The Last Battle?

Jan. 30, 2006 issue - Headlines from the consumer Electronics Show in Vegas screamed: gloves off in digital war. Electronics makers choose sides in battle. The contest is over the $15 billion DVD industry, with the winner to set the standard for the next generation of high-definition discs and, some say, rule the video world. One side, led by Toshiba, is pushing its HD DVD format as a low-cost means to "stretch" the digital capacity of current discs. The other, led by Sony, is touting Blu-Ray, a more radical (and costly) departure that CEO Sir Howard Stringer hails as a "revolutionary" new viewing experience.

No question, stakes are high. All the big players have been taking sides, with Intel and Microsoft behind Toshiba, and most major film studios behind Sony. Virtually every discussion of this battle compares it to the landmark format war in the 1970s. Panasonic's VHS format prevailed, leaving Sony's superior Betamax machines to gather dust. VHS vs. Betamax became a classic B-school case study on the risks of big bets on new technology. But much has changed.

In the '70s, cassettes were the only near-term option for watching video. Now even Toshiba vice president Yoshihide Fujii, a defender of HD DVD, says that "15 years from now DVD will no longer exist." Instead, he says, we'll watch video on gadgets that store video directly from the Internet using flash memory, hard-disk drives (or HDD—think of the brain in your PC, possibly shrunk for handheld gadgets) or even optical holograms.

The explosion of delivery channels has Bill Gates, among others, declaring that the fight between Blu-Ray and HD DVD is "the last of the format wars." Key players are starting to hedge bets; in recent months Blu-Ray backers like Samsung and HP have indicated they will support HD DVD, too. Many analysts expect DVDs to be pushed to the margin, in particular by HDD, which drives the new video iPod. "Within a couple of years," says Goldman Sachs analyst Ikuo Matsuhashi, "people might not even remember what this DVD format competition was about." He contends that victory is not even critically important to earning prospects for the companies involved.

Still, even a fleeting battle is exciting. Toshiba announced in Vegas that it would ship the first HD DVD players this March, priced at $499. The Blu-Ray forces concede they can't respond till summer at the earliest, at prices likely to start at about $1,800. Sony hopes to make up for its rival's head start by rolling out Blu-Ray in the hotly anticipated PlayStation 3, due out later this year. But don't imagine that the impact of this war will be as critical as the last.

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