LG: Bridging the Digital Disc Divide

Electronics maker LG is the first to put both next-gen technologies, Sony's Blu-ray and Toshiba's HD-DVD, into one dual-format player

VHS vs. Betamax: Back in the 1970s, it was one of the bloodiest consumer electronic format wars in the industry's history. And plenty thought the current rivalry between competing consortiums led by Sony (SNE) and Toshiba (TOSBF) over rival technologies for next-generation digital video disc players had the makings of another knock-down, drag-out brawl.

Maybe not, it turns out. A compromise of sorts could be in the making that will ensure the world's biggest consumer electronics companies (and Hollywood movie studios) don't get locked into a war of profit attrition until one DVD technology—either Sony's Blu-ray Disc system or Toshiba's HD-DVD format—emerges as the dominant force. Consumers may soon be able to use dual-format players that incorporate both technologies.

That at least is what South Korea's LG Electronics has in mind. At the upcoming International Consumer Electronics Show in Las Vegas that kicks off on Jan. 8, it will unveil its combo DVD player that is expected to be rolled out in the U.S. by the end of March. The aim is to "end the confusion and inconvenience of competing high-definition disc formats," says the company in a statement (see BusinessWeek.com, 10/30/06, "Video Players: HD-DVD vs. Blu-ray").

Dog in the Manger

LG managers reached in Seoul, who would only speak anonymously, say they plan to price the new DVD player higher than the $999 that Sony and industry ally Samsung are asking for Blu-ray players. It will also position the LG player below the roughly $1,500 it would take to buy both a Blu-ray player and an entry-level HD-DVD model—which until recently looked like the only option for hard-core consumers who wanted access to movies and other entertainment formatted for the competing standards.

Clearly, there will be demand for next-gen DVD players in general. The Blu-ray Disc and HD-DVDs have five times the capacity of current DVDs on the market. Given the sizable sums that the Sony and Toshiba teams have invested in their proprietary systems, both camps have made sure that content designed for one technology won't work for the other.

The confusion about these competing formats has been further complicated by the division among movie studios. Four of the seven major Hollywood studios support the Blu-ray format exclusively, while only one has taken HD-DVD's side. Warner Bros. (TWX) and Paramount work with both. This mess prompted many industry observers to advise consumers to keep their wallets shut until things get sorted out.

Can't We Get Along?

Perhaps that is behind the sudden thaw. On Jan. 4, Warner (a unit of Time Warner -TWX) said it plans to sell a "Total HD" disc, a high-definition disc that can hold films and TV programs that can be played with both Blu-ray and HD-DVD players. "We hope that THD will make it easier for the average consumer to enjoy this next level of technology," said Ron Sanders, president of Warner Home Video, in a statement.

Analysts say dual-format players and discs could make the rival camps hold on to their technologies, while consumers won't have to choose sides. "It is not going to be an all-or-nothing battle," says Jason Kang, electronics analyst at Seoul brokerage Daewoo Securities. "It's just a matter of time before Samsung, Philips, and other electronics makers will follow suit to show both Blu-ray and HD-DVD."

Samsung has indicated it might make a dual-format player in the future, unless one DVD player technology quickly proves dominant. "We'll wait and see," says Choi Gee Sung, Samsung president in charge of TV, DVDs and other home electronics.

"It is not an issue of technology but a question of whether the market wants" dual format players, Choi notes.

He adds that Samsung is "ready technologywise" to make a dual-format player.

Side by Side

For now, though, leaders of the rival camps are not budging. Sony has no comment on LG's move, but company spokesman Daichi Yamafuji said: "We have no plans at all to develop our own dual-format player." Toshiba spokeswoman Yuko Sugahara says the same thing: "Gaining market penetration for HD-DVD is our No. 1 mission (see BusinessWeek.com, 6/23/06, "Toshiba's Battle with Blu-ray")."

But LG's announcement suggests that it and its suppliers have been quietly hedging their bets for some time and have figured out how to integrate the two technologies and iron out license and royalty issues. An LG senior manager, who declined to be identified, says the combo will use the same disc tray and the same optical pickup unit to play both formats.

Daewoo's Kang thinks the industry will avoid the kind of pain that accompanied the VHS/Betamax battle three decades back. "In the old era, even the sizes of videotapes were different, but for high-definition DVD, we are talking about the same disc and the same blue laser and similar technologies with different specifications," he says. "I think Blu-ray and HD-DVD will coexist for years to come."

Gathering Dust

So will consumers embrace the next-generation DVD technology and snap up universal players? Not quite, at least not yet.

One big hurdle is the expected $1,000-plus it will take to buy the player from LG. "Unless you can drive down prices, consumers will hold off buying these new DVD players, and it could take some time before they become a mass-market product," says Hiroyuki Shimizu, principal analyst at market research firm Gartner in Tokyo.

Another problem is the current scarcity of content in high-definition formats—either in Blu-ray or HD-DVD. Only a handful of titles exist, although next-generation players will play anything in your old DVD collection. Unless studios bring out more interesting high-definition content, hardware won't fly off store shelves (see BusinessWeek.com, 7/20/06, "Cool Players, Tepid DVDs").

A shortage of parts could prove a barrier, too. Last year, the industry faced a shortage of optical pickup units that read the data by shining the laser on the discs. Market research firm iSuppli, however, predicted last year that the next-generation DVD market will reach 65 million units by 2010.

Smoothing the Path

For that forecast to be realized, prices for next-gen DVD players will have to fall. One plus: A new breed of gaming consoles, reaching a huge global consumer base, is acquainting consumers with both technologies. Sony's PlayStation 3 basically doubles as a Blu-ray Disc player. And Microsoft's (MSFT) attachable HD-DVD player for its Xbox 360 has been available since November.

If dual-formatted players and content eventually get consumers serious about upgrading their DVD players, things could get interesting. True, it may be some time before the much-promised new era of high-definition home theater becomes a reality. But giving consumers more options to figure out how best to get there is not a bad idea.

Click here for a slide show on the 2007 Consumer Electronics Show

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