Such digital processing provides
significant flexibility over the photochemical process. Consequently, most of the films
made today for analog movie theaters are digitally edited and written back on to film for
distribution.
Service providers in this chain provide digitization services (for converting film
images to digital data), digital processing services (such as editing) and reproduction
services (like writing digital data back to film and making distribution copies of film) to
the content creators.
Technicolor, which pioneered the color separation process, has
significant market share in reproduction services today.
As new, higher end digital video cameras start to appear and all-digital capturing
starts to become the norm, the need for other digital services such as editing and color
correction to create digital masters will increase significantly. A few key players in the
analog chain such as Kodak, Technicolor and Deluxe are already positioning themselves
Sadasivan, SDM Thesis
93
to fulfill this need. Deluxe has partnered with Panavision to create EFILM with an aim
of leveraging its partnerships with creators to provide image management services from
capture through release.
83
Thomson,
Technicolor
Grass-Valley
Technicolor Digital
Screen Vision
Thomson GV, Canal
Singingfish.com,
Nextream, RCA
Products
HD Camera
Scanners,
Telecines,
Storage
systems
Services
End-to-end D cinema
system
Conditional Access Service
Capabilities for Internet,
Home, Satellite distribution
Content
Creators
Distributors
Distributors,
Movie Theater Owners,
End users
Services
Customers
Content
&
Creators
(Studios
Indies)
Production&
Postproduction
&
&
+
Thomson
Companies
Figure 32. Firms that are part of Thomson Multimedia involved in digital cinema
activities.
Thomson Multimedia is acquiring companies along different parts of the value
chain to position itself well in the digital age. Thomson makes Spirit DataCine, the very
popular film-to-digital conversion device and the Viper Digital Camera System. Grass
Valley Group8 4 acquired by Thomson provides products and services for HDTV and
Digital Cinema Production. Technicolor, 85 another acquiree, provides analog and digital
production services along with film recording and duplication services. Technicolor
Digital Cinema, 8 6 a joint venture between Technicolor and Qualcomm provides end-toend digital cinema distribution and display systems. Screen Vision, 7 another Thomson
See www.efilm.com and Brian McKernan's article, "Efilm Forges
Ahead in Digital
Intermediates," announcement of this new venture in Online Digital Cinema
Magazine at http://www.uemedia.com
84 See for instance the product listing at http://www.thomsongrassvalley.com
83
85
http://www.technicolor.com
86
http://www.technicolordigital.com
87
http://www.thomson.net
Sadasivan, SDM Thesis
94
firm, provides cinema advertisement services. The singingfish.com,
a Thomson
Company, intends to develop streaming media capabilities to deliver movies over the
Internet.
Thomson is not the only firm developing capabilities at different ends for digital
cinema. Sony and Kodak have been developing products and services at different ends of
the chain, to capture value when digital cinema becomes mainstream. For instance, in the
case of Kodak, combination of Kodak Digital Cinema and Kodak Cinesite provides
integrated service provider and distribution-display system integrator capabilities. The
firms, such as Thomson and Kodak, seek to create a different supply chain, as shown in
Figure 33. Whether such a supply chain scenario will threaten the power of studios and
provide opportunities for independents, remains to be seen.
Equipment &
Service
Providers
Service
Providers &
DistributionDisplay System
Integrators
Content
Creators
Studios &
Independents
Exhibitors
Figure 33. Potential motion picture supply chain.
Meanwhile, Hollywood's seven major studios, Metro-Goldwyn-Mayer, Sony
Pictures Entertainment, Universal Studios, Warner Brothers, Paramount Pictures, 20th
Century Fox and Disney have formed a company called Digital Cinema Initiatives to
create open technology standards for digital cinema. In a recent communication,
Hollywood studios declared their intent with this new venture as:
"Through this venture, the studios hope to steer product manufacturers
toward an open set of standards, making it less expensive for industryplayers
to adopt digital cinema"89
88
http://www.singingfish.com
"Hollywood Studios form Digital Cinema Venture," News Report, April 04, 2002 can
be found at http://www.tvmeetstheweb.com/news/shownews.asr?ArticleID=9817
89
Sadasivan, SDM Thesis
95
With open standards, studios are least likely to be locked into one system and a
joint arrangement between studios eliminates the threat of competing standards. Firms
developing products and services have to compete with each other under open standards
to capture a sliver of the enormous value created by them. Clearly, such an arrangement
may help major studios extend their power over the supply chain. Moreover, five major
studios have recently formed Movielink90 , an online service to distribute movies over the
Internet9 l, creating an alternate distribution channel.
The power of coalition such as this can be seen in the establishment of DVD
standards recently. 92 Toshiba partnered with Time Warner to establish its technology as
the industry standard over Philips-Sony technology. Toshiba's technology offered
advantages in terms of capacity and pricing over Philips-Sony technology. But the winner
here was not decided by the technology, rather by the strength of ad-hoc coalition of
seven major studios organized by Toshiba and Time Warner. Philips and Sony worked in
relative isolation, with support from Columbia and Polygram, which Sony owned. After
relentless pressure from the entertainment industry, Sony accepted Toshiba's technology
as the standard. In return, Toshiba incorporated Sony and Philips signal processing and
error correction technologies into its standard, besides making it backward compatible
with audio and video CD.
Recently, Microsoft and BMW, together have launched an initiative to help
independent filmmakers. 93 This effort called BMW's Digital Cinema Series plans to
showcase eight independent films in digital format over the next year at theaters in 25
cities. The equipment for this effort has been contributed by Microsoft, whose intent is to
make its Windows media technology the leading format for distributing movies over the
internet, which in turn would help sales of its Windows operating system to play back
digital movies on PCs and other digital devices. The projection equipment and digital
http://www.movielink.com
"Movie Studios Provide Link for Internet Downloading", The New York Times Article
by Amy Harmon, Nov 11, 2002.
92 Yves Dos and Gary Hamel, "Alliance Advantage:
The Art of Creating Value through
Partnering", HBS Press.
93 "Using a Hard Drive to Show Films in Theaters" The New York Times Article
by
Amy Harmon, Nov 14, 2002.
90
91
Sadasivan, SDM Thesis
96
encoding to protect independent moviemakers' content will be provided free. It is unclear
if this effort will be a success, but it is true that such projects offer independent
moviemakers more choices than they currently have at the moment.
In summary, the shape of the motion picture value chain will ultimately be
defined by the actions of new entrants and incumbents alike. The value chain will be
decided by the product architecture decisions and standards decisions. If the efforts by the
studios to create open standards prevail, the value chain will be very different than if the
system
integrators
maintain
control over the
architecture
and standards. The
interrelationship between standards, value chain and product architecture decisions will
be discussed in detail in the next chapter.
Sadasivan, SDM Thesis
97
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Sadasivan, SDM Thesis
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Chapter 6: Product Architecture Strategy
6.0 Chapter Summary
This chapter discusses the interrelationship between standards, value chain and
product architecture decisions.
Given this interrelationship, it is suggested here these
decisions have to be made concurrently.
Firms developing products and services have a unique opportunity with Digital
Cinema because these firms can co-design product, process and value chain architectures
concurrently that can provide enormous competitive advantage.
As mentioned
previously, not one firm has all core competencies to develop and deliver digital cinema
system. Naturally, alliances and sponsorships are the norm in digital cinema and the
product architecture will most likely be modular. Given this scenario, it is essential to
understand how to modularize the architecture. This work suggests modularizing along
the clockspeed boundary in the architecture. To that extent, the architecture strategies of
Kodak, Technicolor and Boeing have been analyzed in this chapter. These architectures
have been analyzed on several fronts, including integrality/modularity decisions, location
of modularity, alignment of supply chain and product architectures and the extent of
architectural control.
The analysis indicates that the product architectures reflect each firm's core
competencies, its relationships in the industry and each firm's view of the where value
can be captured in the newly emerging digital cinema marketplace. Alignment of product
and supply chain architectures is evident, to some extent, in the efforts of all the three
integrators. Modularity along clockspeed boundaries is also evident in some cases. If the
firms with control of clockspeed boundaries exert their power over others is remain to be
seen.
6.1 Concurrent Engineering in Three Dimensions
Product architecture decisions have ramifications beyond the product itself. As
discussed in the last chapter, standards decisions made as a part of the product
architecture decisions may end up defining the value chain. Standards, value chain and
product architecture decisions interact and will ultimately define various players' ability
Sadasivan, SDM Thesis
99
to realize profits and maintain flexibility. The idea of concurrent engineering can also be
found in the recent work of Lawrence Lessig. While describing Internet architecture,
Lessig states:
"Fourconstraintsregulate [Internet]- the law, the social norms, the
market and the architecture - and the "regulation of this [Internet] is the
sum of these four constraints. Changes in any one will affect the regulation
of the whole. Some constraints will support others; some may undermine
others. A complete view, however, should consider them together".79
The competitive ability of a firm in a rapidly changing environment (i.e., fast
clockspeed) arises from knowing what capabilities to develop internally and what to
outsource. Concurrent engineering is an approach that provides ways for identifying and
developing capabilities. Concurrent Engineering involves developing product, process
and
supply
chain architectures
concurrently.
Concurrent process
and
product
development has been popular since the early 1990s, a good example being the Design
for Manufacturing
(DFM) methodology. In the context of this work, product
development is defined as making architectural decisions, such as integrality and
modularity of the product and subsequent standards decisions. The process development
includes manufacturing systems development and the supply chain development involves
making decisions on whether to buy a subsystem or make it.
As mentioned previously, every industry has its own clockspeed or rate of
evolution based on its products. Individual capabilities that provide firms with
competitive advantage can lose value overnight as a result of the arrival of new
technologies, changes in customer needs and other such factors. The faster the clockspeed
of an industry/firm, the shorter is the half-life of any given competitive advantage. Under
conditions of such fleeting or temporary advantage, a firm's real core capability is its
ability to design and redesign its value chain. In industries where product architecture
decisions are already set, little leverage is available to make supply chain decisions
independently, because product architecture decisions affect supply chain decisions and
vice versa.
9
Lawrence Lessig, Code and other Laws of Cybernetics, Perseus Books, 1999.
Sadasivan, SDM Thesis
100
For instance, key product architecture decisions involve integrality or modularity
of product architecture. In integral architectures, there is a close coupling amongst its
elements or subsystems that make up the system. In contrast, a modular architecture
features separation amongst the subsystems that makes up the system. The subsystems in
a modular architecture are interchangeable and individually upgradeable. Standards
dictate to a certain extent the modularity/integrality of architecture. Open standards lead
to modular architecture, while integral architectures tend to have closed standards. Open,
modular architecture increases the number of competing firms in the supply chain, while
closed integral architectures tend to promote monopoly.
Similarly, supply chain architecture can be modular or integral.
An integral
supply chain architecture features close proximity amongst the players in the supply
chain. Proximity is measured along four dimensions: geographic, organizational, cultural
and electronic. Geographic proximity can be measured by the physical distance between
the players. Organizational proximity can be approximated by ownership, organizational
control, interpersonal and inter-team dependencies. The cultural proximity can be
approximated by commonness of language, business mores and laws. The electronic
proximity can be measured by virtual vicinity occurring through electronic data
exchange, intranets, videoconferencing and such. The lean production system developed
by Toyota is a good example of integral supply chain. The lean production system was
conceived by Toyota in the Nagoya/Toyota City industrial region within a uniform
culture and with significant ownership and managerial participation by Toyota and its
suppliers.
In contrast to the integral supply chain, modular supply chains exhibit low
proximity on all the four dimensions. Modular supply chains tend to feature multiple
interchangeable suppliers, as in the case of the personal computer industry.
Alignment of product and supply chain architectures is essential. Table 19 shows
popular examples for product and supply chain architecture alignment. The excellence of
Toyota Production System and Dell Computers can be attributed to the alignment of their
business practices arising from the supply chain architectures and product architectures.
Similarly, Polaroid's troubles can be attributed to misalignment of technology and supply
chain architectures. In the era of digital imaging with faster clockspeed, misalignment of
Sadasivan, SDM Thesis
101
technology and supply chain architectures creates significant inflexibility and cripples
effective competition with nimble and fast competitors.
Supply Chain Architecture
Integral
Modular
Integral
Microprocessors, BMW
Automobile, Toyota
Production System
Polaroid
Modular
Digital Rights
Music Distribution
Dell Computers
Bicycles
Product
Architecture
Table 19. Alignment of product and supply chain architectures. 95
The recent case of Recording Industry Association of America (RIAA) versus
Napster underscores the difficulty of using an integral business practice in distributing
MP3 music files. 96 MP3, being an open standard, has made this product modular. Napster
unsuccessfully challenged the business practices of music giants. In this very fast
clockspeed environment, Napster proved to be the most important node in distributing
music online with its lion's share of the market. In a short period of time, Napster
disrupted a significant portion of the distribution segment of the music industry's value
chain wherein most profits are made. Instead of promoting Napster, RIAA shut them
down and has damaged its own ability to control the online music distribution. In the
wake of Napster's demise, a multitude of Napster clones have sprung up, illegally
distributing the music and making it extremely difficult to enforce the laws.97
Firms developing products and services have a unique opportunity with digital
cinema because these firms can co-design product, process and value chain architectures
Charles Fine, 15.769 Lecture Notes, Spring 2002.
Charles Fine, Rapid Response Capability in Value Chain Design, Sloan Management
Review, Winter 2002.
9 Prof. Fine calls Polaroid's path a "Northern Route" and Music Industry's
path a
"Southern Route" and suggests that it is much more damaging and difficult to take
the Northern route rather than the Southern route.
9s
96
Sadasivan, SDM Thesis
102
concurrently that can provide enormous competitive advantage.
As mentioned
previously, not one firm has all core competencies to develop and deliver a digital cinema
system. Naturally, alliances and sponsorships are the norm in digital cinema and the
product architecture will most likely be modular. Given this scenario, it is essential to
understand how to modularize the architecture. This work suggests modularizing along
the clockspeed boundary in the architecture. To that extent, the architecture strategies of
Kodak, Technicolor and Boeing will be analyzed in this chapter. These architectures will
be analyzed on several fronts, including integrality/modularity decisions, location of
modularity, alignment of supply chain and product architectures and the extent of
architectural control.
6.2 Emerging Product Architecture Strategies
Kodak, Technicolor and Boeing are currently developing end-to-end distribution
and display digital cinema systems. Key elements of such system include providing
services to create digital cinema master and distribution master, distributing the digital
cinema distribution master and providing infrastructure in theaters to display the digital
movies and manage the operations. Figure 34 shows Kodak digital mastering process,
which starts with the conversion of images captured on film or digital camera along with
computer-generated graphics to form the digital source master. This master file can be
further processed to create: (1) a distribution master, (2) a digital intermediate for
releasing in analog theaters and (3) conversion to home video masters. Kodak uses
internally developed compression, encryption and watermarking technologies to create
the digital cinema distribution master.
Sadasivan, SDM Thesis
103
Laser
Film
/1
Recorder
Film
Digital intermediate
(Release Printing)
Datacine
"lor-tite"
transfer-
DiCita Cinema
2
I
Digital
Camera
3
LI
Computer
Generated
Images
IL
8/24P| Master(DCDM)
HD Master
Format
1080/24P
Conversion
Color
HomeVideo
Masters
Figure 34. Kodak digital cinema mastering process architecture. 98
Kodak's solution for the exhibition process is shown in Figure 35.
Encoded Digital Master
and Decryption Keys
from Distributor
Decryption
Keys
DowNload
Keys
Distribution
Copy
Load Digital
Master
"Satellite
* Features
* Trailers
* Preshow
"Fiber
"Media
Multiple screens
Theatre
Automation
* Advertising
-.
. Audio Processor
Figure 35. Kodak digital cinema exhibition process architecture. 99
Kodak digital cinema operating system is a customized software solution
developed to support loading, scheduling, control and playback of features, trailers and
pre-show content on multiple digital cinema screens. The Kodak digital cinema operating
system downloads the decryption keys from studios. The system also controls the
98 See http://www.kodak.com/US/en/motion/digital/mastering.shtml
99 See http://www.kodak.com/US/en/motion/digital/cineOpSys.shtml
Sadasivan, SDM Thesis
104
automated theatre operation such as lighting and sound systems. The decompressed,
decrypted, color corrected digital data will be projected through a Kodak digital cinema
projector. Kodak digital cinema projector uses JVC D-ILA chip.
Technicolor Digital's approach to digital cinema product architecture is shown in
Figure 36. Technicolor Digital uses its in house expertise to create digital master from
several capture sources. The digital master is then transferred to the digital cinema hub of
Technicolor Digital, wherein the digital master is compressed, encrypted and transported
to digital movie theaters. Technicolor Digital uses compression, and encryption
technologies developed at Qualcomm. Digital cinema hub provides the ability to manage
the operations of transportation in a secure fashion.
Figure 36. Technicolor Digital cinema product architecture.100
The architecture includes a theater management system, which receives, stores
and displays movies through a digital projector. The theater management system also
acts as conditional access system to keep digital content secure. Technicolor currently
uses projectors made by OEMs with TI DLP chips. Except for the projection system,
100
See http://www.technicolorDigital.com
Sadasivan, SDM Thesis
105
Technicolor's digital cinema system integrates proprietary technologies to deliver an endto-end solution to the customers. 10 1
Boeing has also developed an integrated solution with an open-architecture design
that will "integrate any off-the-shelf hardware to compress, store, forward andproject
digital content with the primary goal of interoperability."10 2 Boeing Digital Cinema is a
part of Boeing Integrated Defense Systems, a $23 billion space and defense business. It
provides systems solutions to its global military, government and commercial customers
including intelligence, surveillance and reconnaissance. It also manufactures military
aircrafts and satellites.
Figure 37. Boeing Digital Cinema.
03
Figure 37 shows Boeing's view of Digital Cinema Architecture.
The Boeing
Digital Cinema's Network Operations Center (NOC) receives the digital master file from
the content creator/studios, compresses and encrypts it and delivers it through satellites or
fiber to theaters. Boeing plans to provide turnkey solutions to theaters, including
installation of digital projectors and theater management systems to display the content.
101 Technicolor Digital is a joint venture between Technicolor and Qualcomm.
Technicolor brings in its expertise of post-production technologies and movie
industry contacts while Qualcomm brings in its digital data encoding technologies
(compression, encryption) to the joint venture.
102 http)://www.boeinq.com/defense-space/space/cinema/backgrounderbackqrounder.html
103 http://www.boeinq.com/defense-space/space/cinema/backqrounder/backcrounder.html
Sadasivan, SDM Thesis
106
6.3 Evaluation of Emerging Product Architecture Strategies
Amongst the three architectures, Boeing has the least control over the
architecture, while Kodak and Technicolor have some extent of control over their
respective architectures. Kodak and Technicolor are currently incumbents in the existing
motion picture value chain and probably have the most to lose from this transition.
Incidentally, they have the most inside connections with the studios. Yet, Boeing's open
architectural decision potentially seems very attractive for those who do not wish to be
locked into a particular manufacturer or standard and may gain the support of the studios
who seek to ensure openness in digital cinema architectures. Boeing is playing the role of
IBM in the PC industry. Whether this strategy will be successful for Boeing is unclear. If
one draws from the IBM's experience, Boeing is ill fated to make changes as technology
evolves, as it has no control over the architecture. Given that digital cinema is not its core
competency, Boeing does not have much to lose from its exploration.
Kodak and Technicolor have proposed modular architectures, knowing major
studios' hesitancy in adopting integral architectures. Kodak and Technicolor seek to
standardize Digital Source Master and Digital Cinema Distribution Master, essentially
creating modularity along these locations.
Within these sub-systems the technologies
may be integrated for optimal performance. While Technicolor plans to buy TI's DLP
projectors from the fabulous three,10 4 Kodak has not declared its intentions on the
projection system. If Kodak co-develops the projection system, Kodak may have partial
control over the clockspeed boundary, which lies within the projection system, while
Technicolor does not as it is controlled and owned by TI.
104
Fabulous three are the OEMs- Christie Digital, Barco and NEC.
Sadasivan, SDM Thesis
107
Projection
System
~image
e
nd
Audio
Sound
System
ITransport
~Subtitle
Subtitle
Auxiliary
System
Auxiliary
Auxiliary
CaDis
or
Crbt/Encryp~
Post
7Produto
Pduction
Distribution
Display
Figure 38. Mapping Kodak's architecture to generalized architecture. Green shaded areas
denote areas of control and dotted lines indicate points of modularity.
Projectio
System
.3
Audio
System
Transport
Subtitle
SSubtitle
Auxiliary
System
Auxiliary
Auxiliary
tJ
d
Distributioi
Display
Figure 39. Mapping Technicolor's architecture to generalized architecture. Green shaded
areas denote regions of control and dotted lines show points of modularity.
Sadasivan, SDM Thesis
108
Image
Snd
Comp.
Projection
ImeDeComp.
System
Image
Image
Comp.
Comp.
Sound
SoundSSuun
Comp.
Sound
Sound
yAud io
System
S
Theater:
mSystem
Storage
Subtitle
Subtitle
S
Subtitle
Subtitle
Subtitle
+
Auxiliary
Auxiliary
Capture
or
Production
Auxiliary
Auxiliary
Auxiliary
System
Auxiliary
Auxiliary
....,.....F.....y......
Post
Production
Distribution
Theater Management System
Display
Figure 40. Mapping Boeing's architecture to generalized architecture. Green shaded
areas denote regions of control and dotted lines show points of modularity.
Alignment of product and supply chain architectures is evident to some extent in the
strategies of all of these three firms. In general all these firms have close partnerships or
internal development for technologies within a subsystem and have modularized along
those subsystems where they rely on outside suppliers. For example, to create digital
cinema masters, Kodak works through its subsidiary Cinesite, while Technicolor Digital
goes through Technicolor.
Similar strategies can be seen in the key technologies
involved in creating distribution masters,
including compression and encryption.
Technicolor's partner in Digital Cinema Qualcomm provides these technologies, while
Kodak relies on its internal research and development organization. To leverage the use
of physical drives and satellite-based distribution of digital files to movie theaters, Kodak
and Technicolor plan to create modular interoperable product, i.e. a standardized
distribution master.
The final subsystem is the theater subsystem, including digital
projection. Since Technicolor plans to use TI projectors, its theater subsystem will be
Sadasivan, SDM Thesis
109
modular while Kodak can provide an optimized integral subsystem if it co-develops with
JVC. In such a scenario, a very close relationship with JVC is critical for success. In
contrast, Boeing has truly modular sub-systems except for their encryption and delivery
subsystem, which seems to be integral, aligning with Boeing's core-competencies.
In summary, product architecture reflects each firm's core competencies, its
relationships in the industry and each firm's view of the where value can be captured in
the newly emerging digital cinema marketplace. Alignment of product and supply chain
architectures is evident to some extent in the efforts of all the three integrators.
In some cases, the observed modularity in product architecture seems to lie along
the clockspeed boundaries.
By aligning modularity in product architecture along
clockspeed boundaries, firms can potentially help remove fears of obsolescence. Firms
can trade the benefit of removing fears of obsolescence with partial lock-in of its
customers. By creating a consistent marketing strategy through various leasing versus
selling arrangements, firms can further extend their lock-in strategy.
Firms can also
develop a cohesive technology strategy around the clockspeed boundary that enables
them to leverage the fast changing nature of one sub-system. In summary, clockspeed
boundary modularity provides a unique way of creating concurrent product and value
chain architectures.
Sadasivan, SDM Thesis
110
Chapter 7: Conclusions
Digital cinema brings to the motion picture industry a rate of change it has never
seen before in its history. In fast clockspeed industries, the competitive advantage arise
from choosing the capabilities wisely, remaining flexible and adapting to change. In such
scenarios, firms need to anticipate which capabilities are worth investing in and which
should be phased out. Concurrent design of products, process and capabilities provide a
framework adjust the overall strategy of any firm in fast changing environments.
This thesis presents a novel view of architecting the digital cinema system taking
into account the fast-changing nature of digital cinema technology and the dynamics
between key players in the motion picture industry. This unique approach for architecting
the digital cinema system, involves strategically controlling the boundary, i.e., the
"clockspeed boundary" between slow and fast clockspeed elements within the system. It
is believed that such an approach may provide essential market survival competency to
firms in the digital cinema value chain.
The use of standards to control this interface is
also articulated in this work.
The value chain analysis of the current motion picture industry is performed to
understand the power and structure of the industry. The transition from analog to digital
cinema seeks to alter the power distribution and structure of the industry. Currently, the
movie studios control the value chain. The unique capabilities of digital cinema may
provide fresh opportunities for independent moviemakers. The complexity of digital
cinema technology will also provide new opportunities for system integrators.
The standards dynamics in the digital cinema has been investigated to understand
the issues involved in creating compatibility standards in digital cinema. Standards add
value by indirect network effects, working through the demand of content. Worldwide
standards can provide significant supply-side economies of scale, leading to lower prices
and increased adoption. The standards strategy of any firm will ultimately decide the
value that can be captured by the firm.
The digital cinema value chain will be ultimately decided by the product
architecture and standards decisions. To that extent, two alternate scenarios for value
chain have been proposed. If standards efforts lead to open standards, the studios may
Sadasivan, SDM Thesis
ill
still be powerful and the resultant value chain may look very similar to the current one. If
system integrators maintain control over the architecture and standards, the resultant
value chain may look very different. In such a case, these system integrators can
potentially extract value from the studios. Given the importance of standards, a hybrid
strategy for setting standards that combines a market-oriented process along with a
committee-oriented process is suggested here.
Finally, concurrent design of product architecture and value chain design is
proposed because value chain and product architecture decisions interact and ultimately
define various players' ability to capture value and maintain flexibility. The product
architectures of three system integrators are analyzed to understand the leverage these
three players have over the digital cinema value chain. The product architecture reflects
each firm's core competencies, its relationships in the industry and each firm's view of
the where value can be captured in the newly emerging digital cinema market place.
In summary, the clockspeed boundary modularity provides a unique way of
creating concurrent product and value chain architectures. By aligning modularity in
product architecture along clockspeed boundaries, firms can potentially help remove
fears of obsolescence. Firms can trade this benefit with partial lock-in of its customers.
By creating a consistent marketing strategy through various leasing versus selling
arrangements, firms can further extend their lock-in strategy. They can also develop a
cohesive technology strategy around the clockspeed boundary that enables them to
leverage the fast-changing nature of one subsystem.
A key element of the technology
strategy is standards strategy that provides a means for controlling the clockspeed
boundary.
Sadasivan, SDM Thesis
112
Appendix A
Digital Cinema Standards Activities
There is no unique digital cinema technology that can replace traditional film. Several
key technologies need to be integrated to create digital cinema architecture, as discussed
in the aforementioned section. This section summarizes the efforts done by the Society
of Motion Picture and Television Engineers (SMPTE) in developing standards for
different interfaces in digital cinema.
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Figure 41. Digital cinema architecture used by SMPTE working groups in coordinating
standards development10 5
Figure 41 shows the system architecture, the information flow and various interfaces in
the Digital Cinema System as described by the Society of Motion Picture and Television
105
See SMPTE DC28 Study Group Interim Report at www.smpte.org
Sadasivan, SDM Thesis
113
Engineers (SMPTE). SMPTE is a trade organization representing the technical aspects of
television, film production and display. SMPTE coordinates standards, engineering
guidelines and recommended practices in areas encompassing analog cinema, digital
cinema, television, video and computer imaging.
SMPTE has created a DC28 technical committee to coordinate standards activities
for the entire system. SMPTE is focused on creating standards to ensure
interoperability,
compatibility, performance and extensibility. For the purpose of this thesis, performance
standards issues studied by SMPTE will not be discussed in detail. SMPTE's charter in
digital cinema is to, "Provide Industry Technical Forum for D-Cinema, Identify Key
Systems & Technology Issues, Develop a Recommended Approach to Standards,
Identify,
Establish and CoordinateNecessary Groups to Achieve Overall Objectives and In future,
write the standards." The schematic of the scope of DC28 is shown in Figure 42.
Image
Audio
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Figure 42. Schematic of scope of SMPTE's standards activities.
The SMPTE DC28 technical committee is focused on creating digital movie
masters, distribution of the digital movie and play back. It is not focusing its efforts on
issues involved in the image capture and production.
The SMPTE DC28 committee has created working groups with a broader charter
of assessing issues in key subsystem and technologies. These groups have been formed
with a broader charter such that they are not working groups for creating standards but
Sadasivan, SDM Thesis
114
may evolve to creating standards. The different working groups and their descriptions are
given in the Table 20.
Committee
DC 28.1
DC 28.2
DC 28.3
DC 28.4
DC 28.5
DC 28.6
DC 28.7
DC 28.8
Description
Overall System Issues
Digital Master
Compression
Conditional Access
Transport
Audio
Theater Systems
Projection
Table 20. Different digital cinema working groups.
SMPTE is not only coordinating the standards activities with its industrial
members, it is also attempting to coordinate the activities amongst several standards
bodies such as the National Association of Theater Owners (NATO), the Motion Picture
Association
of America
(MPAA),
the
Information
Technology
for
European
Advancement (ITEA), the Motion Picture Experts Group (MPEG) and the Audio
Engineering Society (AES). The SMPTE working groups have over 250 representatives
from 100 different member organizations and standards bodies. The testing of the various
technologies is performed at the Entertainment Technology Center (ETC) at the
University of Southern California.
DC 28.2 Mastering
06
The DC28.2 Digital Mastering working group has the responsibility for the
creation of standards for the digital image file for subsequent display and/or processing
through the compression/encryption/distribution chain.
Digital cinema mastering is the process of combining video (visual media) and
audio from different sources into a completed product that is designed for theatrical
presentation using electronic projection as the means to display an image on a large
screen. This visual media could consist of traditional film, computer generated graphics,
material captured with a video camera or any combination of the visual media just
106
See SMPTE DC 28.2 Study Group Interim Report at www.smpte.org
Sadasivan, SDM Thesis
115
mentioned. Traditional mastering for cinema has usually been prepared using film
elements combined together to make a master color-timed InterPositive (IP) from which
multiple InterNegatives (IN) are made. These INs are used to make many 35 mm prints
that are then distributed to the theaters for presentation.
In order to define the final mastering image file, new structure and nomenclatures
have been established. The Digital Source Master (DSM) is the highest quality digital file
and is considered equivalent to the film negative. It has two layers: (1) the digital
negative and (2) a color correction layer. Conversion to all other formats including film,
video (NTSC, PAL and High Definition), DVD and digital cinema is to be done from this
format. DC 28.2 does not plan to standardize or specify DSM, however, a set of
recommended practices necessary to facilitate exchange formats for the production
industry will be developed. But the DC 28.2 working group plans to propose a standard
format for the digital cinema product, Digital Cinema Distribution Master (DCDM). The
DCDM is the file that is distributed to the theaters for display. DC 28.2 seeks to make
this file format a worldwide standard with acceptance equivalent to 35 mm film.
The specification of DCDM will include a layered set of standards. The standard
needs to include: color space, bit depth, pixel format, frame rate, transport protocol, and
physical interface standard to the projector/compression engine.
The DC 28.2 working group has proposed two different formats for transport of
DCDM to the theaters. The first, a non-real time transfer, uses a file transfer model to
deliver DCDM to the theaters storage system. Although non-real time transfer may
become the norm, long transfer times may not be practical. If a portion to the DCDM
becomes corrupted, DCDM must be replaced quickly, which calls for a streaming format
to deliver DCDM. Such a format will also enable delivery of live broadcast to the
theaters.
DC 28.3 Compression' 0 7
The DC 28.3 study group on compression has been created to define the standards
and recommended practices in compression. The charter of the study group includes
defining the image compression requirements and specifications for the digital cinema,
metrics for defining compression image quality and coordinate with other DC 28 study
107
See SMPTE DC 28.3 Study Group Interim Report at www.smpte.org
Sadasivan, SDM Thesis
116
groups to ensure image compression is optimized in the context of the overall system. To
that extent, the working group has defined hand-off points that need to be standardized.
The focus of this section will be on the compatibility standards, not quality standards.
The requirements of the compression are to include compatibility with other subsystems
downstream
of compression
and
downward
compatibility
to
avoid
hardware
obsolescence. The standard for compression/decompression of live events is not part of
the current scope of the group.
Specific standards are required for the data formats and physical interfaces to the
encoder (compression) and decoder (decompression). In describing where these standards
are needed, we reference the DC 28 functional block diagram, the relevant portions of
which are presented here as Figure 43.
ENCRYPTION
(OPTIONAL)
IMAGE
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105~
METADATA.................
DECRYPTION
(OPTIONAL)
124
125
.................................
Image
M ETADATA
Figure 43. DC 28.3 Functional Block Diagram showing the different interfaces
The standards include identifying image and metadata input for the encoder and
decoder and the corresponding outputs as shown above in the block diagram. These
inputs and outputs are to be standardized to enable manufacturers to build encoders and
decoders to that specification.
DC 28.4 Conditional Access 08
The conditional access system controls the use of digital cinema entertainment
content in accordance with contractual agreements between content owners, distributors,
108
See SMPTE DC 28.4 Study Group Interim Report at www.smpte.org
Sadasivan, SDM Thesis
117
exhibitors and other stakeholders. To perform this function, a means is required to allow
access to the content by the legitimate exhibitor while preventing access or misuse by
unauthorized parties. The DC 28.4 working group has been created to develop standards
for the security system required for the protection of the content in a digital cinema
delivery.
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Sadasivan, SDM Thesis
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DC 28.5 Transport 09
The mandate for the transport working group is to provide common interfaces at
the input and output transport link for compressed, secure content such that it can be
transported across a variety of means, including physical media such as DVD, satellites
and terrestrial networks. This group seeks to standardize the interface at the input link by
providing gateways at the input distributor end and at the output link by providing
gateway at the theater as shown in the Figure 45 below.
Packaging
Management.
Conditional
Access
Int. #103
Ethernet
Gateway Processes:
Transactional
Resource Mgt.
System Mgt.
Security
Transport Protocols
Gateway Processes:
Transactional
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Inif. 4 101
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IP ATM
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Courier
Packaging
System
Distributor
Gateway
Contracted
Transport Service
Providers
Theater
Gateway
Theater
Systems Storage
and Playout
Figure 45. Functional block diagram for DC 28.5 working group showing the different
interfaces.
DC 28.6 Audio"
Digital audio is already established in theaters. In the analog version of cinema,
the audio tracks are compressed and written on the back of the film, which are converted
and played in the theaters. Digital cinema technology eliminates the need for audio
09 See SMPTE DC 28.5 Study Group Interim Report at www.smpte.org
See SMPTE DC 28.6 Study Group Interim Report at www.smpte.org
10
Sadasivan, SDM Thesis
119
compression. The audio is expected to be a separate file from the video. Moreover, digital
audio file may contain multiple versions (languages and ratings) as prescribed by the
content owner, additional tracks for hearing impaired and commentary for visually
impaired.
The audio systems interface through the theater system with the conditional
access verification system. In particular, it interfaces with most of the elements of the
theater system and the projection system.
DC 28.7 Theater Systems"
The theater system includes the theater storage and playout system, conditional
access verification system and theater management system, as shown in Figure 46. This
system interfaces with the transport gateway that delivers content to the theaters, which is
stored on the theater network.
Figure 46. Functional block diagram of various interfaces in theater management
system.
The stored content needs to be authenticated through the conditional access key
management system. The theater management system interfaces with content playback,
. See SMPTE DC 28.7 Study Group Interim Report at www.smpte.org
Sadasivan, SDM Thesis
120
auditorium controls and overall system control and monitoring. DC 28.7 seeks to provide
recommendations for standardizing each or most of these interfaces.
DC 28.8 Projection 1 2
The mandate of the DC 28.8 working group is to develop standards,
recommended practices, and engineering guidelines for digital projection of theatrical
presentations in cinema theaters and review rooms. The key interfaces that are being
standardized by this working group include the program interface from the playback
device and automation interface. This groups mandate also includes developing minimum
display characteristics of the display device and minimum display attributes for the
screen, the discussion of which is not pertinent for the subject matter of this thesis.
112
See SMPTE DC 28.8 Study Group Interim Report at www.smpte.org
Sadasivan, SDM Thesis
121