DVD Divide Deepens

Hollywood studios are becoming deeply divided over which high-definition technology will replace the DVD, increasing prospects that it will be years before next-generation players become standard equipment in households.

Paramount Pictures and DreamWorks Animation signed exclusivity deals to distribute their next-generation discs on Toshiba's HD DVD format for the next 18 months, a move that evened a contest in which Sony's Blu-ray Disc appeared to be pulling ahead.

Paramount expected the lower-price HD DVD players, which start at $299 compared with $499 for Blu-ray, to tempt consumers more this holiday season, when summer box office blockbusters are released on high-definition DVD.

"We are in a very nascent stage in the world of high-definition packaged media," said Kelley Avery, president of Paramount Home Entertainment. "Our approach is taking a look at what will motivate the consumer."

But Walt Disney, a Blu-ray supporter, has sent a traveling road show to the top eight U.S. shopping malls to promote Blu-ray players to those looking to upgrade.

"Our goal with the Disney Magical Blu-ray Tour is to reach as many people as possible and help educate consumers across all demographics," said Bob Chapek, president of Walt Disney Studios Home Entertainment.

Pali Capital analyst Rich Greenfield said Paramount's defection from Blu-ray "alter(s) the landscape meaningfully, as Paramount is the leading theatrical distributor."

Eight of the 15 top-grossing films of the year, including Shrek the Third, Transformers and Harry Potter and the Order of the Phoenix, were released by studios that distribute exclusively on HD DVD or on both formats.

Tom Adams, president of Adams Media Research, said the 18-month period of exclusivity for HD DVDs at the two studios comes during slow but growing sales for the new technology and will have little impact on consumers.

"It was going to be a more sedate transition in our view, anyway," Adams said. "That's one reason that a period of exclusivity didn't sound too terrifying to the studios."

The 1.66 billion standard DVD and VHS units sold so far this year dwarf the 3.9 million next-generation discs sold since the format was launched last year.

Preliminary estimates compiled by Adams Media Research show that about 1.5 million U.S. households can play Blu-ray discs on Sony PlayStations 3 video game machines or dedicated players, versus about 300,000 households whose Microsoft Xboxes or dedicated players are HD DVD-compatible.

Sony has dominated high-definition software sales as well, selling twice as many discs as HD DVD in the United States.

The two formats are nearly at parity in the number of titles each has released--about 200, according to Digital Entertainment Group data.

Despite Sony's early edge, Adams and others warn that it is simply too early to tell which format will prevail.

Adams expects HD DVD to be ahead in 2008, in terms of dedicated players, capturing about 1.1 million U.S. households, compared with 900,000 households with dedicated Blu-ray players.

PriceWaterhouseCoopers also expects to wait several years for a winner to emerge and give large numbers of U.S. consumers confidence to buy.

"Relatively few standalone (high-definition) players have been purchased, which suggests that the presence of two incompatible...standards could be inhibiting the market," PwC said in its Global Entertainment and Media Outlook: 2007-2011 report.

In the long wait for a winner, studios that chose one format could find that they're leaving money on the table, Adams said.

"The more positive development for the industry...would have been having the Blu-ray-exclusive studios start releasing on HD DVD," Adams said. "We think...there's some inevitability that they will have to release in both formats."