All eyes on new DVDs' format war

The pictures are crystal-clear, but the real-life future of high-definition DVDs remains foggy. Photos: Next-gen DVDs take center stage DreamWorks sees loss, says SEC launches probe

The DVD era has not been kind to Steven Chack.

Chack's Naked Eye News and Video on San Francisco's Haight Street, tucked in a basement retail space next to a medical marijuana shop, is a film buff's paradise. He amiably rents the latest Tom Cruise and Star Wars films, but his eyes light up when a customer mentions an obscure Italian horror title or a Japanese samurai director.

For the last four years he has been replacing his videotapes with DVDs as quickly as he can afford, but has seen business tumble uncomfortably as customers have turned to alternatives such as Netflix, or have begun buying their own movies. Now he's looking at the impending release of new, high-definition DVDs with growing worry, leery of investing scarce dollars in either of two new formats before the market settles on one or the other.

"They would be crazy if they didn't agree on a format," Chack said. "They should have learned their lesson from Betamax."


What's new:
Two camps backing incompatible next-generation technologies--HD DVD and Blue-Ray--have as yet failed to agree on a way to unify their products, and studio executives increasingly say they're losing hope for an amicable compromise.

Bottom line:
Hollywood executives are counting on DVD sales to make up for slumping box-office receipts. A new format could breathe new life into those sales. But as long as the two formats remain at odds, few believe consumers will rush to open their wallets.

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Chack is one of many businesspeople looking at the impending war over next-generation movie formats with growing anxiety. Echoes of the quixotic war between Sony's Betamax and the VHS format that ultimately replaced it remain high in the minds of everyone involved even loosely with Hollywood, a distraction that nobody wants to repeat.

But it may already be too late.

Hollywood studios have committed to releasing scores of high-definition DVD movies later this year. Two camps backing incompatible next-generation technologies, led respectively by Sony and Toshiba, have as yet failed to agree on a way to unify their products. They're still talking, but studio executives increasingly say--if only privately--that they are losing hope for an amicable compromise.

The timing could not be worse. Consumers' seemingly insatiable hunger for new DVDs may finally be diminishing. Executives at Dreamworks Animation and Pixar Animation Studios have each issued earnings warnings in recent weeks, blaming slower-than-expected sales of the movies "Shrek 2" and "The Incredibles."

Retailer Best Buy noted in its quarterly earnings statement last week that sales of DVDs, as well as CDs, had tumbled at the same time that video-game sales had grown by double digits. As with CDs, explanations abound for this phenomenon: The DVD market may finally be saturated, or studios are releasing too many movies too quickly, or maybe this latest batch of movies simply didn't resonate with consumers, analysts say.

Nevertheless, the apparent slowdown has shaken Hollywood executives, who are counting on DVD sales--already for the majority of their revenues in the United States--to make up for slumping box-office receipts. According to PriceWaterhouseCoopers, home video sales were $16.6 billion in 2004, up 15 percent from the previous year, compared with just $9.8 billion in ticket sales in the United States.

A new format could breathe new life into those sales. But as long as the two formats, called HD DVD and Blu-Ray, remain at odds, few believe that consumers will rush to open their wallets.

"If the PC market has taught consumers anything, it's that if there is not a standard, don't buy," said Gartner analyst Van Baker. "We really believe these things are going to fall flat on their face this Christmas season."

Clearer pictures, cloudy future
Home video has already provided the classic example of a format war, when the young VCR market saw Sony's Betamax tape format, the favorite of recording cognoscenti, square off against JVC's VHS. By the early 1990s, the VHS tape had become the standard for home use, in part because Sony had difficulty licensing its technology to other companies.

Both new formats, which have taken years to develop, offer vastly more storage capacity on single DVDs, a prospect that excites movie studios, game developers and other software makers. The formats use blue lasers, which have a shorter wavelength than the red lasers used in today's DVDs, allowing manufacturers to pack more data into the same space.

Next-gen DVDs Both camps say their discs will be playable on today's players, with the creation of a hybrid disc that includes standard DVD content. Both also say their next-generation hardware will also play today's DVDs.

After that, the similarities diminish.

The Blu-Ray disc is backed by a large group of consumer electronics and computer companies. Offering 50 gigabytes of storage, it is the more substantial redesign of today's DVD structure. One of its biggest selling points is the fact that Sony has already committed to supporting it in the upcoming Playstation 3.

Blu-Ray backers say they can include a standard DVD on one layer of a multilayered disc, so high-definition and standard DVD content will be available without having to flip the disc.

The HD DVD format, backed by Toshiba and favored by a majority of

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