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Powers face off in the DVD war

Japan may be the land of Confucian harmony, but when it comes to the future of homevideo, this gentle country appears to be getting ready for a battle royale.

The setting for the duel is plush meeting rooms behind closed doors. The weapons aren’t Samurai swords, but rather, little silver discs packed with reams of entertainment.

Welcome to the battle of the digital video disc.

The world’s – and therefore, Japan’s – consumer electronics titans are currently in a standoff on setting the standard for the much-touted digital video disc (DVD) to replace the venerable videocassette.

On one side is Japan’s Sony Corp., and its partner Philips Electronics of the Netherlands, with a single-sided, dual-layer disc format that will be able to store about 4.5 hours of video. The product’s called the Multimedia Compact Disc (MMCD).

On the other side is Toshiba and Matsushita, together with Time Warner, with their offering: a double-sided disc able to store about 25% more data, called the Super Density Disc (SD).

Both compact videodiscs promoted by the two camps will look much like an ordinary music CD. But looks can be deceiving.

Because they can store full-length movies on tiny discs with little distortion and high-quality sound, videodiscs are expected to hasten the retirement of the aging videocassettes for viewing movies at home.

For the rival camps, the prospect of seeing their own format dominate that vast market makes winning the standards’ stakes a fight to the finish.

Well, almost.

Sony has offered a compromise in the ongoing talks to allow two formats – one for movies and another for personal computers.

But the Toshiba side wasn’t impressed with that proposal.

“The computer and movie format must be the same,” said Sakon Nagasaki, director of Matsushita’s DVD Promotion Office. “Computermakers are targeting the entertainment field and they need a format that can play long and short movies. A single format is the only alternative.”

While a solution doesn’t seem in sight, analysts say it’s inconceivable the companies will engage in a bloodfest similar to the one that took place in the ’80s with Matsushita’s VHS and Sony’s Betamax tape formats.

There’s too much at stake: Profit margins are razor thin and the industry is desperately in need of a hit. The last thing they need is to confuse consumers.

“The market is saturated and consumers are bored with what’s out there,” said Fujino Masami, an analyst at Swiss Bank in Tokyo. “People already have three CD players at home. It’s crucial for the electronics makers to get something on the market, particularly for Sony.”

Memories of the VHS-Betamax war, which some say initially turned consumers off, caused studio execs and computermakers to push the two camps to agree on one standard.

Computermakers see huge prospects for using DVD technology in next-generation CDROMs, and they need to develop products compatible with the DVD in time for its expected 1996 rollout.

“No one wants two products on the market,” said Paul Rawle, electronics’ analyst at Smith New Court Securities (Japan). “One party or the other is going to have to step down. But these public talks suggest they have made progress. They may have a foundation for an agreement.”

But Toshiba officials say no progress was made.

The first shot in the standoff was fired earlier this year when Matsushita, which had initially leaned toward Sony, jumped ship after Hollywood began lining up behind Toshiba.

To Matsushita, the lure of films such as “Jurassic Park” and “E.T.: The Extra-Terrestrial” won out.

“Major film producers, like Steven Spielberg, are very important. What they prefer, which is larger disc capacity, is key to which format should be chosen,” Matsushita’s Nagasaki said in a telephone interview from Osaka. “Sony felt that Hollywood would follow the format that was set. But we didn’t agree. Matsushita wants to give the movie studios what they want… and therefore we went with the Toshiba format,” he said.

With Matsushita’s departure, Sony says it would study the Toshiba format, prompting many in the industry to believe standardization was near.

But it later announced it would stick to its own format.

“After we evaluated the standards of the Toshiba disc, we reached the conclusion that our disc is better in every respect,” Sony’s new prexy, Nobuyuki Idei, said at the time.

The argument has turned heatedly on issues like cost of disc manufacture, and the technology needed to make disc players.

Sony has claimed disc replicators will incur higher costs in revamping production lines to turn out Toshiba’s double-side format. But Toshiba and Time Warner say they have already turned out enough SD discs at different plants to prove costs are, in fact, competitive.

As for the hardware arguments, sources in the Toshiba/Time Warner camp say optimistically – or perhaps diplomatically – that that argument is rendered moot in view of ongoing talks to unify the formats.

“Our full attention is now on the ongoing unification talks. We’d like to focus on the future rather than on the past,” said Warner Home Video president Warren Lieberfarb.

Still, Toshiba appears to have the upper hand with its team, including heavy hitters such as Warner Bros., which is owned by Time Warner, and Universal, whose parent company, MCA, is 20%-owned by Matsushita.

“The most important thing is software support. (Sony has) only one studio (Sony Pictures Entertainment owned Columbia) backing them now. And there are several majors backing the Toshiba format,” said analyst Katsuhiko Sugiyama.

In the battle for dominance in the videodisc industry, Hollywood has a huge say because it initially will provide much of the software, in the form of movies, to the industry.

Despite all the hype about the new technology, the DVD has its problems. Unlike VCRs, current versions cannot record programs, for instance.

But the manufacturers and studios, for their part, say that problem will be solved in the near future, and are betting that the DVD – with its wide range of applications – will usher in a new golden age and the next golden revenue stream for copyright holders.

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