In DVD War, Body Blows for Toshiba

(page 2 of 2)

Looking for Allies in China

The resurgent Toshiba player sales make it more difficult for retailers to sit firmly in the Blu-ray camp since those surging HD DVD player sales could also spur purchases of HDTV and other big-ticket home theater equipment. While the PS3 has sold well on a relative basis, the bad news for retailers is that the competing Nintendo Wii game console, which does not require consumers to purchase additional high-definition equipment, has been the retail champ since its launch.

Toshiba also is lining up allies in other quarters outside retail. It could get some unlikely support in coming months from the Chinese. The Japanese conglomerate is encouraging the Chinese government to adopt its variation of the HD DVD technology for internal use. Two large Chinese DVD manufacturers have committed to doing just that, and aim to begin selling such products later this year.

The bet Toshiba is making with its tieup in China holds promise and peril. It could benefit if the Chinese entries help bring down the cost of components rapidly. Analysts consider a price tag below $199 attractive enough to grab mainstream consumers. But those same Chinese manufacturers could try to export competing players that undercut Toshiba on price. And Chinese makers have balked at paying licensing and royalty fees on key patents held by Japanese DVD makers; the same could happen to Toshiba with HD DVD.

Hollywood Backing Pivotal

Still, the backing of Hollywood studios will be most crucial to either format's success. Content providers hope to strike gold with high-definition DVDs, much like they saw from a $24 billion home video sales market created after DVD players made their first appearance in 1997.

With so much money at stake, anyone betting on the wrong camp might pay a heavy price. Universal Studios is the HD DVD side's only exclusive partner, though Warner Bros. (TWX) and Paramount Pictures (VIA) support both standards. Blu-ray has had more momentum, since Sony, Disney (DIS), Twentieth Century Fox (NWS), Lions Gate Entertainment (LGF), and Metro-Goldwyn-Mayer (MGM) are solely in that camp.

Recent events, however, are making even that Blu-ray advantage appear less formidable. After hackers announced in April that they had cracked next-generation DVD encryption schemes, Fox, which also distributes MGM titles, has not released any new titles. Sources say both camps are working feverishly on new encryption software that might entice Fox to its side.

Another significant problem for both camps is that the high-definition DVD is not as obvious a leap in overall picture quality as the switch to DVD from videocassette recorders. What's more, most of the benefits viewers do see come when watching the content only on a very large high-definition television—usually 50 inches or larger.

PC Market Not Yet a Swing Factor

Toshiba recently announced plans to add HD DVD players to all its PCs and notebooks, while other large manufacturers such as Dell (DELL), Sony, and Apple (AAPL) support only Blu-ray (though Apple has yet to release a Blu-ray computer). Analysts say the PC market may not become a swing factor until manufacturers add recording capability and blank discs come down in price.

On top of it all, time doesn't appear to be on either side. With hard-drive capacity growing exponentially and prices coming down even more sharply, experts predict most broadband-enabled homes within 10 years will download much of their content off the Internet, store it on terabyte home servers or cable boxes, and shuffle that content around the home or onto portable devices.

The solution, of course, is for each side to call a truce and revive talks that failed two years ago to marry the two formats, Bajarin says. But with the exceptions of LG Electronics and Samsung Electronics, who have announced combination players, the two camps appear firmly committed to following the race through to its conclusion. By the time that happens, the money-losing strategies each side has set will have even the winner limping to the finish line.

Edwards is a correspondent in BusinessWeek's Silicon Valley bureau.