DVD Cold War

Las Vegas isn't the sort of place usually given to premonitions of the apocalypse. But at the Consumer Electronics Show, the world's largest trade fair of electronic gadgetry, the talk earlier this month was of total war. The headlines said it all: gloves off in digital war. two tribes go to war.

The casus belli is about who will define the format of high-definition video-discs--a technology, some claim, that will determine who reigns supreme in the world of video for at least a decade to come. The contest is already splitting the tech world into opposing camps. One leader is Toshiba, which is pushing its HD DVD format as a low-cost alternative that "stretches" current DVD technology to accommodate the data loads required by high-definition video. It's opposed by Sony's Blu-ray Disc Association, which is betting on a more radical (and costly) departure that, it claims, will create far greater data capacity and what Sony chairman and CEO Howard Stringer has hailed as a "revolutionary" and "amazing" new viewing experience. Sony can count on all the major motion-picture studios but one, and most of the key video-hardware makers, while Toshiba has recruited Microsoft and Intel.

Both sides came to Vegas ready to open fire. Toshiba announced it would ship the first HD DVD players in March, priced at just $499. By contrast, the earliest delivery date for a Blu-ray player is sometime this summer, at a price of $1,800. Sony believes it can overcome its rivals' head start by rolling out Blu-ray in the hotly anticipated PlayStation 3, due later this year.

No doubt the stakes are considerable. In 2005 consumers purchased some $15 billion worth of DVDs, and that was a relatively slow year. The movie industry is hoping that high-def video formats can stem the steady erosion of DVD sales, which have long since outpaced sales of movie-theater tickets and thus represent one of the industry's primary sources of income. Meanwhile, customers are watching the spectacle warily. Who wants to pony up hundreds of dollars for a disc player, only to discover in a year or two that the other side's format has won the day?

Behind all these worries lies the memory of the Mother of All Format Battles: the --tug of war over videocassette formats between Sony and Panasonic in the 1970s and early '80s. The victor then, of course, was Panasonic: its VHS format became the universal standard, leaving Sony's technologically superior Betamax machines gathering dust on store shelves. VHS vs. Betamax became a classic B-school case study, emphasizing the importance of garnering early support for big investments on new technology.

But much has changed in 30 years. In the 1970s, cassettes of one kind or the other were the only current or potential options for watching video. That's not the case today. Toshiba vice president Yoshihide Fujii passionately defends HD DVD, accusing the Blu-ray side of dispensing "propaganda" and unfounded claims of technical superiority. But he's also quick to acknowledge that optical discs aren't the only means of delivery anymore. The format battle is important, he says, "but 15 years from now DVD will no longer exist. So disc capacity, to me, is not so important." His counterparts at Sony, he suggests, are fixated on "physical format" for its own sake. "The Blu-ray guys are optical-disc guys. But in the future, flash memory or hard-disc drives or even optical holograms" may turn out to play a bigger role.

It's tough to pick a likely winner, but many analysts point to hard-disc drives, known as HDD (think of the "brain" inside your PC, possibly shrunk to fit into handheld gadgets). "Every single month that there isn't an HD DVD out on the market, it's good for networks and HDDs," says Richard Doherty, research director at the Envisioneering Group. "People are getting more and more used to having content in their personal video recorders," which also run on HDDs.

The explosion of options has Bill Gates, among others, declaring that the fight between Blu-ray and HD DVD is "the last of the format wars." In Vegas he demonstrated how Microsoft's Windows Media Center will store content, making DVDs unnecessary. Ikuo Matsuhashi, a consumer-electronics analyst for Goldman Sachs, says HDDs will emerge as "the easiest and most convenient way of recording movies or TVs," marginalizing DVDs. "Within a couple of years people might not even remember what this DVD-format competition was about," he says. Some of the combatants aren't ready to concede. Andy Parsons, a spokesman for the Blu-ray Disc Association, says options like cable and video on demand have yet to undercut DVDs because people still prefer the tangibility of traditional "package media," like the DVD, which they can carry home and collect in libraries.

Lately the lines between the opposing camps have started to blur as major players hedge their bets. Paramount and Warner plan to release films in both formats. Samsung and Hewlett-Packard, once committed solely to Blu-ray, have hinted they will support HD DVD, too. Meanwhile, every player in the field is looking beyond DVD, including the leaders of the rival camps, argues Matsuhashi. He says that from the larger earnings perspective DVD may not matter as much as other strategic projects--for example, in Toshiba's case, making good on huge investments in flat-panel TVs. "We're not even sure that the next-gen DVD-format war is really that important," he says. At a minimum, this war will not be as decisive as the last one.