EU roadblock on map

By Paul Sweeting -- Video Business, 8/11/2006

AUG. 11 | The process of developing a next-generation DVD format has been, to say the least, an unedifying affair. Dubious claims have flown thick and fast, trash has been talked, allegiances bought, strategic priorities pushed aside in favor of personal and corporate agendas.

And for all that, the process has still produced two incompatible formats of nearly identical capabilities but nothing that ensures consumers’ universal access to high-definition movies.

The likely result, according to a new forecast by British research firm Screen Digest, will be a long, stultifying stalemate between the formats that will “dampen consumer appetite for the whole high-definition disc category.”

As ugly as the process has looked from the outside, however, there may be worse to come.

Last month, antitrust investigators from the European Commission sent “requests for information” to the major studios, as well as to Sony and Toshiba, apparently in an effort to determine whether the unedifying behavior we know about crossed the line into illegality.

According to a report in the New York Times, which was shown a copy of the request, investigators have asked the studios for any e-mails, faxes, PowerPoint presentations, meeting notes, internal reports or other records of conversations with technology companies regarding Blu-ray Disc and/or HD DVD.

Similar requests were made to Sony and Toshiba.

According to the Times, the requests seem to focus on whether the two formats’ hardware backers unfairly secured studio support for their respective sides through direct payments, the waiving of patent licensing fees, promotional funding or offers to cap replication prices at below-cost levels.

Sony and Toshiba said they were cooperating with the investigation. The studios have not commented.

IT’S POSSIBLE, OF COURSE, that the investigation will go nowhere. Legal analysts cited by the Times said it did not appear that the Commission has yet formed a view one way or another on whether Sony or Toshiba acted anti-competitively.

At the very least, however, the investigation is likely to drag on for months and cost the studios a bundle. It will take the studios months to collect the enormous volume of material investigators have asked for, and it will take the investigators months more to plow through it.

And that’s not counting the unavoidable back-and-forth among the lawyers.

There is also real danger for both the hardware companies and the studios. The antitrust office of the European Commission is fresh off a long battle with Microsoft that resulted in the U.S. software giant paying hefty fines for what the Commission considered anti-competitive leveraging of a technology standard.

Clearly, the establishment of proprietary technology standards is going to receive careful scrutiny by European regulators, who are not shy about imposing substantial penalties.

The real danger for the studios, however, is that the investigation could delay the rollout of both high-def formats in the 25 countries of the European Union.

Under EU rules, the fines imposed on companies found to have engaged in anti-competitive behavior are based on a percentage of gross sales. If either Toshiba or the Blu-ray hardware camp see a danger of being fined, the more aggressively they roll out their formats, the bigger the fines would likely be.

Any delay in the rollout, however, could impact the studios’ high-def sales at a time when the standard DVD market in some European territories is in far worse shape than it is in the U.S.

Any action against the hardware companies, moreover, would almost certainly include an injunction barring them from fulfilling whatever sweetheart deals they may have made with the major U.S. studios.

Although the U.S. studios all had an equal opportunity to cut their deals with Toshiba or Sony, smaller European distributors probably were not given the same considerations. That could, in the eyes of European regulators, put them at a competitive disadvantage to the U.S. giants, possibly even creating liability for the studios.

All of those risks could have been avoided, however, if the industry had found a way to stop the format war before it started.