In Sony's Stumble, the Ghost of Betamax - New York Times

In Sony's Stumble, the Ghost of Betamax - New York TimesFebruary 26, 2006
In Sony's Stumble, the Ghost of Betamax
By KEN BELSON

AT first glance, Amir Majidimehr does not look like a game-changer in the battle to develop the next generation of DVD players and discs. As the vice president for Windows digital media at Microsoft, he neither steers a Hollywood studio nor controls one of the many consumer electronics giants that are betting billions of dollars on one of the two new formats that promise to play high-definition movies and television shows.

Yet when he and his team in Redmond, Wash., decided last September to abandon their neutral stance and to support Toshiba and its HD-DVD standard over the Blu-ray format led by Sony, the unexpected change of heart reverberated through the technology industry.

Suddenly, Toshiba's seemingly quixotic defense of its format had new life. Intel joined Microsoft in backing HD-DVD. Hewlett-Packard withdrew its exclusive support of Blu-ray. This month, another member of the Blu-ray camp, LG Electronics, hedged its bets, too, signing a deal to license Toshiba's technology.

And earlier this month, one of the main reasons underpinning Microsoft's move to shuck its neutrality — the complexity of producing Blu-ray technology — led to Sony's acknowledgment that it might delay this spring's scheduled release of its PlayStation 3 game console partly because the needed technology was still being worked out.

The possible delay and the Blu-ray group's loss of its once-commanding lead are not encouraging developments for Sony in its attempt to revive its electronics group after a series of bungles. PlayStation 3 is crucial to Sony's future, and not only because the latest version of its gaming consoles could generate billions in revenue; the new machines will include disc drives that will turn them into Blu-ray DVD players as well.

"The PlayStation is more than a game system to them; it's one of their attempts to own the digital living room," said Robert Heiblim, a consultant to electronics companies. "Blu-ray is also critically important to get right. They don't want to be weak in an area they feel they can dominate."

A DECADE ago, a prospective death match between competing first-generation DVD players was averted when Sony and Philips agreed to back down and join the Toshiba/Warner Brothers side, in exchange for a share of royalties that all DVD player producers pay to the format's creator. Now, no truce seems near, as neither side wants to settle for a small piece of what could be a big electronics success.

So consumers and retailers may be in for a reprise of the confusing VHS-Betamax showdown of the early 1980's, with Toshiba replacing Matsushita as Sony's adversary. But Sony hopes to have a happier resolution this time. Sony lost the battle two decades ago when its highly regarded Betamax technology was defeated by VHS, a more widely accepted alternative.

Once again, the differences between the two technologies are not huge. And a growing chorus of critics, including some studio chiefs eager to sell new products as quickly as possible, call the Blu-ray format unnecessarily elaborate and expensive.

The first HD-DVD machines from Toshiba and the competing Blu-ray players from Sony, Samsung and the other Blu-ray companies will all play movies with crisper pictures, enhanced sound and a bevy of interactive features like pictures within pictures and links to the Internet. The machines will also play older DVD's.

Technophiles got a preview of the HD-DVD technology on Wednesday at an electronics store on the Upper West Side of Manhattan. As Jessica Simpson and Johnny Knoxville cavorted in the movie "The Dukes of Hazzard," prospective buyers were able to see the difference between a plain old DVD and the high-definition kind. But the main feature was the price. Toshiba will sell two players starting in March; one will cost just $499, half the price of the cheapest Blu-ray machines, the first of which will hit the stores this spring. Samsung's first machine will cost $1,000, while Pioneer's Blu-ray player will run $1,800.

Toshiba executives have said that because more high-definition movies will be distributed over the Internet in coming years, they have essentially upgraded existing DVD technology to keep prices down. Blu-ray discs, however, include an architecture that Sir Howard Stringer, Sony's chairman, calls "revolutionary, not evolutionary."

The Blu-ray camp is trying to create a brand-new technology that will accommodate features that are still to be created. In preparation for that future, Blu-ray discs will store 25 gigabytes of data, compared with the 15 gigabytes on comparable Toshiba discs and 4.7 gigabytes on today's DVD's.

The first batch of high-definition DVD's from the studios' vaults will highlight rich graphics, vivid scenery and fast-moving action. The films include "Rambo," science fiction thrillers like "The Matrix" and "Dune" and animated features like "Ice Age." The DVD's are generally expected to cost $19 to $25.

But movies are only one front in the format war. In throwing its weight behind Toshiba, Microsoft has expanded the fight into the computer and game industries. Later this year, Microsoft will start selling an external drive for its Xbox game that will play HD-DVD discs, countering Sony's effort to turn PlayStation into a high-definition DVD player by adding Blu-ray technology. Microsoft and its ally Intel have also convinced Hewlett-Packard to consider making HD-DVD drives for computers. This would give Toshiba an answer to Dell, which remains committed to the Blu-ray format.

"The pendulum is swinging back to the HD-DVD camp," said John Freeman, who runs a technology research firm, Strategic Marketing Decisions, which last year declared Blu-ray the front-runner. "It will be interesting to see if the Blu-ray group can recover. It's only a matter of time before people start backing out of the Blu-ray camp."

Still, even with Microsoft on board, Toshiba may have only closed the gap, not overtaken the Blu-ray group. With Samsung, Panasonic and others siding with Sony, consumers will see more Blu-ray machines in the stores. And Blu-ray has more studios in its camp, which means more choice in movies. Every major studio except Universal plans to release Blu-ray DVD's, while Toshiba has commitments from only Universal, Warner Brothers and Paramount.

But one thing is clear: given Microsoft's growing power and scope in the entertainment realm — thanks to its Xbox machines, its media player software and forays into Internet television — its support of HD-DVD has deepened, and has probably prolonged, the format battle. That means consumers must figure out each format's advantages and risk being stuck with obsolete machines if one camp backs down.

This is giving retailers fits, not only because they have to carry twice as many machines and discs, but also because they have to train their employees to explain the differences between the standards.

"Both sides are digging in their heels and stupidity has prevailed," said Joe McGuire, the chief executive of Tweeter, a high-end electronics chain. Mr. McGuire called the failure of the two camps to agree on a single format "criminal" and said he would have a hard time advising consumers. "The answer to which is better is: 'We don't know,' " he said. "I'm tempted not to sell anyone these machines."

But sell they will, because retailers — and studios — need something new to throw at consumers now that DVD players are in 82 percent of American homes. Sales of DVD players are "pretty dead," said John LaRegina, a senior buyer at P.C. Richards, which has 49 stores in the New York area.

But Mr. LaRegina said format battles confused consumers and gave them an excuse not to buy. The uncertainty over who may win also forces film studios and electronics companies to hedge their bets.

Warner Brothers and Paramount, which were originally committed only to HD-DVD, decided last fall to make movies in both formats.

"It was very, very clear that Sony was not going to back down from Blu-ray, and they are basically betting their company on it," said Kevin Tsujihara, the president of Warner Brothers Home Entertainment Group. But, he added, Toshiba has mounted "something of a comeback" by winning endorsements from Microsoft and Intel.

Some Blu-ray companies are also waiting to see how the market develops before jumping in with machines of their own. If the PlayStation 3 is priced below Toshiba's $500 player, it could double as the poor man's Blu-Ray player and undercut Sony's partners. (It will also cost Sony dearly; Merrill Lynch issued a report on Feb. 17 estimating that the first PlayStation 3 players would cost about $900 to produce. If so, Sony could end up with substantial losses on those machines if they are priced around $299, as analysts expect, to compete with the Xbox 360, which has been out since November.)

"It's too early to move into this market," said Katsuhiko Machida, the president of Sharp, a Blu-ray company that has not released details for its players in the United States. "Blu-Ray won't be a big business until probably 2008," he said, so "we can watch and see what happens."

Those doubts are a far cry from Blu-ray's bravado last summer and fall, when it won endorsements from Fox, Lions Gate, Warner Brothers and Paramount. Those agreements, coupled with the presumed sway of the PlayStation 3, led industry analysts at Forrester and elsewhere to predict that Blu-ray would ultimately win the format war.

But two unexpected and little-noticed decisions by the Blu-ray group last spring managed to alienate Microsoft and ultimately revive Toshiba's sagging fortunes.

First, Sony and the Blu-ray group adopted a Java program for interactive features. Microsoft favored a rival called iHD because, among other things, it would work better with its new Vista operating system. The Blu-ray group's board also approved an encryption technology called BD+, which Mr. Majidimehr, Microsoft's vice president for Windows digital media, deemed superfluous.

THESE decisions led Mr. Majidimehr to take a deeper look at the Blu-ray format and whether it would be more expensive to produce, as Toshiba had long contended. Mr. Majidimehr and his deputy, Jordi Ribas, spent the next few months on the phones and flying to Asia to meet with Sony, Panasonic and the other Blu-ray companies.

"We asked them if they are serious, and they told us they were," Mr. Majidimehr said, referring to the added software. Microsoft also received more data that showed that the Blu-ray group was not meeting its targets for producing discs and optical drives. "We were getting a lot of data saying the HD-DVD format was a walk in the park and Blu-ray was having trouble developing theirs," Mr. Majidimehr said.

Microsoft's announcement last September raised alarm bells at Hewlett-Packard, which was coming to similar conclusions. Hewlett-Packard worried that the software included in the Blu-ray format would cost so much in royalties that H-P would be unable to add affordable DVD drives to its computers.

Blu-ray drives cost up to 75 percent more than HD-DVD drives, according to Maureen Weber, the general manager of the personal storage group at Hewlett-Packard and a former spokeswoman for the Blu-ray coalition. "There's not a lot of elbow room," she said of the thin profit margins on computers. "The economics of HD-DVD make a lot more sense for us. I'm starting to wonder about the manufacturing ability of Blu-ray."

A Blu-ray spokesman, Andy Parsons, says his group's royalties, which have not yet been set, will be far lower than critics expect. He also disputed the idea that Toshiba had any advantage because Microsoft or Hewlett-Packard might promote the use of HD-DVD in computers.

"DVD's are about movies and people watch them in their living rooms," he said. "How many people actually use their computer drives to sit and watch movies?"

He added that the price of Blu-ray machines and discs was bound to fall as volume rose. Besides, he said, Toshiba is missing the point by selling cheaper machines, because the first people who buy new technologies typically care less about cost and more about the technology.

There are other industry analysts who contend that Microsoft is simply propping up Toshiba to further its own aims, like countering the PlayStation and combating the spread of Sun's Java software. Nonetheless, Toshiba is happy for the backing, given that the format was written off for dead just a few months ago.

"There's no doubt that everyone has various agendas," said Mark Knox, an adviser to the Toshiba promotion group. "But whatever their agenda, Microsoft's support has been a huge boon to HD-DVD."

For Sony, a fortified rival spells trouble. Not only does it make it harder for Blu-ray to catch on, but it raises questions about Sony's approach of trying to create new formats when consumers turn out to be content with something less ambitious.

That is the lesson Sony learned the hard way in the 1980's with Betamax, and more recently when Apple outdid the Walkman with the iPod. Now it is Toshiba's and Microsoft's turn to challenge Sony's strategy.

Martin Fackler contributed reporting for this article.