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OK, let's see if it works...

Posted by Eric LeRouge (A) on October 2, 2004 at 10:20:44

In Reply to: What exactly constitutes "success" for a hi-rez format? (long) posted by Bayside Bomber on October 1, 2004 at 20:41:32:

*** the basic rule of thumb we teach students is that a firm or an industry will endure if the value it creates for consumers exceeds the costs of creating that value (at least until something comes along that has a larger value/cost gap.) For those buyers and sellers involved, the market is a success, as they enjoy part of the value that is created. ****

So let's see if this works:

- the marginal cost to invest for a higher resolution format release (sacd or dvd-a) is $25,000 to $50,000 (depending on MCH mix, authoring, pressing costs, etc). This could go down with ramp up production, but mixing and mastering (and authoring, for dvd-a), is a one-time cost that cannot be reduced

- the median sale of high resolution formats is 3,500 to 5,000 units at best in the current environment

Hence, best case scenario: the increased value perceived by the customer should be $25,000 / 5,000 - or a minimum of $5 per unit purchased.

So if your rule is correct, the customer should be prepared to pay at least $5 more (than a CD) for the additional value. I think this is about right, in Europe at least, where high resolution formats are sold $5 to $8 higher than regular CDs.

Now worst case scenario: If the production costs increase dramatically to $50,000 and the number of copies sold is only 3,500, the company will struggle because the cost of creating this value is 50,000 / 3,500 = $14,29, a cost it cannot pass on to the customer.

This leads to the conclusion that high-resolution formats may be more profitable for smaller organizations, which do not have high overheads, unionized employees, and shareholder pressure. In other words, SACD is more profitable for Telarc or AIX than for Sony.

Just musing

(Err... did I flunk the test? :-)

Best

Eric

"Julian Dicks is everywhere.
It's like they've got eleven Dicks on the
field."

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