Wednesday, February 20, 2008

Blu-ray winner by KO in high-definition war

With studio support, Sony format reigns supreme as Toshiba throws in the towel.

By Dawn C. Chmielewski and Bruce Wallace
Los Angeles Times Staff Writers

February 20, 2008

Sony Corp. has finally exorcised the ghost of Betamax.

The Japanese company's Blu-ray format emerged the victor in the battle to set the standard for high-definition DVDs. Its victory over Toshiba Corp.'s rival HD DVD leaves behind its embarrassing loss to VHS in last century's battle for the home videocassette market.

Toshiba announced Tuesday it was abandoning its next-generation high-definition disc format, saying it would no longer make and market players and recorders. The announcement followed a series of defections, including Friday's decision by the nation's largest retailer, Wal-Mart Stores Inc., to stop selling HD DVD hardware and movies and devote its shelves exclusively to Blu-ray.

Toshiba Chief Executive Atsutoshi Nishida told a packed news conference at the company's Tokyo headquarters that continuing the fight for control of the high-definition home video market "would have created problems for consumers, and we simply had no chance to win. Although this is a bitter decision, there would have been a greater impact on our business if we had continued any longer," he said.

With that, Nishida ended a battle between rival formats that had confused consumers, split the Hollywood studios and retarded the growth of a potential new market for movies and the games and extras that go alongwith them.

Ironically, HD DVD appeared to have an edge over Blu-ray. Its players were cheaper and its movie discs less costly to manufacture. But Sony trumped Toshiba by building broad support for its Blu-ray format among consumer electronics manufacturers and Hollywood studios. It also pursued a risky strategy that paid off: incorporating a Blu-ray drive into its PlayStation 3 video game console.

That decision cost Sony money -- about $300 per console, according to researcher iSuppli. But it helped put more Blu-ray players in the homes of early technology adopters, more than 8 million of whom have bought PS3s worldwide.

By contrast, Toshiba said it had sold about 1 million HD DVD players worldwide.

"The PlayStation 3 was a Trojan Horse," said Walt Disney Studios Home Entertainment President Bob Chapek.

Now that Toshiba has waved the white flag, one question remains: How many consumers will ultimately embrace high-definition digital video discs? Although high-definition offers a sharper picture, the benefits are not as dramatic as the transition from videotape to DVD -- and most noticeable on big-screen TVs. Moreover, the DVD itself is under assault from myriad technologies vying to supplant it as a means for delivering movies into the home.

"The market, it's moving to downloads," said researcher Rob Enderle, president of the Enderle Group, referring to services such as Apple's iTunes, through which consumers can purchase movies online. "Blu-ray may never ramp."

Toshiba's Nishida blamed the format's downfall on the actions of a single studio: Warner Bros. The studio announced on Jan. 4 it would abandon HD DVD and sell high-definition movies exclusively on Blu-ray discs. The shift gave the Blu-ray camp about 70% of the home video market, with Warner, Walt Disney Co., 20th Century Fox, Lions Gate Entertainment Corp. and Sony Pictures all backing the format.

Nishida said Warner's abrupt decision dramatically altered the competitive environment that triggered mass defections. In rapid succession, online movie rental service Netflix Inc. said it would exclusively stock Blu-ray discs and electronics retailer Best Buy Co. said it would "prominently showcase" Blu-ray hardware and movies as a way of steering consumers to the format. Then came the final blow: Wal-Mart's decision to sell only Blu-ray movies and players at its 4,000 discount stores and Sam's Clubs.

"Warner's sudden change -- and it came out of the blue -- and U.S. retailers also following, was the reason we lost," Nishida said.

Until Warner took sides, Blu-ray and HD DVD accounted for an equal share of high-definition, stand-alone movie player sales, according to market research company NPD Group. The following week Blu-ray sales skyrocketed -- grabbing 90% of all next-generation hardware purchased, according to NPD. A last-ditch effort by Toshiba to salvage the format by slashing prices in half failed to stave off the inevitable.

Movie sales quickly tilted heavily in favor of Blu-ray. The latest Nielsen VideoScan First Alert sales data showed that Blu-ray represented 81% of all high-definition movie discs sold in the week ended Sunday.

Toshiba's problems started even before the first players were sold.

Disney dealt it a blow in December 2004, just before the annual Consumer Electronics Show, with an unanticipated switch to the Blu-ray camp. Although Disney was among the studios that initially embraced HD DVD, it opted to go Blu following a series of high-level meetings with Sony executives, including Howard Stringer, who at the time was president of Sony Entertainment Inc. Disney was promised a role in helping shape the format, which could put it in position to collect royalties.

Insiders within the HD DVD camp acknowledged that the combined marketing clout of the Disney and Sony brands proved difficult to overcome. The Burbank studio turned up the heat with Disney's Magical Blu-ray Tour, a display in malls around the country that gave shoppers a glimpse of high-definition home video releases of the movies "Cars" and "Meet the Robinsons."

"Our efforts have only just begun," Chapek said. "We have to get the consumer to make the move from DVD to Blu-ray, now that the risk of picking the wrong format has gone."

Sony similarly won over Fox by acknowledging its concerns about movie piracy and allowing it to add a layer of copyright protection to the Blu-ray format. The goal was to give the studios an influence in the development of the format alongside Sony and others who contributed to the patents.

Toshiba, by contrast, suffered from the lack of broad studio support for HD DVD. It secured exclusive deals only with Universal Pictures, Paramount Pictures and DreamWorks Animation SKG Inc., and also offered movies from Warner, which were available on both formats.

Toshiba's studio partners sought to make the best of the format's demise, saying it would ultimately serve consumers.

"The emergence of a single high-definition format is cause for consumers, as well as the entire entertainment industry, to celebrate," said Craig Kornblau, president of Universal Studios Home Entertainment. "While Universal values the close partnership we have shared with Toshiba, it is time to turn our focus to releasing new and catalog titles on Blu-ray."

Sony Corp. said its ability to secure broad studio and hardware support for Blu-ray was pivotal in its victory. Sony also relied on its traditionally strong-selling game console to give Blu-ray a boost. It bet that sales of the PlayStation 3 would not only establish Blu-ray as the default standard for high-definition video, but also pay off more broadly for Sony Corp., increasing sales of the movie discs sold by Sony Pictures and the Bravia brand television sets made by its consumer electronics group.

"Overwhelming support from all the relevant industries, including Hollywood studios, consumer electronics and IT companies, retailers and video rental stores is clear proof that consumers have chosen Blu-ray as the next generation optical disc format," Sony said in a statement. "We believe that a single format will benefit both consumers and the industry, and will accelerate the expansion of the market."

Even before Toshiba's formal announcement, on the floor of one of Tokyo's cacophonous electronics stores the war for control over the next generation of high-definition video players was clearly over.

The price of Toshiba's HD DVD players had already been slashed, bright red stickers announcing a "Surprise Discount." A customer who had recently bought a Toshiba high-definition player drifted in, wondering if he could get his money back -- though the retailer was having none of that. And up on the fifth floor, in the section set aside for the sale of used electronics, the offering price for a second-hand Toshiba HD player was already tumbling, and surely headed further south, a salesman said.

"Only maniacs will buy one now," he said, unable to keep a straight face.