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Billions at disc risk

Opposing studios say no way to Sony's Blu-ray format

The biz is bracing for Betamax — the sequel.

In a decision reminiscent of the tech conflict that changed the industry forever, three studios — Warner, Universal and Paramount — have taken sides in a battle for the next-generation DVD market by endorsing a format, HD DVD, that will compete with one backed by Sony.

Decision means that starting next fall, consumers will be faced with high-definition DVDs with similar features but two incompatible formats.

Backing HD DVD’s competitor, Blu-ray, will be the 8,000 pic library of Sony and its soon-to-be partner, MGM. Sony and MGM had a combined 19% of the DVD market through October, while Par, U and WB accounted for 41%.

Putting the Lion in the Blu-ray camp was a significant reason behind the Sony-led consortium’s agreement to acquire the studio for $5 billion.

Toshiba, the main tech company behind HD DVD, is believed to have joined with Time Warner to back a last minute unsuccessful bid for MGM for the same reason.

Yet to declare their allegiances are Disney, Fox, DreamWorks and Lions Gate. New Line and HBO are aligned with their sister company and DVD distributor Warner.

At stake are billions of dollars in patent and copyright fees and tens of billions of dollars in consumer spending on movies, TV shows, music and videogames. Any confusion in the marketplace by consumers could delay and possibly derail anticipated incremental revenue that could mirror the windfall enjoyed by the introduction of DVD.

HD DVD releases are expected to start by the fourth quarter of next year, along with the first players, and will include a mix of new releases and library titles that should reach several dozen from each studio. Blu-ray machines and discs, meanwhile, likely won’t hit the market until 2006.

Such plans are based on the assumption that consumers will adopt high-def DVDs aggressively, as they did when shifting from VHS to DVD.

Convincing consumers

One major problem studios have is convincing consumers that a new player and more expensive discs will be worth the investment. High-def DVDs offer around six times as much storage capacity as current DVDs and allow for interactivity through broadband Internet connections, but studios have yet to figure out what they’ll do with the storage beyond vague plans for more content and shipping entire seasons of a TV show on fewer discs.

Next-generation DVD players are expected to cost around $1000 when they launch late next year, with prices falling quickly as has happened to current players. Discs are expected to cost $5 or $10 more each.

Biggest draw may be the higher video quality hi-def DVDs enable. But to really see the difference, consumers will also have to purchase digital televisions. Over 13 million are in the U.S. market so far, with the Consumer Electronics Assn. predicting that over 10 million more will be sold next year.

Studios are eager to push the new formats to generate new revenue — and because of their more robust copy protection. While current DVDs are relatively easy to hack, high-def discs are considered by tech experts to be nearly invulnerable, which could put a dent in film piracy.

No surprise

Warner’s announcement came as little surprise, since Time Warner holds some of the patents and copyrights behind the HD DVD format, along with Toshiba and others. In addition, the format was championed by former Warner Home Video president Warren Lieberfarb, now a consultant to Toshiba.

It’s widely believed that Par and U were seeking cash and other incentives from both groups and that at least one of the uncommitted studios is still holding out for a more lucrative incentive. Insiders suggested that more than one studio was offered as much as $30 million, but the three studios involved in the announcements Monday say they did not receive any cash incentives.

One studio exec suggested that his studio did, however, receive a break on royalty fees. And according to one player close to the negotiations, Par and U almost certainly won either financial consideration or a change in the technology to their liking in order to make an early commitment.

Leveraging both sides

Many believe Fox and Disney are hoping to use the leverage of an undecided position to push both technologies to adopt features they prefer. Fox is currently working with the organizations developing both formats.

“Fox and Disney don’t want to endorse a format until they have used up all of their political capital to influence it coming out the way they want,” observed Paul Kocher, prexy of content protection company Cryptography Research.

The launch of competing and incompatible formats for the same new product is viewed almost unanimously as a scenario that could lead to an unsuccessful launch of the format.

After years of costly fighting in front of consumers, Sony lost the original homevideo format war in the 1980s when its Betamax could not stand up against the less expensive VHS vidcassette that also offered more recording time.

Format divide

The downside for consumers with competing formats is that many movies will be made available only in one format or the other. So far no studio other than Sony has said it will produce programming exclusively for one format or the other, but economics will likely make that a de facto situation.

“We will let the consumer be our guide, but right now we do not plan to release product in Blu-ray,” Universal Studios Home Entertainment president Craig Kornblau said. “Our priority is HD DVD.”

Execs at studios choosing HD DVD Monday said the lower cost of transitioning current DVD manufacturing plants to the other format was a key driver of the decision.

“It’s simply a less expensive product to replicate,” said Paramount worldwide home entertainment prexy Thomas Lesinski, a former lieutenant of Lieberfarb’s at Warner. “We won’t have to amortize the costs of retooling factories.”

Anxious to get on with it

After initially dragging their feet on a next-generation format, the studios now seem anxious to accelerate the transition from standard to high-definition DVD. Beyond piracy protection, they’re also hopeful it can help raise margins in the face of cost-cutting by big retailers like Wal-Mart, as well as jumpstart some foreign markets.

“I don’t think we’ve fully monetized our assets in standard definition in a number of countries,” said Warner Home Video prexy Jim Cardwell. “There are still territories where DVD penetration is well behind the U.S.”

Blu-ray supporters, meanwhile, expressed confidence that studios would come back their way and seized on piracy concerns as an advantage.

“The difference is that we rely on a whole new manufacturing process, and the (licensing) standards are going to be much stricter in the beginning,” said Sony homevid prexy Ben Feingold. “You’re not going to have every replicator in the world selling pirated product out the back door.”

Faster take-up?

Feingold also noted that Blu-ray has a broader commitment from hardware makers right now than does HD DVD, meaning the installed base of Blu-ray players will likely ramp up more quickly.

In addition to consumer electronics companies, computer makers Dell and HP plan to introduce PC-based Blu-ray disc drives next year. Sony also plans to base its next-generation PlayStation console around Blu-ray, potentially adding millions of playback devices when it launches in 2006.

HD DVD backers have said they hope to get Microsoft to use their format in the next version of Xbox, but the tech giant hasn’t made any decisions yet.

(Scott Hettrick contributed to this report.)

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