Technology

Blu-ray's High-Definition Knockout


Warner Bros. opts to back the Blu-ray high-def DVD format in a decision that could drive consumers away from the rival standard, HD DVD

The battle to determine the future of the DVD may be coming to an end. In a blow to Toshiba's (TOSBF) HD DVD movie format, Warner Bros. Entertainment (TWX) announced on Jan. 4 that it plans to begin releasing high-definition movies exclusively in the Blu-ray format backed by Sony (SNE) and dozens of consumer electronics and PC industry titans.

Warner's decision could consign the HD DVD format to the dustbin of consumer technologies that delivered on their promise but failed to secure the backing of key decision-makers. Warner had been considered a linchpin in the race for dominance between Blu-ray and HD DVD. The studio has the largest library of movies in the industry and consistently releases many of the biggest hits annually.

Both camps had been lobbying to get Warner to make a decision ahead of the annual Consumer Electronics Show in Las Vegas next week. Retailers attend the giant trade show to determine which items they might like on their shelves. Warner executives late last year said they planned to evaluate the market after watching sales of both HD DVD and Blu-ray titles and players during the holiday shopping period. "We just looked at what the consumers were telling us, and they were saying it was Blu-ray," says Barry Meyer, CEO of Warner Bros. Entertainment, which had supported both formats.

Denial of a Bidding War

BusinessWeek reported in December that both DVD camps were offering Warner cash and incentives in exchange for exclusive support (BusinessWeek, 12/6/07). One source reported that Toshiba had offered to pay more than $100 million, while Sony bid closer to $400 million. But Meyer denied there was a bidding war and said Warner instead looked solely at global sales of both formats in making its decision. "The window of opportunity for high-definition DVD could be missed if format confusion continues to linger," he said.

Warner plans to continue releasing HD DVD titles through June, after releasing them first on Blu-ray and standard DVDs. When it begins releasing films exclusively to Blu-ray in July, more than 70% of new releases will be exclusive to the Blu-ray format. Warner joins Disney (DIS), Fox (NWS), MGM, Sony's studio, and Lionsgate (LGF) as major supporters.

As a practical matter, retailers are likely to begin phasing out HD DVD players almost immediately despite recent price-cutting that saw some HD DVD players tumble to just $99, compared with about $400 for Blu-ray machines.

HD DVD Won't Disappear Overnight

Should Toshiba decide to stay the course, the HD DVD format will not disappear overnight. Universal Studios has been solidly in the HD DVD camp since the format's debut nearly two years ago, and Paramount (VIA) and DreamWorks Animation (DWA) last summer signed an exclusive deal with HD DVD that is expected to last through at least 2008.

Even so, Warner's move is important because many consumers have stayed on the sidelines during the high-definition format war. Analysts estimate fewer than 1 million standalone machines have been sold in either format. Sales of Sony's PlayStation 3, which includes a Blu-ray player, likely contributed to Warner's decision; Sony has sold several million PS3s.

The move to a single standard would prove a major victory for consumers. Many who have come to enjoy the crisp detail of high-definition television likely would move ahead with purchases of advanced DVD players if they knew their technology would not become obsolete. The Warner decision removes some of that uncertainty, and appears to eliminate the prospect that Sony will lose out, as it did with its ill-fated Betamax standard in the battle against VHS.

Competition from Movie Downloads

It nonetheless could be a pyrrhic victory for the Blu-ray camp. In their efforts to sway the studios to their side, Sony, Samsung, and other Blu-ray manufacturers have been forced to slash prices on the relatively expensive technology. They initially had hoped by switching to the new format that they could get greater margins than with regular DVD players, whose prices tumbled after Chinese and Taiwanese manufacturers swamped the market with cheap models. Now margins on the new products have been squeezed because of the intense price-cutting.

The new DVD formats also will face heavy competition beginning this year from companies that aim to deliver movies to consumers' televisions via the Web. Mail-order movie rental company Netflix (NFLX) on Jan. 3 announced it had struck a deal with LG Electronics to deliver part of its library to people's homes via a set-top box (BusinessWeek.com, 1/3/08). And Apple (AAPL) is expected to unveil its own movie download service as early as mid-January.

The major studios also have high hopes for "download-to-burn" technology being offered by services such as CinemaNow and Blockbuster's (BBI) MovieLink. These technologies could slash high distribution costs and reduce the influence of Wal-Mart (WMT), Best Buy (BBY), and other retailers who demand a take of the profits. It also is a cheap way to sell older movies that retailers are unlikely to stock.

For now, though, the Blu-ray camp is likely to be celebrating its success.


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