A DVD Standoff in Hollywood
By KEN BELSON The New York Times July 11, 2005
LOS ANGELES - The Hollywood studio executives who gathered here late last month at an annual home entertainment conference in Century City were all chuckles and backslaps. In front of several hundred industry managers, analysts and reporters, they talked breezily about hit movies, DVD sales and prospects for the holiday season.
Then, with a few minutes left in the session, the moderator asked the question everyone was waiting for: Can the studios break the deadlock between the rival camps developing the next generation of digital video discs, players and recorders?
The question was not academic. Hollywood has not been able to unite around one of the two new formats, called Blu-ray and HD DVD. As a result, tens of billions of dollars in potential sales hang in the balance.
Before anyone could answer, Thomas Lesinski, president of home entertainment at Paramount Pictures, jumped in and said it would not benefit the studios to discuss the issue in public while behind-the-scenes negotiations were going on.
Stunned by the curt response, the audience offered nervous laughter and the other executives fell silent.
Mr. Lesinski's testy reaction was a sign of how touchy the debate over the competing formats has become. To everyone's regret, the studios are split over which group to support. Sony's studio and Disney, with 39 percent of the DVD market, back the Blu-ray group that includes Sony, Panasonic, Hewlett-Packard and others. Warner, Universal and Paramount, with 43 percent of the market, support the HD-DVD standard developed by Toshiba and NEC.
Fox, MGM, Lions Gate and others, which control the remaining 18 percent of the market, have yet to declare their allegiance definitively.
Yet the result is the same: Hollywood has been unable to throw its weight behind one format, and because the rival discs are largely incompatible, the studios have been unable to persuade the manufacturers to reach a compromise or to get one side to withdraw.
Compounding matters, many Hollywood executives have staked their reputations - both corporate and personal - on one technology or the other, making it politically difficult for them to switch sides.
Yet the studios, retailers and makers of electronics, computers and video games are still gearing up for a format war over the new technology, which promises high-definition video, enhanced audio and a slew of interactive features.
Starting this Christmas, consumers will start seeing high-definition DVD players and movies in stores. But because there is no foreseeable end to the format fight, shoppers are expected to shy away from buying the machines and discs. After all, the equipment could quickly become obsolete, just as the Sony Betamax home machines faded in the 1980's after losing out to VHS.
With no great pleasure, Mr. Lesinski said in an interview that if both sides release competing discs and machines, the companies involved will probably generate half the revenue they would with only one format. Other industry analysts are even more pessimistic.
"Both sides have so much vested in their technology that no one wants to blink, given the potential upside," said Mr. Lesinski, whose studio, Paramount, is a division of Viacom. Paramount, along with Warner Home Video and Universal Studios Home Video, will release 89 movies this year in the HD-DVD format.
The three studios have backed the HD-DVD format because the technology is essentially an upgrade of existing DVD technology, so it requires less investment and time to produce. Toshiba says it can make the discs now for a few pennies more than the current generation of discs.
Yet, as Blu-ray advocates love to point out, their discs hold more data, and thus can offer better-quality video. The technology also gives the studios and game makers room to develop new, interactive features. These extra goodies, they say, will make Blu-ray more attractive to consumers, who will have to pay about $1,000 for the first machines.
"The way to do it is to have discs chock full of benefits," said Bob Chapek, the president of the home entertainment division of Buena Vista, a unit of Disney. "Some of these things chew up a lot of capacity."
But to get all that, the Blu-ray group companies are creating entirely new production techniques that require a lot more money and time. Though Sony, Panasonic and others now sell Blu-ray recorders and rewriteable discs in Japan, they are still testing the read-only discs that the Hollywood studios need.
Indeed, 20 miles south of Hollywood, in Torrance, Calif., Panasonic, a division of Matsu****a, has built a pilot production line to show that Blu-ray read-only discs can be made cheaply and quickly. To do this, Panasonic is developing a new way of coating discs with their all-important protective layer.
The test line in a clean room at the factory now spits out a disc every 4.5 seconds, and Shinya Abe, who runs Panasonic's replication task force for producing read-only Blu-ray discs, said he expected that rate to fall to one every 3.5 seconds. "We want to show Hollywood we can make read-only discs," he said.
Yet Mr. Abe and other Panasonic executives sidestepped questions about how many of the discs were usable for commercial purposes, saying it was up to the mass-market manufacturers to determine.
The issues of cost and time to market would matter less if sales of the current generation of DVD equipment were booming. But there are plenty of signs that they are not.
The studios know that the percentage of American homes with a DVD player is nearing 80 percent, or the saturation point, and that the latest converts typically buy fewer discs.
Indeed, while sales of discs are expected to rise 13 percent this year in the United States, the salad days of 20 to 30 percent annual growth are a memory. Most movie libraries are now out on DVD, and stores like Wal-Mart are slashing disc prices, which means less profit for studios.
To jump-start growth, the studios are turning to their television archives for new material. But those sales are expected to slow, too.
This is particularly bad news for studios, which rely more and more heavily on DVD sales as the video rental business shrinks and income from theaters flattens. For example, Americans spent $9.1 billion on feature movies on DVD last year, 47.9 percent of the money studios made from those films. That's up from 28.7 percent in 1996, when videotapes still dominated.
The power of DVD sales was also apparent earlier this month, when shares of Pixar Animation Studios Inc. tumbled after the company said it expected fewer DVD sales of its film "The Incredibles."
Hollywood studio chiefs who are responsible for making five-year plans see the writing on the wall for the current generation of DVD's, and know they need something new to sell consumers. Most Hollywood executives who attended the conference here remained optimistic that ultimately they could reach a consensus and use their collective weight to persuade hardware makers to devise a hybrid solution.
"We're at the worst part of the storm now," said Mike Dunn, president of 20th Century Fox Home Entertainment. But "this will get worked out in the back room."