02/16/98 ON THE DIGITAL FRONTIER: A SHOOT-OUT WITH NO WINNERS

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ON THE DIGITAL FRONTIER: A SHOOT-OUT WITH NO WINNERS

In a mock TV studio in lower Manhattan, Sony shows off its latest collection of high-definition TV wares. A $35,000 professional HDTV camera focuses on a model seated on a sofa. Able to shoot in daylight or darkness, it displays her face on a wide-screen TV in subtle variations of shadow and light. The details are perfect--the hair, the skin tone, the patterns on her clothes.
But one crucial thing is missing from this picture: the payoff. Since the early 1970s, Sony Corp. and a dozen other, mostly Japanese companies have spent billions of dollars developing digital high-definition cameras, VCRs, and TVs. But the mass market for such gear could take another five years to develop. And when it does, profit margins won't look nearly as fetching as the model on Sony's sofa.
Entertainment hardware companies like Sony are suffering from much the same problem that is plaguing entertainment content companies: Too many players across a range of industries are investing huge amounts in ever more elaborate products that, for a variety of reasons, don't find their way into an adequate number of family rooms.
For one thing, the hardware clutter confuses shoppers. People are afraid to buy a device that might soon be obsolete. And that wariness has an impact throughout the food chain. Entertainment companies may hesitate to issue lots of movies or records on a fledgling format. Broadcasters also may balk at airing shows in a new medium, such as HDTV, if few homes own the necessary receivers. Retailers get hurt, too. They depend on timely introductions of new, breakthrough products to lure shoppers. Without such products, stores can flounder. Witness Nobody Beats the Wiz, a large New York-based chain that filed for bankruptcy protection in December.
Indeed, new hardware formats have long been the engine driving big entertainment sales increases. Remember the introduction of the VCR? As the machines became commonplace, Hollywood studios reaped billions selling their old movies on tape. But recently, there has been a drought of big new products to drive revenue growth. And if it's hurting the content companies, it's killing their hardware brethren.
The main problem is, there are too many players from different outposts on the digital frontier trying to set tech standards. Already, the lines between computers and digital TVs have blurred, leaving companies like Microsoft, Compaq Computer, and Intel suddenly squared off against Sony, Philips, Thomson, and Zenith in the race to define digital TV and its accoutrements.
PRICE-CUT FRENZY. Warring factions now undercut every effort to standardize revolutionary products. And when standards finally do emerge--for HDTV, say, or digital videodisks (DVD)--price-cutting begins early, before products are even launched. ''We used to compete against other consumer giants,'' complained Carl Yankowski in December, shortly before resigning as President of Sony Electronics. ''Now, we're up against PC and software companies, as well.''
HDTV isn't the first casualty, but it may well turn out to be the bloodiest. Giants like Sony, Philips, and Thomson spent nearly 10 years hashing out digital-TV standards in a ''grand alliance'' with America's own digital pioneers, including AT&T, Zenith, and NextLevel Systems, formerly called General Instruments. The Federal Communications Commission tried to force a consensus but failed. So last spring, it set guidelines that are broad and vague.
Now, networks are poised to start digital broadcasting. But none has decided how much high-quality HDTV to include. Consumers don't know which TV sets to buy, and manufacturers don't know what to build. PC companies such as Microsoft Corp. also want in. ''The stakes are so high on this technology,'' says Mary Bourdon, principal industry analyst at Dataquest Inc. in San Jose. ''The titans of the universe are at war.''
The nascent DVD industry is no less fractious. Developed at great cost by Toshiba, Time Warner, Sony, Philips, and others, DVD-style disks store whole movies. But sales of players are slow. And come summer, interested consumers will have to choose between standard DVD and a rival, incompatible format called Divx (page 118). Worse, in two years, there may be three different versions of recordable DVD players.
The cable-TV sector also is trapped in standards and pricing hell. In late December, Tele-Communications, Time Warner, Comcast, and five other cable operators placed a $4.5 billion order with NextLevel for 15 million digital set-top boxes. Stuffed with chips from Intel and others, the boxes will let cable operators compete with broadcasters to provide digital entertainment, fast Internet access, and snazzy new services like Net-based videoconferencing. But NextLevel will have to hold prices at about $300 per box--even though each will pack the processing power of a Pentium PC. Next, expect a battle over the software in the box.
One thing is certain: The winner won't take much home in the way of profits. Witness digital satellite broadcasting. Since 1994, some 8 million shoppers have snapped up satellite systems. But price wars have trashed profits for dishmakers such as Sony and Thomson. As in the entertainment content field, too many players are trying to carve up each pie. In the end, none ever gets more than a sliver.
By Neil Gross in New York

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