The Truth About the Format War and HD DVD's Demise

Illustration for article titled The Truth About the Format War and HD DVD's Demise

Click to viewMost people have already declared Blu-ray to be the format war's victor—even us, begrudgingly—and our recent talks with Toshiba and Universal seem to suggest that the HD DVD camp might be ready to pull up stakes. Back at CES, so many moons ago, Microsoft said HD DVD was over when Toshiba said it was. Ken Graffeo, Universal's Executive VP and Co-President of HD DVD promo group, told us the exact same thing: "If Toshiba says it's over, it is over." Our impression? Toshiba knows it's over. The crazy part is this: Just a few weeks ago, it might've gone the other way entirely.

When we talked to Jodi Sally, Toshiba's VP of Digital AV Marketing, she said, "We still feel there's some value in HD DVD, but we're watching the market closely, waiting to see how sales go." Saying there's "still some value" in something is clutching at a reason not to throw it out, like your old bowling ball you haven't rolled in three years, or your dusty Laserdisc collection.


Consequently, we have a pretty good grip on where HD DVD and Universal stand. We think that rumors Universal's contract had expired and they're getting ready to jump are false for a couple of reasons, and not just because Graffeo told us: "Nobody talked to us. Everything that you see out there has never been substantiated."

We've heard on background from several insiders that Universal's contract with HD DVD runs through 2009, and that the contract is null only when the format is declared non-viable. Graffeo repeatedly placing the onus on Toshiba to declare HD DVD dead seems to confirm this. In addition to the above quote, we specifically asked him how HD DVD would react to Paramount jumping ship, and he responded "That's something you would have to ask Toshiba." In other words, everyone is basically waiting for the other shoe (or studio) to drop.

But several weeks ago, before Warner defected, things could have turned out quite different. One reliable source confirmed to us a few days before the Warner/Blu-ray deal went down, a Fox executive called Robbie Bach (Microsoft's head entertainment exec) confirming they were going exclusive to HD DVD, not Blu-ray. And if Fox went, the deal was that Warner would go, according to the same source. At the last minute, Fox decided to stick with Blu, effectively taking Warner with it. Toshiba's total surprise at the Warner shift corroborates that it was an 11th-hour move. Graffeo also confirmed that a bunch of HD DVD execs were on the plane to Vegas when the news dropped, so they had no idea.


So what happened? Don Lindich at the PIttsburgh Post-Gazette says Fox was handed $120 million by Sony to stay put, and Warner received around $500 million for painting itself Blu. BusinessWeek put the Warner number "closer to $400 million," which trumped the $100 million Toshiba was prepared to offer it. In our phone call with him, Warner's Kevin Tsujihara denied that a bidding war was a factor. While we believe money was on the table, we do believe that what Tsujihara is, strictly speaking, true.


Every studio wants the war to end—it's dragging down HD disc and regular DVD sales as people don't wanna buy Betamax 2 or get double-dipped with an HD version in a couple years. Warner Home Video is the biggest player in the video market, with a 19.7 percent market share, so it also had the most to lose with a drawn-out war slowly sapping away profits from both its foundation (DVD) and future platform (HD). Its market clout (plus Fox's follow-me plan) made it the Sandra Day O'Connor of the format war, allowing it tip the scales in favor of whichever side it landed on.

Let's talk about the timing. Another source told us that Warner had actually planned to make its announcement at CES. Making it just before CES effectively cut Toshiba and HD DVD off at the knees, and according to that source, led our man Billy G to chop out a 20-minute (?) portion of his keynote dedicated to HD DVD, in which Microsoft would declare a full-steam-ahead push.


The end result of the early announcement was the effective elimination of HD DVD from the show. Literally, the HD DVD camp canceled its own press event. The biggest beneficiary from the revised timeline was obviously the Blu-ray camp. The nagging detail here is that Warner's incentive to let the cat out of the bag early is seemingly only indirect—what did it directly gain from sucker punching Toshiba versus a slightly later announcement? Or would it have been more humiliating for Toshiba and the camp if Warner had smiled and hugged everybody through the show and then performed its judo chop?


The question of payouts is trickier. Why? Insiders tell us that the purported amounts—in the hundreds of millions, varying by camp and studio—are pittances in what is multi-billion-dollar game. It makes little sense to those in the know (on both sides) that the studios would be swayed to either side of the river by a drop in the bucket, or even a bucketful of money. (There is an exception or two, studios known for penny-pinching and an eagerness to jump at just a sliver of a profit.) More likely the payouts constituted good will or in some cases, just free money, as the commitment itself wasn't as hard as the coin.

We think the real power play, if there was one, came from within Sony, but it's hard to get to the bottom of it, given the number of Blu-ray proponents—i.e. mum cronies—in the CE business.


Where we officially are: The ball is in Toshiba's court, and Universal, Paramount and DreamWorks Animation are sticking with Toshiba until it calls it quits, which it may do if the market" for its players turns sour—according to Toshiba, the most recent price cuts may well lead to a sales bump before any kind of bitter end.


Where we actually are: Blu-ray execs are 100 percent confident they have won—publicly and privately in our conversations with them; dual-format swinger Samsung thinks HD DVD's back was broken on the Hollywood front and will be relegated to personally recorded content; an IDC analyst told us Toshiba may fall back on dual-format players, like Samsung and LG. It could have gone either way just a few weeks ago, but now it really is over for HD DVD.


Studios, execs and insiders: Wanna cut through the cloak-and-dagger BS and set the things straight for us and all consumers? Tell us the score, straight up, on the record.

–Additional reporting by Mark Wilson


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Granted, I'm usually a first adopter, (even bought a DVD player before DVDs were available in my town, thank you Amazon) but I sat on the fence until November, where I finally felt good enough about Blu-Ray that I was willing to invest in a PS3.

You guys who are trashing both, saying that download is the future need a reality check. There's a lot of this country that is a long way from having the Internet penetration at bitrates to support that kind of stuff. You might be able to pull HD over your cable modem in NYC or LA, but out here in the other 90% of the US, we're stuck with slow speeds, high prices and few choices. I pay $40 a month for a whopping 128Kpbs each way.