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A Warner Bros. Green Light for Blu-ray?

By Ronald Grover, Peter Burrows, and Cliff Edwards Warner Brothers is poised to raise the stakes in what has become a pitched battle over the next generation of digital videodisks, or DVDs. Warner Brothers is expected to throw its weight behind a new generation of high-definition DVDs sponsored by long-time rival Sony (SNE), BusinessWeek Online has learned.The new DVD, called Blu-ray, could eventually replace the standard DVD format that today accounts for an estimated $18 billion a year in U.S. sales and has been Hollywood's hottest growth engine for the last six years.

Endorsement by Warner Brothers -- a division of Time Warner (TWX) -- would be a crucial vote of confidence in a new technology that has already drawn support from Walt Disney (DIS) and Fox (NWS), both of which said they would release their movies only on Blu-ray disks. It could also undermine efforts by Toshiba to garner support for a rival next-generation disk, the so-called HD DVD.

CHOOSING SIDES. Last November, Warner along with Paramount, Universal and New Line Cinema, had said they would provide their movies to the HD DVD disks. For now, Warner would declare "nonexclusive" support for Blu-ray, meaning it could theoretically produce films in both formats.

Still, the support for Blu-ray would indicate Warner Brothers is no longer convinced Toshiba and HD is the only way to go, and it leaves open the prospect of exclusive backing for Blu-ray. Paramount on Oct. 2 said it would make its movies in both formats. Microsoft (MSFT) and Intel (INTC), meantime, have thrown their weight behind the Toshiba-led group backing HD DVD.

Like everything in this on-again-off-again DVD battle among media and technology heavyweights, an agreement between Warner and Sony could still fall apart. But the sides appear close to a deal, say knowledgeable sources.

HIGH-STAKES GAMES. The next generation DVD is considered crucial for Hollywood, which has seen growth in sales of traditional DVDs slow as the number of consumers with new DVD players reaches saturation. The new high-definition DVDs would provide a crisper picture and hold more material, letting studios resell their older movies with more bonus features, such as alternate endings and so-called director's cuts.

The Sony-backed format, which draws more on the latest technology, is projected to produce a disk with far larger capacity than the Toshiba-backed disk. Toshiba's HD DVD disk, based more on existing technology, is said to be cheaper to produce, however.

Disney and Fox were likely influenced in their decision to back Blu-ray after Toshiba said on Sept. 30 that it would delay launch of its new format to "February or March" from December. Sony has swayed Hollywood with promises that it will include a Blu-ray device in its PlayStation 3 game console, expected to be a hot seller when introduced early next year. Paramount (VIA) said in a statement that it was "intrigued" by Sony's decision. The game player is expected to use the Blu-ray drive to show games as well as movies, thus priming the pump for the high-definition market.

THREE POINTS. Backers of the competing technologies have been tussling for support from Hollywood to insure that consumers would be able to buy movies from all the studios for whatever technology gets to market first. Thus, Warner, which traditionally has among the heftiest box office market shares, would be key for Sony.

On top of that, Warner, which owns 11 patents to make DVDs, had been a leader in assembling the Hollywood studios that backed Toshiba's HD DVD format. And in the mid-90s, Warner and Toshiba had beaten Sony's efforts to have its technology adopted for the standard definition DVD, with most of the technology based on patents controlled by Toshiba, Warner, and other companies. Sony had some of its patents adopted by the standard definition DVD.

Neither Sony nor Warner would discuss their talks. But those with knowledge of the negotiations say they have focused on three key areas: the cost of producing the DVDs, how Sony would treat Warner's patents, and guarantees that the Blu-ray disk can be manufactured on time. Additionally, the sides are said to be discussing whether Blu-ray licensees, which include computer makers Dell (DELL) and Hewlett-Packard (HPQ) and DVD makers Samsung and Pioneer (PIO), would be able to link to computers based on Microsoft's Windows software.

NOT OVER YET.At present, Blu-ray uses Java software. Hollywood insiders say that Sony has also been offering studios a cap on the costs of producing its Blu-ray disks and perhaps some break on royalties for its patents. That might enable Warner to get a break on the so-called cross-licensing of its patents -- where the costs for its patents are traded off against the cost of patents it uses that are controlled by members of the Sony consortium.

Concerns still remain over whether the Sony-sponsored Blu-ray can be produced on time or in large enough amounts. Backers of Toshiba's HD DVD standard have argued that Sony has yet to produce detailed engineering and cost data to support its claim that it can soon begin production. That's one reason why Toshiba remains in the race -- and why, in early October, 2005, it added three Chinese DVD manufacturers to its collation -- as it tries to prove to Hollywood that it can make its version of the hot little disk on time and at a reasonable cost.

Grover is BusinessWeek's Los Angeles bureau chief, Burrows is the computer editor, and Edwards is a correspondent in the Silicon Valley bureau

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