HolidayBuyer's Guide

All eyes on new DVDs' format war

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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."

News.context

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 studios, is more similar to today's DVD. It comes in 15-gigabyte, 30-gigabyte or 45-gigabyte forms. Its backers recently added a version that would allow studios to put a conventional DVD on one side and a high-definition version of the movie on the other.

Its studio backers say manufacturing costs for this will be considerably lower, because they can reuse much of the same equipment in today's plants. The double-sided disc format will also be more attractive to consumers who aren't yet ready to invest in a new DVD player, they argue.

HD DVD, Blu-Ray backers
"The capacity difference between the two is not enough that anyone will notice," said Warner Bros. Chief Technology Officer Chris Cookson. "Interactivity and quality are the same. If we have a choice, what would be the logical reason to pick anything other than HD DVD? There doesn't seem to be any reason for Blu-Ray to exist."

Both sides have said for months that they want to come to some agreement that would merge the two specifications, and that talks are ongoing. While early press reports of an imminent agreement have fallen through, neither side is admitting defeat yet.

"We fully agree and concur that a single format is the best bet," said Mark Knox, adviser to the HD DVD promotion division at Toshiba. "We want to talk--let's talk. We leave everything on the table. We want to find the best single format."

Victor Matsuda, a vice president at Sony's Blu-Ray Group, concurred. "Everybody realizes that it is in the best interest of us all not to come to market with two formats, to have just the one," he said. "That said, we're not there yet."

However, at least one major studio executive who is following the process closely said he expected little more progress to be made at the negotiating table, until one or the other format resonates more strongly with consumers. That executive declined to be quoted for this story.

The cost of the standoff could be substantial. According to a recent estimate by analyst firm Sanford C. Bernstein, media companies could lose as much as $16 billion over seven years if the next-generation DVDs launch with a format war, rather than waiting an extra two years to work out the differences.

Certainly, businesspeople, from the Best Buy executive suites to Chack's small shop on Haight Street, are hoping for a compromise. Retail outlets don't want to stock two versions of the same title, and see little advantage to themselves in supplying both sides.

A Netflix spokesman said his company could not comment on specific plans, but would carry whatever consumers demand.

"Ultimately there will be a standard," Netflix spokesman Steven Swasey said. "It would be good to get there earlier rather than later, rather than having it fractionalized."

Chack said he simply can't afford to buy unless there's a standard. If compromise takes longer, it could push his business even further behind the larger companies that are able to take the uncertainty in stride. But he's optimistic.

"I really think there's going to be compatibility," he said. "Otherwise it's going to be Betamax and VHS again."

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