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DVD Wars: Last Hope for Peace?

If a war over the next generation of DVD technology is inevitable, Hewlett-Packard (HPQ) wants it to be as painless as possible. That's why, on Oct. 19, the computer maker asked the Blu-ray Disc Assn. to add software that will make its Blu-ray DVD standard similar to that of a rival camp called HD DVD.

Specifically, HP wants Blu-ray to include features to ensure that consumers can legally rip movie DVDs to a PC hard drive -- standards already included in HD DVD. The thinking is, whichever standard ends up winning after products start to appear in 2006, consumers will know how to use either. And by pushing for adoption of the same software used to add interactive features to HD DVDs, such as the ability to add the latest movie trailers, movie studios wouldn't have to throw extra money at supporting two approaches.

BREAKING FROM NEUTRAL. If HP's proposal is adopted, it would be the first sign of cooperation between the two camps, which have been locked in an increasingly acerbic war of words. For almost two years, supporters of the dueling approaches have maneuvered to dominate what will be a key segment of the digital entertainment market for years to come. While the Blu-ray alliance, led by Sony (SNE), has always had more support from the consumer-electronics makers, it has recently picked up backing from key PC makers, including HP, as well as some crucial movie studios. As recently as a few weeks back, it appeared a Blu-ray victory was at hand.

And then Microsoft (MSFT) and Intel (INTC) announced on Sept. 27 that they would break from their neutral stance to back HD DVD. Soon thereafter, key Chinese manufacturers said they planned to have HD DVD products on the market in 2006. The next-gen DVD wars were reignited, making it increasingly clear that consumers would soon be faced with two kinds of DVD players when they go to the local retailer.

Enter HP. Even though its verbal sparring with longtime business partner Microsoft had become particularly vitriolic (see BW, 10/17/05, "Daggers Drawn Over DVDs"), the two sides entered negotiations earlier this month. Their aim was to find ways to bridge the gap between the visions of how these DVDs would work -- and most important, how to ensure that consumers have the same ability to legally copy DVDs to hard drives for both Blu-ray- and HD DVD-based products.

"PROTECT OUR CUSTOMERS." Talks culminated with HP's proposal, made public on Oct. 19, asking the Blu-ray Disc Assn. to include the necessary Microsoft technologies. "We know now that there's going to be a standards war," says Maureen Weber, general manager of personal storage at HP. "Our goal is to minimize its impact. The bottom line is that we're still very committed to Blu-ray, but we want to protect our consumers."

It could be a savvy move for HP. First, it ensures that Blu-ray has the same user-friendly features as HD DVD. It could also serve as an olive branch that may bring the two sides back to the bargaining table to negotiate a single standard containing elements of both technical specifications. A unified standard would forestall the first full-blown standards war since VHS vs. Betamax. Calls to the Blu-ray Disc Assn. weren't returned, so it's unclear whether the group plans to accept HP's proposal.

A single standard would certainly be good for consumers, who then wouldn't be faced with the hassle of deciding between DVD machines that play disks for one format or the other. Movie studios also stand to gain because they wouldn't be forced to make films available in both formats.

DISKLESS MOVIES? Other would-be winners include consumer-electronics companies that are looking to next-generation DVDs to give their businesses a lift. Faced with confusion of a standards war, many consumers may choose not to buy devices based on either standard and rather make do with their current DVD players.

It would also help electronics makers develop this market before the advent of a new threat: Internet-based movie distribution. If consumers can get movies over the Web, they wouldn't need disks at all. That has been a pipe dream so far -- due to insufficient use of high-capacity broadband networks and a lack of delivery schemes easy enough for a couch potato to love.

But that could be changing, too. While it currently offers only five TV shows, Apple's (AAPL) new video-download service, announced on Oct. 12, grabbed the attention of HP and Microsoft negotiators, says one insider. "There's some concern that the [potential lifespan for these next-generation optical technologies] is shortening. We realized we better get our shared vision together a bit tighter."

EASILY MOVED CONTENT. HP's détente with Microsoft regarding DVD technology is a surprise, given recent history. Soon after it joined the Blu-ray camp in early 2004, HP nearly convinced Microsoft to do the same. Microsoft's only requirement, says an insider, was that the Blu-Ray Disc Assn. agree to adopt a Microsoft technology called iHD that had already been accepted by the HD DVD backers. The software would let studios add interactive features to Blu-Ray DVDs, such as the ability for users to buy tickets to new releases or download movie trailers. Trouble was, the Blu-ray camp had already adopted similar software devised primarily by HP, based on the Java standard developed by Sun Microsystems (SUNW).

The insider says the Blu-ray Disc Assn. did a three month side-by-side evaluation and concluded that iHD didn't offer enough advantages to make a switch worthwhile. That was good news for HP, which stood to earn royalties on every Blu-ray DVD sold.

Microsoft was livid, says the source. For the software giant, it served as yet further evidence that the Blu-ray camp wasn't embracing its view of how next-generation DVDs should work. Microsoft envisions a future in which DVDs will be just one element of a digital lifestyle, whereby content such as songs or movies can be easily moved among various devices, typically with the PC as the hub. Whether content is purchased in the form of a DVD or as a digital download from an online store, it could be transferred by a variety of means to a variety of devices -- burned to a PC hard drive, streamed to the living room HDTV, or ripped onto a DVD to be played in the car.

GIVING IN. Microsoft insists this can be done while still prohibiting unlawful use of copyrighted material, but the Blu-ray coalition added extra protections in its effort to woo studios -- safeguards Microsoft feared would gum up the works.

When Microsoft announced its support for HD DVD in September, it was HP's turn to be livid. That's because Microsoft had professed its neutrality, after HP had brokered an earlier deal for the Blu-ray group to use another piece of Microsoft technology, it's VC-1 video "codec," which is used to compress data onto a disk and then decompress it so it can be viewed by a consumer.

But now, after two weeks of tough negotiations, HP has basically given in on two key points. First, it agreed to propose that Microsoft's iHD replace its own Java-based interactivity software. That's in part because major movie studios prefer iHD, which was built from the ground up by Microsoft and Disney (DIS) for optical disks. HP's code was built on top of an older, more complex technology that was originally designed to work on set-top boxes, says Rich Doherty, Microsoft's senior program manager for media, entertainment and technology convergence.

"It's enormously complicated," says Doherty "and two-thirds of it is of no use on optical disks. [That's why] the majority of studios prefer iHD." HP wouldn't disclose how much it will forego in the way of potential royalties, but, Weber says, "we're willing to broaden our strategy and give up on some of our own technology to make sure we can make Blu-ray and HD-DVD compatible for the future."

LESS ACRIMONY? HP has changed its tune on another front. Until now, it argued that Blu-ray players wouldn't prevent consumers from legally ripping DVDs to their hard drives. But Microsoft convinced it otherwise. While both formats support a feature called "managed copy" that makes legal transfer possible, Blu-ray left open the possibility that studios could turn it off.

Now, HP is proposing that the Blu-ray Disc Assn. agree to make this feature mandatory. "It's critical for our future business, and for the consumer, that whatever managed-copy scheme that is implemented be mandatory," says Microsoft's Doherty. While DVDs are used almost exclusively for simple playback these days, "In the future, we want to make sure you're able to put it on a hard drive, on a mobile device, or make other copies onto other recordable media."

HP's proposal suggests that at least part of the DVD acrimony may be abating, with HP, Intel, and Microsoft all now pushing for a similar vision. And two sources say HP is likely to join the HD DVD effort if its proposal isn't adopted by the Blu-ray camp. HP, however, says it isn't thinking of dropping out of the Blu-ray Disc Assn.

NOT OVER YET. And what about the prospect of another round of talks aimed at adopting a unified standard? It's still a longshot. Case in point: Microsoft's Doherty says a long list of requirements would need to be met before Microsoft would consider joining the Blu-Ray Disc Assn. But he says an 11th-hour peace treaty is still possible, before products start hitting the market next year. "It's certainly very late" to renew talks about coming up with a new set of technical specs to define the next-generation DVD, Doherty says. "But nothing is out of the question."

A truce in the next-gen DVD wars would almost certainly delay the introduction of products while unified standards are adopted. But for the companies that would avoid having to make gear for use on two standards -- and the millions of consumers who wouldn't be forced to take sides -- it may well be worth the wait.


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