First Blood in the New DVD War

The Toshiba-backed high-definition format may soon get support from three major Hollywood studios. That could put Sony's team in a tight spot

By Ronald Grover

For months, rival electronics giants Toshiba and Sony (SNE ) have been battling over the next generation of DVD. Now, in what amounts to the first major victory in that standards war, three Hollywood studios are expected to announce within the next week that they'll release some of their movies on the high-definition DVD format that Toshiba is promoting. That could turn out to be a severe blow to the future of the Blu-ray standard, which Sony has been pushing with a coalition that includes most of the industry's largest computer and consumer-electronic makers.

An announcement by Warner Bros. (TWX ), Universal (GE ), and Paramount about their adoption of this format by the end of 2005 is in the works, BusinessWeek Online has learned. Disney (DIS ) is also said to be in talks with Toshiba, although Eisner & Co. aren't close to a deal. Warner Bros., Universal, and Disney declined comment, and a Paramount spokesman didn't return phone calls.

Toshiba acknowledged that it has "been receiving a positive response from several studios" but that it "is not in a position to comment on behalf of the studios."


  The movie makers are still negotiating final points in any agreement, and the announcement could still be delayed or scrapped, says one Hollywood insider. And in any event, the studios intend to make the deal nonexclusive, meaning they could still put their films out on Sony's Blu-ray format as well. But the expected agreement clearly would give a leg up to Toshiba's format, which it has developed with Japanese computer maker NEC, for a market that both Hollywood and consumer-electronic makers see as crucial as sales of standard, current-format DVDs start to slow down.

This year consumers are expected to spend $29.1 billion buying and renting DVDs, according to investment banker Veronis Suhler Stevenson. But after growing at a compound annual rate of more than 100% for the last five years, standard DVD sales are expected to grow by an average of 17% over the next five years and will grow by only 10% in 2008, Veronis says in its annual media forecast.


  Hollywood movies are seen as crucial to get consumers to buy DVD players using the technology, especially as they begin latching onto high-definition TV sets in greater numbers and want high-def DVDs to show on them. By next year, as many as 20 million U.S. homes are expected to have digital or HDTV sets, according to figures by Kagan World Media that the Blu-ray group made available. By 2007, as much as half the market could have the higher-quality TV sets, according to the Kagan figures.

Sony, which declined to comment for this story, has been building up its own momentum to head off Toshiba. Its Blu-ray format, developed with fellow electronics giant Matsushita (MC ), is being pushed by a consortium that includes more than 20 companies such major consumer-electronics makers as Pioneer, Philips (PHLKFM ), Samsung, Sony, and Thomson (TMS ), and computer makers Dell (DELL ) and Hewlett-Packard (HPQ ). Sony is expected to make movies from its Columbia and other studios available on Blu-ray as well as those from MGM (MGM ), which a Sony-led group agreed to buy in mid-September.

Both formats provide far sharper pictures as well as vastly increased storage space, which the studios intend to use to provide interactive capabilities that will allow viewers to buy merchandise, play games, and call up bonus material even while the movie is being shown. The Sony-backed Blu-ray disk can hold about six times the capacity of existing DVDs, while the Toshiba's HD DVD can hold about four times as much as standard DVDs.


  Studios are said to be concerned about the cost of producing the new HD disks. The big drawback for Blu-ray is that it requires a new plant and equipment to produce, and would be more expensive at the outset to produce than standard DVDs. The Toshiba disk, by contrast, is based in large part on existing DVD technology and is projected to be cheaper to produce than the Blu-ray.

Toshiba says it can make HD DVDs disks for approximately the same price as current DVDs and that HD DVD players will be introduced in the U.S. later next year. Moreover, players of disks based on Toshiba's HD DVD technology would be able to play current DVDs as well as those in high-definition, Jodi Sally, director of marketing for Toshiba, told a Los Angeles conference on Oct. 26. That should make it an easier sell to DVD users, who own an average of 25 disks apiece, she says. Sony has said it intends to get its production price down, and that its format would also be "backward-compatible."

Warner was widely expected to be the first of the major movie makers to join Toshiba. The studio was part of the consortium (which included Toshiba) that developed the current DVD and holds several patents for which it collects royalties on DVDs sold. The Toshiba-backed HD DVD is said to use many of the same patents in which Warner holds a stake. Moreover, Toshiba is already producing HD DVDs at a plant in Japan, while the more complicated Blu-ray process has yet to enter commercial production.


  Sony has been fighting for nearly 30 years to take the lead in the lucrative home-entertainment wars. In the early 1980s, its Betamax videotape format lost out to the rival VHS standard. Then in the mid-'90s, it lost out in the DVD battle to Toshiba, which enlisted Warner and other studios. Sony technology was incorporated into a merged DVD format.

Sony may be buying a pair of studios, and it will no doubt get commitment from them for Blu-ray, but that probably won't help it win the hearts and minds of the rest of Hollywood -- or consumers.

Grover is BusinessWeek's in Los Angeles bureau chief

Edited by Patricia O'Connell

Before it's here, it's on the Bloomberg Terminal.