Clearer picture emerges in battle over high definition viewing

Sony looks as if it has won the two year fight to produce the next generation of home DVD players with its Blu-ray format, as arch-rival Toshiba prepares to accept defeat and pull the plug on its HD DVD format.

The home DVD market is worth an estimated $24bn (£12.3bn) but has come under threat in recent years. Prices have declined as a result of online piracy and the boom in sales of personal video recorders which make it easy for consumers to save their favourite films and programmes from broadcast TV, doing away with the need for them to buy DVD box sets.

The next generation of DVDs promises to inject new growth. Both Blu-ray and HD DVD deliver high-definition graphics and sound, while the film industry has high hopes that the next generation of players will make it easier to protect their content. The TV manufacturers, meanwhile, believe the availability of content such as natural history programming and movies in the new high-definition standard will provide a reason for consumers to upgrade to the latest in HD television sets.

But take-up of HD DVD and Blu-ray has been low as consumers have held off buying while Sony and Toshiba battle it out. Blu-ray has the upper hand in terms of units sold because its player is built into the Sony PlayStation 3 games console which has sold more than 10m units. Only about a million HD DVD players have been sold and the vast majority are in Japan.

Toshiba, which initially seemed to have the upper hand after signing up DreamWorks, was dealt a severe blow last month when Warner Bros, the world's largest DVD producer, opted to use the Blu-ray format for all new releases, dumping HD-DVD.

Consumer preferences

Warner, which accounts for about a fifth of the lucrative US DVD market, was the last remaining big Hollywood studio producing discs in both formats. MGM, Fox, Walt Disney and Sony Pictures had already signed up to the Blu-ray format. On the device manufacturing side, Blu-ray is also supported by Hitachi, Matsushita and Sharp.

Then late last week the largest retailer in America and indeed the world, Wal-Mart, said it would dump HD DVD across its 4,000 US Wal-Mart and Sam's Club stores by the summer in response to consumer preference.

"This decision will make my job so much easier," said Susan Chronister, one of Wal-Mart's movie buyers on the company's own Check Out blog. "So ... if you bought the HD player like me, I'd retire it to the bedroom, kids' playroom, or give it to your parents to play their John Wayne standard definition movies, and make space for a BD (Blu-ray disc) player for your awesome hi-def experience."

Wal-Mart's move followed a similar decision from consumer electronics retailer Best Buy and online video rental firm Netflix earlier in the week.

At the weekend Toshiba admitted that while it has made no definite decision about the future of HD-DVD it is "making various considerations about its business policy after Warner's decision and the announcements by Best Buy and Wal-Mart".

Insiders believe Toshiba's board could make an official announcement that it is dropping the HD DVD format later this week. The move is a huge success for Sony, which has lost format wars in the past. Perhaps most famously, its Betamax format lost out in the home video battle to VHS. "If true, this will be good news for the next-generation DVD industry in clearing up the confusion for consumers because of the format competition that had curbed buying," said Credit Suisse analyst Koya Tabata.

Certainly the DVD industry hopes that with just one standard for consumers, sales will take off. "Everyone had been waiting to see who will win, so if Toshiba exits, then it could really take off for Sony," said a spokeswoman for Taiwan's CMC Magnetics, which makes a third of the world's DVD discs.

In what many are calling a rerun of the Betamax-VHS video format wars of the 1970s and 80s, Blu-ray's dominance has come on the back of rising sales in Japan, where it accounted for 96% of total sales in the last quarter of last year, according to market researcher BCN.

In fact, Toshiba's discs are cheaper to produce but have a 15-gigabyte storage capacity compared with Blu-ray's 25 gigabytes. Attempts to boost sales with dramatic cuts in the price of HD DVD players in the US and Europe have had little impact.

Toshiba was also hampered by the fact that one of its major technology partners, Microsoft, did not produce a version of its successful Xbox 360 video games console with an HD DVD drive installed, as had originally been mooted. Instead Microsoft has been selling a plug-in HD DVD player.

Deft gamble

Sony, meanwhile, held back the launch of its PlayStation 3 - despite some serious criticism from the analyst community - in order to bring out a console with Blu-ray installed. In fact, the PS3 lags behind Nintendo's Wii in terms of monthly sales and the cost of the Blu-ray player means it makes a loss on every console shipped. But the fact that Blu-ray is likely to become the pre-eminent next generation DVD format, means sales should increase and components become cheaper. It turns out to have been a deft gamble on Sony's part.

Toshiba's shares rose 5.7% to 829 yen (£3.92) in Tokyo yesterday as investors gauged the positive impact of quickly abandoning what had turned into a potential money loser. Shares in Sony, which refused to comment, rose by 1%to 4,900 yen.

As for those consumers who have bought an HD DVD player, they may just have to accept that this time they made a bad decision. HD DVD players were selling on auction site eBay yesterday for about £70 and the price is expected to plummet as it becomes obvious that Blu-ray has won out. As a guide to what an HD DVD player may one day be worth, the losers in some of the other most recent format wars are little more than hobbyist's pieces these days. An in-car eight-track player, for instance, was going for £4.99 on eBay yesterday while a Betamax video recorder will set you back a mere £20.

Fallen formats: From Betamax to mini-disc

The success of Blu-ray will come as great relief to Kiyoshi Nishitani the head of Sony's video business, not just because he has seen off the threat of Toshiba but because of his failure in the last "format war" that he fought.

Nishitani developed the Betamax videotape standard that lost out so spectacularly to Video Home System (VHS), developed by arch-rival JVC, despite the fact that Betamax, which appeared before it in the mid-1970s, was a better technology, not least because it was based on a standard used by TV professionals.

Recorders that could use Betamax were produced by a range of manufacturers including Sony, Sanyo, Toshiba, Pioneer and NEC, but they did little marketing in North America. Fearing that Sony would end up with a de facto monopoly, JVC produced the VHS standard - which offered longer playing time than Betamax - and marketed it heavily in the US, gaining a lion's share of this new market.

Using the scale it had in the US to reduce the cost of production, JVC was also able to flood the European home-recording market with cheaper devices and rein back the early-mover advantage enjoyed by Betamax. In 1988, Sony was forced to admit defeat and launch its own VHS recorders. It stopped making Betamax recorders in 2002.

In the Asia Pacific region, where Betamax started out so well, it was quickly overshadowed by laser discs, because humidity plays havoc with magnetic tape. Laser discs gave way to DVDs, but Betamax is not dead - a variant of the technology is still used by television professionals.

Betamax is not the only setback Sony has suffered. Its Digital Audio Tape devices, introduced in the mid-1980s, and mini-disc technology announced in the early 1990s were both supposed to replace Philips's magnetic cassette technology. Neither were taken up by the music industry with the same enthusiasm as CDs. Both have been in effect made obsolete by MP3

Richard Wray