Toshiba Set to Cede DVD-Format Fight

http://online.wsj.com/article/SB120321618700574049.html?mod=hpp_us_whats_news

 

Source: Wall Street Journal

 

Move Positions Sony As HD-Player Victor;
Studios' Big Stake

By YUKARI IWATANI KANE in Tokyo and SARAH MCBRIDE in Los Angeles
February 18, 2008

Toshiba Corp. is expected to pull out of the HD DVD business early this week, people familiar with the situation said, marking the end of one of the biggest and most-expensive format battles in the electronics industry since the VHS format's defeat of Betamax nearly three decades ago.

The decision makes Sony Corp.'s Blu-ray technology the de facto standard for high-definition DVD players, which can show movies with crisp images on big, flat-panel digital televisions. Sony declined to comment.

Since Time Warner Inc.'s Warner Bros. decided last month to support Blu-ray exclusively, sales of Blu-ray players and movies have gained momentum, putting pressure on Toshiba.

"Sales have been hurt since Warner's decision, and we are considering different options," Toshiba spokesman Keisuke Oomori said, though he added that nothing had been decided at this point.

If Toshiba withdraws from the HD DVD business, Viacom Inc.'s Paramount Pictures and General Electric Co.'s Universal Pictures, both of which support the format exclusively, would be immediately released from their commitments, one of the people familiar with the situation said. Warner Bros., which is obligated to sell HD DVD movies through May under its contract, would also be freed from those terms. All three studios couldn't be immediately reached for comment.

Over the past five years, supporters of HD DVD and Blu-ray have been engaged in a fierce war over the high-definition DVD market as each side launched major campaigns to woo movie studios, retailers and ultimately consumers to their side. Neither side will disclose how much they have spent, but industry observers believe it to be hundreds of millions of dollars by each.

For consumer-electronics makers, winning the format war had meant big potential returns in licensing fees and sales of players and disks for years to come. Setting the standard for high-definition DVDs is also a matter of engineering pride, an important factor for Japanese manufacturers such as Sony and Toshiba.

The studios also have a big stake in the battle because they see next generation technology as a way to get customers back into stores to buy movies. DVDs had been a cash cow for studios for a long time, but the market started slowing in 2006, catching the industry off guard. Last year, sales fell by almost 4%, to $16 billion, according to Digital Entertainment Group. The studios are eager to find ways to jump-start the category.

Toshiba, a sprawling electronics conglomerate that also makes semiconductors, appliances and nuclear reactors, is a small player in the consumer-electronics industry, but winning the next-generation format war would have allowed the company to significantly increase its presence.

Toshiba was particularly aggressive with price cuts during the past holiday season, with some of its older models selling for as little as $99, and it had been buoyed by solid sales of its players by the end of last year. But though the players were selling, HD DVD software wasn't. According to Adams Media Research, HD DVD software sales amounted to just $90million, compared with $186 million for Blu-ray software in 2007.

The Blu-ray side also benefited from a pickup in sales of Sony's PlayStation 3 videogame console, which comes with a Blu-ray player. After the introduction of a lower priced model in November, PS3 sales tripled in the October-December period from the previous quarter. PlayStation 3 is expected to reach cumulative sales of more than 13 million units by March, an additional boost for Blu-ray.

These factors contributed to Warner Bros.'s watershed decision in early January to back Blu-ray, leaving HD DVD with just a 25% share of the high-definition video market. That meant that consumers who bought HD DVD players would have far fewer movie titles to choose from. Faced with declining DVD sales, Warner Bros. was eager to end the format war quickly, hoping that would kick-start sales of high-definition DVDs, people familiar with the decision said.

Toshiba made a last-ditch effort last month to save its HD DVD business by slashing prices on its players by as much as 25% in the U.S. But Blu-ray players still outsold HD DVD players by more than two to one, according to analysts. Movie sales figures have been even more telling. Nearly 80% of high-definition software sales were for the Blu-ray format in January, analysts said.

Given Blu-ray's recent momentum, analysts had speculated that Toshiba would quietly phase out the HD DVD business over the next few years, just as Sony did with its Betamax format, in an effort to save its corporate pride. That its executives are considering a complete withdrawal shows how grim the situation has become.

Over the past month, retailers, which had been relatively neutral, began successively expressing their support for Blu-ray, in the hopes that a decision would persuade consumers who have been cautious about buying high-definition players and movies while the format battle was continuing.

In the past week, major retailers such as consumer-electronics giant Best Buy Co. Inc., online video rental company NetFlix Inc. and Wal-Mart all sided with Blu-ray.

A person familiar with the situation said a complete withdrawal from the HD DVD business is likely to result in a loss in the range of hundreds of millions of dollars for Toshiba, in addition to the losses that it has already racked up.

The person also said Toshiba will likely continue to provide customer support for HD DVD players that it has sold, but it had no compensation plans in mind for consumers who have already purchased them.

Write to Yukari Iwatani Kane at yukari.iwatani@wsj.com and Sarah McBride at sarah.mcbride@wsj.com