Ten months ago, Warner Brothers pulled the plug (and some would say life support) on the HD DVD format, ending what many industry analysts described as a costly, pointless format war between Toshiba’s pride and joy and Sony’s competing Blu-ray Disc (BD) next-generation DVD format.

The script then called for consumers to flock to BD in 2008, ditching their older red laser players as part of a massive upgrade to HDTV displays and content delivery systems. BD manufacturer’s and retailer’s coffers would be flooded with cash as songbirds flitted back and forth below a rainbow while the end credits rolled over a golden sunset.

But things didn’t work out as planned.

The current economic downturn, which has its roots in subprime mortgage problems going back to 2007, has steered potential customers away from large HDTV screens in favor of smaller sizes. This trend was evident as early as the first quarter of this year. Those same customers have also favored inexpensive upconverting DVD players over the $300 to $800+ BD models from Samsung, Sony, Panasonic, Sharp, Pioneer, and LG.

Now, Best Buy has taken a big gamble to jump-start BD player and disc sales for the all-important fourth quarter. According to the Home Media.com Web site, they’ve cut the price on their Insignia NS-BRDVD player (BD Profile 1.1) to $199, using an in-store "instant savings" coupon worth $30.

The Insignia player also includes $100 worth of coupons towards the purchase of BD movies. Toshiba employed a similar strategy with great success last year, offering five free HD DVD movies with each player bought. Coupled with a price cut to $99, it drove closeout sales of the company’s HD-A2 player through the roof.

The problem with Best Buy’s action is that it flies in the face of conventional analyst wisdom that profit margins on BD players will be severely squeezed or disappear altogether below a $299 price point. And this price cut may lead to more panic discounting from other brands, if Q4 sales prove to be as sluggish as forecast and retailers wind up with lots of unsold inventory.

Other brands are taking similar steps. Target now carries the Olevia BD-100 (also BD Profile 1.1) player for $229, while Sony’ slashed the price on its Profile 1.1 BDP-S350 to $299 earlier this month. Those are encouraging trends, but these players are still too expensive for mainstream buyers.

The BD format also has to fight increased availability of direct movie downloads. Yesterday, TiVo announced a deal with CinemaNow that allows downloads of Disney movies for $2.99, including the hit Pirates of the Caribbean: Dead Man’s Chest. These are only standard definition downloads for now, but one can clearly see the writing on the wall, what with VuDu, Apple TV, and cable companies offering HD downloads.

While TiVo’s HD set-top costs $299 (the same as Sony’s entry-level BD player), SD movie downloads from CinemaNow or UnBox are a fraction of BD purchase prices, and there’s no store to visit or DVDs to mail back. An even better deal: VuDu’s $299 BX100 HD media player now comes with a $200 credit towards HD movie rentals or purchases through Best Buy, with rental costs ranging from $3.99 to $5.99 per film.

Clearly, the BD format has some real obstacles to overcome if it is to replace red laser DVD. One Hollywood executive told me last spring the only way BD could succeed would be for studios to immediately stop releasing titles in the red laser format - and that’s not likely to happen any time soon.