You probably can’t tolerate another "format wars" column. After all, the war’s over, isn’t it? Toshiba has discontinued sales and marketing of HD DVD players (although they are continuing to provide full product support and after-sales service).

Ken Werner
Senior Analyst and Editor

Of course, there are still brand new HD DVD players out there in the supply chain. Circuit City will sell you a Toshiba HD-A3, which carried an MSRP of $249.99 in December, for $79.99 with 2 free HD DVDs and free shipping (or 24-minute in-store pick-up), and there are plenty of HD DVD discs for sale. The most recent ones were introduced just this week - I Am Legend (a DVD/HD DVD combo disk) and a UFO mostly-live concert disc. Bonnie and Clyde is scheduled for next week, and then there’s a trickle of releases through June, when the trickle dries up.

But that’s not the format war I’m talking about. Sony won that victory - purchased it, really - by paying Warner Studios $400M not to renew is agreement with Toshiba to continue releasing movies in HD DVD. Despite the blather from Sony and Warner, this was not the marketplace speaking. If anything, the market was tipping toward HD DVD in December. This was Sony buying off a critical supplier of HD DVD media. Think of the old Westerns in which the fat cat in the black hat fenced off the water supply that good-hearted ranchers needed to survive. Except that in this case, the good-hearted ranchers (Toshiba), had done the same thing earlier. Sony just paid more.

In this case, we don’t have cattle pitifully dying for lack of water, but Toshiba will reportedly lose about two-thirds of a billion dollars (or more, depending on the report you read) on its HD DVD adventure.

So what did Sony buy? Sony hoped it had bought an end to the format war, resolving consumer doubt and unleashing a pent-up demand for hi-res DVD players and discs. Last year, both hi-res formats together accounted for less than 1% of DVD player sales, according to CEA, which was a serious disappointment to Sony, Toshiba, and the studios releasing movies in either of the advanced formats.

The new optimism was reflected in press conference comments made last week in Taipei by Sony Electronics President and CEO Ryoji Chubachi. Chubachi said his company will offer Blu-ray Disc (BRD) players in a broad variety of product lines and prices, including TV sets with integrated BRD play and record, with the goal of increasing BRD movie penetration from its current 20% to 50% by year’s end.

Wait a minute! We’ve gone from less than 1% to 20% in three months? Does anybody believe that? (All right. You caught me. It was 1% player sales and 20% disc sales. Still….)

Hollywood Reporter, for one, does not believe it. Citing data from Nielsen VideoScan in a story published in late March, HR noted that several movies sold as much as 10% in BRD. First-day sales of No Country For Old Men were 9.8% BRD; Hitman 12.6%. In December, while the format war was still being fought, 2% to 3% of most movies’ sales were in hi-def formats, HR said. (There’s the number to compare directly with Sony’s 20%.) HR predicted that BRD will generate up to $1B in sales this year, three times the combined sales of HD DVD and BRD last year.

None of this is bad, but it’s a long way from 50% BRD penetration, or even 20%. With HD DVD all but gone, what’s keeping BRD from taking over the world as Sony intended?

In the short run, it’s good, old-fashioned, standard definition DVD. In a CEA survey, whose results were announced at CES in January, well over 80% of consumers said they were happy with plain old DVD. And that didn’t take into consideration the very good results you can obtain with DVD players that up-convert standard DVD output to nearly BRD quality. Toshiba is now pushing its up-converting DVD players, which start at about $70 MSRP, and OPPO has premium up-converters that start at about $170 MSRP. (We’ll do a comparison test in the future.) If you sit 8 feet away from a 42- or 50-inch screen, you’ll probably be hard-pressed to see the difference between BRD and up-converted DVD on a good player.

In the medium and long term, digital downloads will reduce the market for all kinds of physical media. That’s a big deal for music already, and it will be a big deal for hi-def video. Hollywood will have to give up some of its DRM excesses for digital delivery to really fly, and downloading will have to be liberated from the PC in the den, but those things will happen eventually.

So, Sony is caught between a BRD ramp-up that is slower than expected because DVD is really pretty good (and very good when up-converted), and a format lifetime that will be curtailed by digital downloading. Will there be enough in the middle to justify Sony’s efforts? Yes, but this won’t be VHS all over again. That train left the station long ago, and Sony missed it.

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