The Format Wars

I. The Phantom Menace for Consumers

High Definition Television (HDTV) was first demonstrated to the public in 1969 and
made commercially available in the mid-1990s.[1] However, upon being made commercially
available, HDTV created a problem for consumers who wished to record
and watch movies. In 1998, more than 90% of households in the United
States had a videocassette recorder (VCR).[2] At the time, most of those VCRs recorded in an analog format, rather than in a digital format.[3] Analog media formats have lower image and sound qualities than digital media formats.[4]
While consumers would be able to watch
videocassettes on their HDTVs, they would not be utilizing the high
definition technology to its fullest. A digital media format needed to
come into the marketplace that could cheaply and effectively record and
play high definition programming. However, instead of one format
establishing itself, two formats have fought to become the next
established standard.  This article will examine how these formats have
developed and progressed, the legal problems that have arisen out of
the conflict between these two formats, and what this conflict might
mean for consumers.

II. Attack of the Clones: HD DVD and Blu-ray

The first media format to come to the forefront
was Blu-ray. Announced in 1999, Sony and Philips introduced DVR-blue,
which boasted large data capacity and high data read/write
rates, thereby satisfying the requirements for a format that could
effectively record and play back high definition programs.[5] The system got the name from its use of a blue laser, which operated on
a shorter wavelength than red lasers used for digital video discs
(DVDs), allowing for these features.[6] In February 2002, DVR-blue was re-christened Blu-ray, with nine of the
world’s largest electronics companies throwing their support behind the
new format.[7]

Notably absent from these companies was Toshiba.[8]
The reason for their absence was that they were also working on their
own high definition format at the time. Toshiba and NEC unveiled this
new format in August 2002.[9] Both companies claimed this new format would have a larger storage
capacity than Blu-ray and would also benefit disc manufacturers since
they could simply modify existing equipment to make the new format,
rather than replace the equipment altogether.[10] Like the Blu-ray, it would utilize blue lasers to facilitate increased
storage capacity as well as effectively reading and writing high
definition programming.[11]

Supporters of these two technologies began to
make their cases to the DVD Forum, which was an industry group that was
responsible for choosing which format would become the next official
DVD format.[12] Competition was incredibly heated among both sides. Eventually, the DVD
Forum settled on the Toshiba and NEC HD DVD model over the Blu-ray
model.[13] Shortly thereafter, in 2004, the US Department of Justice launched a
preliminary inquiry to investigate claims that the Blu-ray Disc
Founders, a group consisting of electronics vendors such as Sony and
Philips, had attempted to impede progress of the DVD Forum and
development of the HD DVD.[14] The next two years saw negotiations and compromises between the two
sides to unify the DVD standard and settle on a single format, but in
the end, those negotiations fell apart.[15]

III. Revenge of the Video Game Nerds

The two companies moved their rivalry from the
negotiating table out to the
marketplace shortly after these negotiations fell apart. Needless to
say, this rivalry has become
incredibly heated. Moreover, unlike previous format wars, such as the
conflict between Betamax and VHS, this particular format war is not
just relegated to the recording and playing of
movies. Video games play just as prominent of a role in this conflict.

Sony, one of the primary proponents of Blu-ray,
unveiled details about its
Playstation 3 (PS3) in 2006, revealing that the PS3 would utilize the
Blu-ray technology to act both as a video game console as well as a
Blu-ray movie player.[16] At the time of its unveiling, analysts noted the gamble Sony was
taking, as the PS3 would be priced considerably lower than standalone
Blu-ray players, but would cost more than competing video game systems,
such as Microsoft’s Xbox 360.[17]

Sony’s PS3 is competing in the video game console
market against both the Xbox 360 and the Nintendo Wii, neither of which
utilize the HD DVD format. Since its introduction a little over a year
ago, sales of the PS3 have fluctuated wildly. Between January and April
of 2007, the PS3 sold approximately 583,000 units, compared to 850,000
Xbox 360 units and 1,390,000 units of the Wii.[18] However, ever since Sony announced price cuts to its original PS3 model and introduced a new PS3 model with 40 gigabytes more
memory than the original model,[19]
Sony claimed its U.S. sales of the PS3 more than doubled.[20] While the PS3 has a long way to go before it catches up with the other
two systems in terms of overall sales figures, Blu-ray supporters can
breathe a temporary sigh of relief that Blu-ray’s main platform appears
to be making a recovery from its disastrous start.

IV. Exclusivity: A New Hope

This rivalry has become incredibly heated ever
since both formats announced their
respective formats. First and foremost, both sides have taken
incredible measures to secure the support of various movie studios,
technology companies, and retailers. One of the most important tools in
the legal arsenal of these two sides is the ability to get sides to
exclusively commit to
their side of the fray.

Many movie and technology companies have gone in
different directions thus far. In August 2007, Paramount and DreamWorks
Animation pledged their exclusive worldwide support of the HD DVD
format.[21] Along with a number of other movie studios, technology giants Microsoft and Intel both back the HD DVD,[22]
with
rumors continuing to swirl about whether or not Microsoft will
integrate HD DVD drives into forthcoming models of the Xbox 360.[23] On the other side of the fence, supporters of Blu-ray include movie
studios such as Disney and Twentieth Century Fox, along with notable
technology companies Dell and Apple.[24] Currently, supporters of both formats are attempting to sway movie studio giant Warner into an exclusive contract.[25]

Retailers have also felt the effects of this
conflict. Most notably, Kmart and Target have both been in the news
because of their dealings with both sides. In July 2007, news came out
that Target would no longer sell HD DVDs and would instead only sell
Blu-rays.[26] Shortly after the news broke, Target issued a clarification, stating that Sony had merely purchased an end cap with Target
retailers, featuring Blu-ray titles at the end of aisles, rather than reached an exclusivity agreement.[27]
At the end of October 2007, a report circulated that Kmart would not be
selling Blu-ray players this holiday season due to the high prices of
the players and would instead sell HD DVDs exclusively.[28] However, a few days later, Kmart claimed the reports were erroneous, stating they would still sell Blu-ray players.[29] At the time this article was written, Kmart’s website sells a Toshiba standalone HD DVD player and an HD DVD player for the
Xbox 360. However, while the website sells PS3s, no standalone Blu-ray players are offered.

V. The European Commission Strikes Back

Both sides attempting to garner exclusive support
from movie studios has not gone
unnoticed over in Europe. Fresh off their victory over Microsoft, the
European Commission launched an investigation into numerous movie and
technology companies, including Sony and Toshiba, over
whether they were acting anti-competitively in locking up other
companies into these exclusive contracts.[30]
Requesting records and data regarding the decisions these companies
have made regarding these companies’ dealings regarding these two
formats along with questionnaires regarding actions these companies
have taken.[31] Given the enormous amount of data and records likely to be handed over,
it may be awhile before investigators come to any conclusion, although
the potential fines that might be handed out could put a major dent in
the pocketbooks of movie studios and technology companies.[32]

VI. Return of the Outdated Format to the Local Retailer

The European Commission investigation highlights
a serious problem looming for
consumers as well as for manufacturers of these high definition formats
in this format war. While consumers may benefit from both sides
attempting to gain favor by cutting their prices, these exclusive
contracts could create some really difficult situations for consumers.
Because of these exclusivity contracts, consumers who wish to watch
their favorite movies may have to spend hundreds of dollars to buy
players for both formats. While the current situation may be a
stalemate between both sides, according to Sony Corp.’s head,[33] one format is bound to win out in the end. After spending hundreds of
dollars on both sides, numerous consumers will eventually have one
player that plays the established high definition format with new
movies released on it and another player that will have no new
releases. Considering computer manufacturers have hitched their wagons
to either side, plenty of consumers who bought new computers with an
optical drive exclusive to the losing format will find they will be
unable to install and utilize new software.

Moreover, exclusive contracts are an enormous
gamble for those who utilize the high definition formats. While Sony,
Toshiba, and other companies have already sunk countless amounts of
money into researching, developing, manufacturing, and marketing their
products, movie studios and technology companies who put their products
on those formats take an enormous risk by signing an exclusive
contract. Assuming a movie studio sides with the losing format, that
studio will now have to go back to the format it originally spurned.
That movie studio will have to re-release all of its movies onto that
format. The studio will also have to break off or renegotiate a number
of contracts with the companies responsible for putting their movies
onto the high definition format. While the movie company may benefit if
its gamble pays off, the long term costs could really hurt the
companies. This will not reward movie companies who put out superior
products. It will only reward movie companies who either have an
incredible grasp on the market for high definition formats or who make
lucky guesses.

Finally, exclusivity is not good from a
technological standpoint. In short, exclusivity will not reward the
company which has the superior product, but will instead reward the
company which is better at negotiating these contracts with movie
studios and other companies. If one side locked up most of
the major movie studios, it would be the death knell for the other
format, no matter how advanced it is and how effectively it utilizes
HDTV technology. Depending on the length and breadth of these
contracts, they could be remarkable barriers to entry for any
technology companies who wish to introduce their own high definition
format.

In short, these exclusive practices are
anti-competitive and could seriously harm
consumers. Granted, these agreements might be beneficial to the
businesses who enter into these agreements due to the amount of money
they receive in exchange and also if the businesses side
with the winning format. However, the potential long-term ramifications
could seriously harm consumers, other businesses, and even the
businesses entering into these contracts. The wisest choice any
consumer can do at this point is wait until a clear winner comes
forward. Anyone wishing to enter the fray should do
their research and be prepared to pay the price if they choose poorly.


[1] Martyn Williams, Researchers Craft HDTV’s Successor, PC
WORLD, May 28, 2007, http://www.pcworld.com/article/id,132289-c,hdtv/article.html.

[2] Evan Ramstad, In HDTV Age, Successor To VCR Is a Long Way
Off
, WALL ST. J., Apr. 8, 1998, at B1.

[3] Id.

[4] Id.

[5] S.B. Luitjens, Blue Laser Bolsters DTV
Storage, Features
, Planet Analog, June 15, 2001, http://www.planetanalog.com/features/OEG20010615S0046.

[6] Id.

[7] The other companies beyond Sony and Philips to support Blu-ray were Hitachi,
LG, Matsushita, Pioneer, Samsung, Sharp, and Thomson. Barry Fox, Replacement for DVD Unveiled, NEW SCIENTIST, Feb. 19, 2002, http://www.newscientist.com/article/dn1952.html.

[8] Id.

[9] Martyn Williams, Toshiba, NEC Share Details
of Blue-Laser Storage
, PC WORLD, Aug. 29, 2002, http://www.pcworld.com/article/id,104570-page,1/article.html.

[10] Id.

[11] Id.

[12] Greg Tarr, Toshiba, NEC Rally Support for
HD-DVD
, This Week in Consumer Electronics, Nov. 24, 2003, http://www.twice.com/article/CA337851.html.

[13] DVD Forum Backs Toshiba-NEC Format,
The Inquirer, Nov. 28, 2003, http://www.theinquirer.net/en/inquirer/news/2003/11/28/dvd-forum-backs-toshiba-nec-format.

[14] The DoJ took no further action. Andy
Patrizio, Blu-ray Group Investigated by
DoJ
, IGN, Jan 26, 2004, http://dvd.ign.com/articles/475/475534p1.html.

[15] Nozomi Toyama, Sony, Toshiba Fail to
Unify DVD Format – Report
, Forbes.com, Aug. 22, 2005, http://www.forbes.com/home/feeds/afx/2005/08/22/afx2188394.html.

[16] Michael Kanellos, Blu-ray a Player in
Playstation Pricing
, CNET News, May 9, 2006, http://www.news.com/Blu-ray-a-player-in-PlayStation-pricing/2100-1043_3-6070342.html.

[17] Id.

[18] Patrick Klepek, NPD Fallout: Sony Blames
April on Lack of Software
, 1up.com, May 18, 2007, http://www.1up.com/do/newsStory?cId=3159628.

[19] Sony Computer Entertainment America Announces New 40 GB Playstation(R) 3
(PS3(TM)) Configuration and Price Reduction of Current 80 GB Model, PR
NEWSWIRE, Oct. 18, 2007, http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=109&STORY=/www/story/10-18-2007/0004684726&EDATE=.

[20] PS3’s U.S. Sales Double after Price Cut, Reuters, Nov. 16, 2007, http://www.reuters.com/article/technologyNews/idUST8890020071116?feedType=RSS&feedName=technologyNews.

[21] David Carnoy, Paramount and Dreamworks
Give HD DVD a Boost
, Crave, Aug. 20, 2007, http://crave.cnet.com/8301-1_105-9762530-1.html.

[22] Michael Kanellos, HD DVD Backers Promise
200 Movies
, CNET News, Jan 5, 2006, http://www.news.com/HD-DVD-backers-promise-200-movies/2100-1026_3-6019023.html.

[23] Jimmy Hsu, Microsoft to Offer Xbox with
Built-in HD DVD Drive, Say Makers
, DigiTimes, Sept. 13, 2006, http://www.digitimes.com/systems/a20060913A6035.html?www.reghardware.co.uk.

[24] The Blu-Ray Disc Association has a full list of its board of directors, contributors,
and members available at: http://www.blu-raydisc.com/general_information/Section-14009/Index.html.

[25] David Carnoy, Toshiba Romancing Warner to
Date HD DVD Exclusively?
, Crave, Sept. 10, 2007, http://crave.cnet.com/8301-1_105-9774927-1.html.

[26] David Carnoy, Target Jumps on the Blu-ray
Bandwagon
, Crave, Jul. 26, 2007, http://crave.cnet.com/8301-1_105-9774927-1.html.

[27] Id.

[28] Nate Mook, Kmart Dumps Blu-ray Due to
Price
, BetaNews, Oct. 31, 2007, http://www.betanews.com/article/Kmart_Dumps_Bluray_Due_to_Price/1193854397.

[29] Erica Ogg, Kmart Says It Still Supports
Blu-ray
, CNET News, Nov. 2, 2007, http://www.news.com/8301-10784_3-9810157-7.html?tag=nefd.only.

[30] James Kanter and Ken Belson, European
Panel Investigates DVD-Standards Rivalry
, N.Y. TIMES, Aug. 8, 2007, §C, at 3.

[31] Id.

[32] Id.

[33] Sony Sees Blu-ray Stalemate with HD DVD,
CBC News, Nov. 9, 2007, http://www.cbc.ca/technology/story/2007/11/09/tech-sony.html.

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