A Fight To The Death

It should be a colossal success story for television. A new generation of high-definition DVDs hold more than five times the data of conventional DVDs, offering crisper images, richer colors and room left over for features such as movie-related games. Last year sales of hi-def discs amounted to only 10 million, compared with 900 million conventional DVDs. What's been standing in the way of a potentially huge market, the conventional wisdom holds, is the format war between Blu-ray, backed by Sony and other firms, and Toshiba's HD DVD.

Now that Warner Bros., a studio that has invested in both formats, has said it will abandon HD DVD by June, will sales take off? Not necessarily. Amid the speculation on whether the death of HD DVDs will be slow or swift, a third scenario has begun to seem likely: that the entire market for high-definition discs will wither as consumers download movies instead. In the bitter five-year struggle over formats, the technology for downloading movies has accelerated, and now a number of firms are poised to make discs irrelevant. "This is something the industry should have thought about a lot before we got into this mess," says analyst Craig Mathias at Fairpoint Group, a market-research firm in Ashville, Massachusetts. "The assumption we're making," says Mathias, is that packaged media "is doomed."

Movie downloads have already begun to edge out DVDs—sales fell 4.5 percent last year in the United States and 11 percent in France, according to SEVN, an industry organization in Paris. Whereas high-definition discs generally sell for more than $20, Apple recently began selling high-definition movie rentals for less than $5; Amazon, Netflix and Movielink, a Blockbuster company, sell standard-definition download rentals for even less. (Rented movies erase themselves, usually after 30 days.) Downloads purchased at Movielink can be burned directly onto a blank DVD. Steve Swasey, VP of corporate communications at Netflix, believes downloads will overtake hardcopies "in several years." Netflix now offers more than 6,000 titles for downloading.

Hi-def DVDs may not offer a worthwhile improvement in quality. Whereas the DVD experience was a real leap up from the grainy and muted colors of VHS cassettes, the better quality of hi-def DVDs is hard to appreciate on the screens of small laptops and iPhones.

For the moment, downloading high-definition films is too slow for most consumers. But broadband development "has been going great guns," says Bruce Nazarian, VP of the Las Vegas-based DVD Association, a grouping of film and electronics companies. One fifth of households in the United States and Western Europe enjoy broadband, with annual growth of more than 20 percent in the United States and about 28 percent in Western Europe. The day will soon be here, Nazarian says, when even high-definition discs will be "eclipsed" by downloads.

An aborted market for high-definition discs would be a bitter pill for many companies. The large consortium of firms that developed Blu-ray technology will lose licensing fees to companies who would otherwise manufacture Blu-ray players, computers, game consoles and discs, says Frank Simonis, a spokesman for Philips, a Dutch consumer-electronics giant that owns a significant share of Blu-ray intellectual property. Toshiba invested north of $1 billion in HD DVD, according to several industry sources, including a $150 million sweetener paid to Paramount in exchange for an 18-month commitment to distribute movies only for HD DVD. After Warner's bombshell, Toshiba, Paramount and Universal Pictures declared they would continue to promote HD DVD. That decision, says James Steynor, head of Datarius, a Reutte, Austria, maker of manufacturing equipment for both formats, is not a reflection of sound business sense, but rather "pride or ego," or, more cynically, an attempt to facilitate selling off remaining stocks of HD DVD players and discs.

Film studios also stand to miss out if the market for high-definition discs fails to materialize. Many film buffs already own the DVD back titles they want and limit purchases to new releases (American households now own, on average, 85 DVDs). The movie industry has counted on convincing consumers to replace their DVD libraries with high-definition discs. That's why the hi-def DVD "is so critically important to our industry," says Bob Chapek, head of Disney's Buena Vista Entertainment. "In the beginning of format [change] people gobble up everything."

Downloads have already dashed similar hopes in the music industry. In 2000, two new, incompatible recorded-music formats, Super Audio CD and DVD-Audio, vied to become the successor of CDs. While the electronics companies duked it out, listeners downloaded music to iPods and PCs. That's a lesson the movie industry apparently failed to learn. Blu-ray may have won the battle against HD DVD, but it looks like both camps lost the war.