Four studios choose HD DVD format

UPDATE: Disney last to decide in high-def battle

By Paul Sweeting and Scott Hettrick -- Video Business, 11/29/2004

NOV. 29 | A brutal war that most had hoped to avert was initiated Monday when three studios--Warner, Universal and Paramount--simultaneously announced plans to back a format for high-definition DVD that will compete with a platform being launched by Sony.

The situation sets up the worst possible scenario for the introduction of the next-generation of DVD: dual incompatible formats being presented to consumers as early as next fall that could be akin to the near-disastrous Betamax/VHS wars.

At stake are billions of dollars in patent and copyright fees and tens of billions of dollars in consumer spending on movies, TV shows, music and videogames. Any confusion in the marketplace by consumers could delay and possibly derail anticipated incremental revenue that could mirror the windfall enjoyed by the introduction of DVD, which now generates more than double annual box-office grosses and represents as much as 70% of every studio's overall profits.

Of course, all this is assuming that consumers will adopt high-def DVD, with increased visual quality and storage capacity, anywhere near as aggressively as they shifted from VHS to DVD.

Disney, Fox, DreamWorks and Lions Gate have yet to choose a side. New Line and HBO are aligned with sister company and their DVD distributor Warner.

A big reason for Sony's recent purchase of MGM was to give the company more leverage to push through its so-called Blu-ray high-def DVD format and capitalize on the profits of a new platform with MGM's enormous library of films and TV shows, along with its own studio properties and popular PlayStation videogames.

But a group of consumer electronics companies that compete with Sony and Blu-ray partner Matsushita, led by Toshiba, NEC and Sanyo, has developed a high-def format of its own--dubbed HD DVD--based more closely on current DVD standards for which Toshiba and others, including Warner, hold technology patents and copyrights. The current format was championed by former Warner Home Video president Warren Lieberfarb, who is now a consultant to Toshiba and others, including Microsoft, Disney, Miramax and Best Buy. Former Lieberfarb lieutenant Thomas Lesinski is now president of Paramount Home Entertainment, which has joined the Toshiba HD DVD camp.

There is mutual agreement that at least some studios were seeking cash and other incentives from both groups and that at least one of the uncommitted studios is still holding out for a more lucrative incentive. Some rumors suggested that more than one studio was offered as much as $30 million but three studios involved in the announcements Monday say they did not receive any cash incentives. One studio exec, however, suggested that his studio did receive a break on royalty fees.

The two camps competed similarly in the mid-'90s over the DVD format but finally compromised on the standard currently in use before launching either of the original formats.

The launch of competing and incompatible formats for the same new product is viewed almost unanimously as a scenario that could potentially lead to an unsuccessful launch of the format, which would not be good for anyone.

After years of costly fighting in front of consumers, Sony lost the original home video format war in the '80s when its Betamax could not stand up against the less expensive VHS videocassette that also offered more recording time.

The downside for consumers with competing formats is that many movies will only be made available in one format or the other. So far no studio other than Sony has said it will produce programming exclusively for one format or the other, but economics will likely make that a defacto situation.

"We will let the consumer be our guide, but right now we do not plan to release product in Blu-ray," Universal Studios Home Entertainment president Craig Kornblau said. "Our priority is HD DVD."

Although Blu-ray and HD DVD discs look similar to the naked eye, the two formats are physically as well as technically incompatible.

Blu-ray discs are slightly thicker than standard DVDs and store the data differently.

HD DVD is essentially an extension of the current DVD standard, but uses a blue laser to pack more data onto the disc than the current red-laser standard.

To some extent, the technical differences reflect the proprietary interest of the two formats' developers.

After initially dragging their feet on a next-generation format, the studios now seem anxious to accelerate the transition from standard to high-definition DVD.

"I think it's in everyone's interest to replace the current format as soon as possible for two reasons," Kornblau said. "The first is that HD DVD gives us the kind of enhanced content protection not available on standard DVD. The second is that high-definition TV penetration is exploding and consumers are going to demand high-definition from their packaged media."

Kornblau said Universal will begin issuing new releases on HD DVD day-and-date with its release on standard DVD by Christmas of 2005. It also will support the format with significant HD catalog releases.

Warner Home Video president Jim Cardwell was somewhat more cautious about the timing but agreed on the need to move beyond the current standard.

"I agree 100% that content protection is essential and that it's much greater on HD, but I don't think we've fully monetized our assets in standard definition in a number of countries," Cardwell said. "There are still territories where DVD penetration is well behind the U.S."

Still, studios are beginning to feel the bite of piracy and fear that DVD sales could suffer the same fate as CD sales at the hands of online file-swapping.

Declining retail prices for DVDs also are cutting into studio profits.

"We're having a huge fourth quarter but growth has slowed tremendously," Kornblau said. "We're still shipping a lot of units, but consumer spending has slowed. Price points are changing very dramatically right now."

Blu-ray supporters, meanwhile, seized on studio concerns about piracy to suggest that Monday's announcement is far from the last word on HD.

"The content protection system is essentially the same for each format," Sony Pictures' homevid prexy Ben Feingold said. "The difference is that we rely on a whole new manufacturing process, and the (licensing) standards are going to be much stricter in the beginning. You're not going to have every replicator in the world selling pirated product out the back door."

Feingold also noted that Blu-ray has a broader commitment from hardware makers right now than HD DVD, meaning the installed base of Blu-ray players will likely ramp up more quickly.

In addition to consumer electronics companies, computer-makers Dell and HP have announced plans to introduce PC-based Blu-ray disc drives next year. Sony's game division also plans to base its next-generation PlayStation console around Blu-ray, potentially adding millions of Blu-ray playback devices to the mix within the first year.

"The installed base of Blu-ray playback will be very compelling for all studios to distribute their movies," Feingold said. "Other studios may not be on board right now, or even when we launch, but within six months, 12 months, I think you'll see others want to take advantage of that installed base, just as happened with DVD."

Monday's announcement leaves only two major studios officially uncommitted.

Fox has a foot in both camps, having recently joined both the DVD Forum, which backs HD DVD, and the Blu-ray Disc Assn.

Disney said in a statement that it is not yet ready to discuss its HD plans.