Next-Gen DVDs: Advantage, Sony

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It was price that prompted DreamWorks Animation and Paramount to throw in their lot with HD DVD earlier this summer. (Like Warner, Paramount had previously backed both formats.) "The game-changer for us was the hardware costs dramatically coming down to where it could succeed broadly for the consumer," says DreamWorks Animation CEO Jeffrey Katzenberg. "In addition, the software manufacturing costs in the future would be significantly lower than Blu-ray." Of course, it didn't hurt that Toshiba agreed to pay Paramount and DreamWorks Animation a combined $150 million in incentives, including money to license DreamWorks' Shrek character for marketing purposes.

The Blu-ray faction insists there is no burning reason for it to match HD DVD's prices. "We think Warner will respond to the fact that our greater number of titles gives us a greater likelihood of being the single standard," says Andy Parsons, who leads the Blu-ray lobbying effort. But another executive backing Blu-ray, who didn't want to be identified, expects the imminent arrival of a sub-$300 Blu-ray machine.

What's more, Hollywood insiders say the $150 million that the Toshiba group showered on Paramount and DreamWorks Animation radically changed the game. These people suggest the Blu-ray team is so determined to win that it will throw hundreds of millions of dollars of marketing support behind Blu-ray equipment if Warner gets on board.

Warner isn't talking, but people close to the situation say the studio is waiting to see which group sells more of the new-fangled DVD players this holiday season. "Warner wants one of the two sides to make a commitment to getting this format into as many hands as possible," says a studio executive with knowledge of its thinking.

So far Toshiba has eked out a lead. According to industry tracker Adams Media Research, by the end of this year as many as 578,000 U.S. households will own HD DVD players, compared with 370,000 that have Blu-ray players. Adams also estimates there are 300,000 more HD DVD players in circulation as an external add-on to Microsoft Xbox game consoles. But that still pales in comparison to the estimated 2.3 million Blu-ray-equipped Sony PlayStation 3 consoles sold through November in the U.S.

The Blu-ray side has another advantage. Disney caters to families, who buy lots of older films for their kids. That could help the format build critical mass. "The Blu-ray customer is more likely to build a new library," says market researcher Richard Doherty. "Studios live for [that]."

That leaves one question. If the Sony camp wins Warner, will the other studios ditch HD DVD? They're not saying. But Dreamworks Animation and Paramount only signed on with the Toshiba side for 18 months. So then they could take the money and run.

Grover is Los Angeles bureau chief for BusinessWeek. Edwards is a correspondent in BusinessWeek's Silicon Valley bureau.