DVD FORMAT WARS LOOM

DENNIS BLANK

The battle between major players over two competing, incompatible technologies of high definition DVDs could have profound effects not only on retailers but on consumers as well. Some experts warn that if consumers are confused or unsure of which one they prefer, they may defer spending until the issue

is resolved.

If current schedules hold, the battle will not begin at least until later this year, and won't start to impact most supermarket customers until hardware prices come down to mass market levels, which may take several years.

However, it is shaping up to be one heck of a war, according to experts. "Each one has big investments in their chosen technology, and think that they've got a winning product, want it adopted as the industry standard, and will fight tooth and nail to do it," said Peter King, an electronics expert with Strategy Analytics, Boston.

"We are talking about billions of dollars in filmed content," said Laura Behrens, an analyst for GartnerG2, Stamford, Conn. "The stakes are very large."

In a nutshell, major studios have aligned themselves with developing either one or the other of the two competing systems for high definition video recording, called Blu-ray or HD DVD.

While products for the DVD players will be in the marketplace later this year, the first recorders are expected to cost about $2,000 for the Blu-ray player and about $1,000 for the HD DVD unit. The systems offer a much better quality playback and improved copyright protections.

"It is never a good thing for the industry overall to have multiple formats," said Aditya Kishore, an analyst with Yankee Group, Boston. "It is less important for the best format to win out than for some format to win out."

While many of the major corporations involved did not want to comment publicly, others are concerned that the inability to agree on one format could have serious repercussions.

Sean Bersell, vice president of public affairs for the Video Software Dealers Association, Encino, Calif., noted that retailers have been through the "format wars from the beginning over video VHS and Betamax." The implications of the competing high definition DVD formats may "cause consumers to sit on the sidelines" until one format wins out, he said. "Our association has not taken sides, but we have made it clear our desire is to avoid a format war."

Even those involved with two competing formats are aware of consumers' reaction. Walt Disney Co., Burbank, Calif., which said it plans to release its movies in the Blu-ray format, was hopeful that one of the two formats would emerge as a leader. "It now doesn't seem likely," said Robert Iger, president of Disney, who spoke recently at an investor's conference.

However, some believe the battle could end quickly if Toshiba and Sony agree to a one-technology format as happened with the current version of DVD. So far, there is no indication that will happen.

Hope For One Format

In a statement issued by Warner Home Video, Burbank, Calif., the company said it prefers to see one format. "No one should mistake that," said Marsha King, general manager at Warner. "The reason DVD has been the enormous success that it has been is there is one format. We still hope we can come to one format."

Bersell said the association was also concerned about the packaging and the impact it will have on their 1,000 members, representing 12,000 stores. "We don't want to have a situation, where the packaging is four times as big as or substantially larger, as an example, than the DVD movies now being sold by retailers," he said, "because then retailers will be forced to reconfigure their shelf space."

There is nothing wrong in making sure the new product distinguishes itself on the shelf to attract consumers, Bersell said, but not to the point where it cannot be adequately marketed in stores.

However, industry consultant Bob Alexander, president, Alexander & Associates, New York, said format competition has some advantages. "I am not convinced that competing formats are a bad thing. There is definitely a point of view that says we don't want to confuse the consumer and that is a good argument, but competition between the two formats actually ends up educating the consumer."

"What happens is the high definition format suppliers reassert their control over pricing," Alexander said. "High definition is a superior format, and it should be sold at premium pricing. Pricing should be maintained with all intensity."

Taking Sides

For their HD DVD format, Toshiba and NEC have the support of Paramount Home Entertainment, Universal Pictures and Warner Bros., which includes New Line Cinema and HBO. All have announced that they would be releasing films in the HD DVD format by next Christmas. The studios said they chose the HD DVD format because it offers consumers improved picture and sound quality, better navigation tools and new interactive features.

"We want the product to be in the market a year from now," said Thomas Lesinski, president of Paramount Pictures World Home Entertainment, Hollywood, Calif. "If you want to get people to place orders at the Consumer Electronics Show in January, they want to know what software is available. We wanted people to have time so

they can plan to have the right hardware lineup out there."

Sony Corp., Tokyo, developed the Blu-ray format in 2003, and Disney became the latest studio to align itself with that technology. Columbia Pictures, Culver City, Calif., which is owned by Sony, and Metro-Goldwyn-Mayer, which was recently bought by a group led by Sony, are also aligned with Blu-ray.

Sony continues to announce a host of new products to complement its Blu-ray technology. "By making available to the industry the key components and technologies of the Blu-ray Disc recorder and other related products," said Sony's Osamu Kumagai, "we expect the Blu-ray Disc market to expand and thus our consumers will enjoy, record and experience high definition content."

The Blu-ray Disc Association now has 73 company members and among the corporations serving on the organization's board of directors are Dell, Hewlett-Packard, Hitachi, Panasonic, Samsung Electronics, TDK Corp. and Twentieth Century Fox.

On the other hand, Toshiba Corp. and NEC said both formats have broad acceptance in the market. In a formal statement, Toshiba said: "Assurance of robust content protection is of primary importance to the sound development of both the hardware and software industries."

Other major players are coming on board as well. "Buena Vista Home Entertainment [Disney's home entertainment arm] is very pleased to support the Blu-ray format, "which will help set the stage for the next generation of digital video disc," said its president, Robert Chapek, in a prepared statement. Chapek is also president of DEG: the Digital Entertainment Group, Los Angeles.

Experts said the technology of both machines will be basically the same; however, HD DVD players will play consumers' existing library of DVD movies. Both HD DVD and Blu-ray use blue lasers, which have shorter wave lengths than conventional red lasers, and allow the discs to save more data. The difference between the two is the electronic language each machine uses to encode data on the discs and the amount of data that can be stored.

Blu-ray discs can hold twice the information with at least an entire feature film and all the extras while HD DVDs can only hold one feature film. But because Blu-ray discs will require new equipment to be manufactured, the price tag will be higher.