High-Def Bribe or Format War For The Ages?

Reporter’s Notebook: There I was this week, stuck in the back of the Stanford University Memorial Union auditorium at the Hot Chips conference, when I received an e-mail informing me that Paramount Pictures and DreamWorks had decided to go exclusively with the HD DVD camp. I could have screamed.

Why would they do this given not only Blockbuster and Target siding with Blu-ray, but the clear negative reaction of consumers to the two formats? Warner’s hit film 300 is available in both HD DVD and Blu-ray formats, and word from retailers was that the Blu-ray version was outselling the HD DVD version by more than two to one. This says something about the equipment.

For the unfamiliar, HD DVD, created by Toshiba and backed by Warner Bros., Microsoft and NEC, and Blu-ray, developed by Sony and its multiple partners, are vying to replace standard DVD

Despite years of objection from the home theater press, as well as aficionados on sites such as Home Theater Forum, the studios refused to unite behind one format, thus splitting the market in two.

The result has been what everyone warned them would happen: consumers are staying away, with some saying they don’t feel a need to upgrade.

A question of hardware?

The two formats have their strengths and weaknesses. For HD DVD, it’s price and manufacturing. The cheapest HD DVD player from Toshiba is $299, while the cheapest Blu-ray player is $499.

It’s also possible to stamp HD DVD discs on a standard DVD manufacturing line, whereas Blu-ray requires a whole new production. This is no small issue for movie studios, as the lines are not cheap.

Blu-ray can hold 25GB of data per layer, while HD DVD can hold 15GB per layer. However, the interactivity layer of HD DVD is considered superior to the interactive technology in Blu-ray.

For the longest time, the battle has been of perception, with Blu-ray perceived as the leader because it had so much more studio support than HD DVD. That’s why the Paramount-DreamWorks news is considered such a big deal. At this point, it’s all about perceptions.

NPD Group puts the HD DVD and Blu-ray hardware sales at about even, but does not take into consideration PlayStation 3 and Xbox 360 add-on drive sales. The PS3 has native Blu-ray film playback while the XBox 360 has an inexpensive add-on drive for playing HD DVD movies.

Although numbers for the 360 HD drive are unavailable, they’re believed to be in the six-figure range, while the 360 has sold some 12 million units worldwide. Currently, the PS3 has sold more than 4 million units. The gap between the PS3 and 360 add-on drive will only widen when PS3 sales start to accelerate. Sony recently cut the price by $100, but more importantly, it had a great showing at the Electronics Entertainment Expo (E3).

Sony’s put on a great presentation at this year’s E3, the annual dog-and-pony tradeshow for the videogame industry, and the games they demonstrated left the videogame press stunned. That can only boost PS3 sales in the coming year, and thus broaden the Blu-ray installed base.

Greed as motivator?

The day after the Paramount-DreamWorks announcement, the New York Times reported that an anonymous benefactor floated $150 million to the cause. Shades of Great Expectations! Paramount got $50 million and DreamWorks got $100 million for HD DVD exclusivity.

The studios admitted getting the money, but no one would take credit for spreading the wealth. The Times reporter questioned Microsoft, which has the deep pockets to fund such a move and the vested interest in HD DVD, but Microsoft denied any involvement.

Bill Hunt, editor of the long-running DVD Web site The Digital Bits, tells me Paramount’s staff didn’t know this was coming until the morning of the announcement and they were working on Blu-ray titles up until the day of the news.

A vehement critic of the format war, Hunt was as unhappy about this news as I was. “Hollywood is shooting itself in the foot. If this goes on for another 18 months, it’s over. Both formats will be dead,” he said.

Next page: Long live format war or death of the formats?

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Yes, greed. And bribery?

Hunt and I were left with the same question: How is this not a bribe? Well, according to Randy Friedberg, a partner at the intellectual property and entertainment law firm of Olshan Grundman LLP, it’s not.

“This is business,” he explained. “Bribery has to be an illegal payment by default, for favor or influence. The only way this could be wrongful would be if there were antitrust considerations. It’s no different from AT&T making payments to Apple to get the iPhone. It’s a win-win for both sides.”

Friedberg doesn’t think Microsoft is up to any of its old exclusionary games that got it into so much trouble in the 1990s. “Given Microsoft’s anti-competitive problems, to do something that had antitrust implications would be extremely stupid for a company that’s not stupid,” he said.

Indeed, the deal is only for 18 months, and Hunt said there is plenty of wiggle room for both companies to get out if they want to.

Peter Berghammer, chairman of market research firm Future Formats, admits it looks funny, but concurs, “that’s the way the industry works. That industry has a pretty good track record of back and forth.”

Berghammer said that for now, neither format is gaining a lot of traction. “We haven’t been convinced yet there is any incentive for consumers to move to one format or another, and a large portion of that is due to digital video recorders and on-demand downloads,” he said.

When DVD came out in 1997, there was no competition and certainly no equal. It was a clear and obvious improvement over VHS and standard definition TV. But now, in 2007, there’s HBO and Showtime in high definition, high def content on demand from Comcast and other cable companies and downloadable movies from Netflix.

Having compared standard-definition DVD to high def, I can tell you that the difference is real and worth it. But depending on the drama that continues to unfold, it might not matter.

Berghammer believes there is “a very high possibility the split will kill both formats,” and this deal doesn’t help because it balances out Blu-ray’s momentum, meaning the end to the war gets pushed back.

“It really was a good comeback to the whole Target deal, because that was a critical deal. It’s so important to have those players our there in the supply chain,” he said.

For Friedberg, it’s just how the game is played. “The marketplace is deciding because you’ve got the better funded [party] paying to get the strategic advantage for their item. It happens all the time. I do think it needs to shake itself out, but I don’t see it as dirty pool or illegal,” he said.

Maybe not illegal but it stinks as badly as this foolish format war that no one wanted. Some day, this will make a great business school case study right alongside VHS-Betamax.

Andy Patrizio is a senior editor with internetnews.com.

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