Commentary: A War That Hollywood Can't Afford

As DVD sales slow, any delay of next-generation must-haves will cost the studios

For Hollywood executives, the hottest movie in recent months has been the sprawling 1962 epic Lawrence of Arabia. No, Sony Corp.'s Columbia Pictures hasn't rereleased the flick. Instead, it's being shown in private screening rooms around town by Sony executives in a furious behind-the-scenes battle over who will control the industry's Next Big Thing: high-definition DVDs. Like previous format wars, such as the bitter clash that pitted VHS against Betamax videotape standards in the early 1980s, this one promises to have even more action than David Lean's Oscar-winning film.

On one side, Sony, along with 12 leading companies in the computer and consumer-electronics industries, is pushing a format called Blu-ray. It has the capacity to hold as much as six times the number of TV shows and movies that a current DVD holds. Blu-ray also promises spellbinding clarity that prompted some studio execs to swear they saw insignias on the horses in a panoramic shot in Lawrence of Arabia. The competing format, promoted by Toshiba and NEC Corp., has clear pictures, too -- and it can be made more cheaply by using existing DVD plants. But it has less capacity than Blu-ray. Both offer anti-piracy protection.

The prize for winning this contest is huge. The consortium that triumphs in the standards war will clearly be in a position to own an explosive new category of consumer hardware. What's less obvious is how high the stakes are for Tinseltown. Today, DVDs generate as much as 50% of a film's revenues. But that windfall may soon diminish. By 2008, last year's 44% growth in traditional DVD sales will slow to 7%, figures PricewaterhouseCoopers LLC. And by that time as much as half the country could own high-definition TV sets -- on which old DVDs will not have the new clarity. "Folks are going to love the HD picture, and standard DVDs will look pretty tame," says media analyst Harold Vogel. So if the studios don't act quickly to back a unified HD format, there'll be no new revenue stream to replace that big cash cow.

None of this drama is lost on the contenders. The hardware lobbying campaign began late last year when Toshiba enlisted help from software giant Microsoft Corp. to provide it with compression technology to squeeze HD content onto its discs. Microsoft's support helped Toshiba win approval for some of its technology from the DVD Forum, a 200-company group that sets technical specifications. That allowed Toshiba to move forward with tests. Sony, quite uncharacteristically, offered to share its technology. It lined up Panasonic, Philips Electronics (PHG ), Hewlett-Packard (HPQ ), Dell (DELL ), and other leading brands, in part, critics say, by offering some a cut of Sony's Blu-ray royalties. Sony execs wouldn't comment, and Microsoft says it remains open to working with the Blu-ray group as well.

So far, Hollywood moguls have chosen to sit on the fence and let the techies fight it out -- a self-destructive decision. As the rollout of digital entertainment accelerates and choices for consumers proliferate beyond DVDs, movie studios can ill afford a delay in the expansion of a rich new marketplace -- or confuse consumers with two competing formats.

For Hollywood's sake, history needs to repeat itself. In the early 1990s, when Sony and Toshiba were fighting a similar war over the then-new DVD, it took a member of the Hollywood Establishment, strong-willed Warner Bros. executive Warren Lieberfarb, to push for a compromise that eventually gave Toshiba and Warner the lion's share of royalties. Problem is, consumer electronics and Hollywood have often been fractious industries, holding back progress because of stubbornness and ego. "We can't let that happen again," says Steve Beeks, president of independent studio Lions Gate Entertainment Inc. (LGF ). That's for sure -- because in an age of so many entertainment options, winning consumers' loyalty can be as arduous as a camel ride across the desert.

By Ronald Grover

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