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Saturday, February 16, 2008

Wal-Mart said it would continue to sell its HD DVD inventory over several months

Wal-Mart moves to the Blu-ray camp
The HD DVD format is reeling from another body blow.

The nation's largest retailer, Wal-Mart Stores Inc., said Friday that it would sell movies and players only in the rival Blu-ray format at its 4,000 discount stores and Sam's Clubs.

Wal-Mart said it would continue to sell its HD DVD inventory over several months, then devote more shelf space to Sony Corp.'s Blu-ray. The announcement from the country's biggest seller of DVDs comes amid a growing number of defections from the Toshiba Corp.-backed HD DVD camp.

Earlier this week, online movie rental service Netflix Inc. said it would exclusively stock Blu-ray discs, and electronics retailer Best Buy Co. said it would "prominently showcase" Blu-ray hardware and movies as a way of steering consumers to the format.

"Up to this point, it's been death by a thousand cuts," said Ross Rubin, director of industry analysis for NPD Group, a market research firm in Port Washington, N.Y. "This one may be the unkindest of all."

The HD DVD format has been losing momentum since January, when the last major studio to support both formats, Time Warner Inc.'s Warner Bros. Entertainment, announced it would sell its high-definition movies exclusively on Blu-ray discs. The shift gave the Blu-ray camp about 70% of the home video market, with Warner, Walt Disney Co., 20th Century Fox, Lions Gate Entertainment Corp. and Sony Pictures.

Toshiba has deals with Universal Pictures and Paramount Pictures and DreamWorks Animation SKG Inc. Toshiba could not be reached Friday to comment on Wal-Mart's announcement. In a sign of the high stakes in this format war, the Tokyo-based Toshiba said in a December earnings call that it anticipated losing $370 million on its HD DVD equipment this fiscal year, which ends in March.

Before Warner's defection, Toshiba had been in active discussions with Fox and Warner to secure support for the format. It sought an exclusive content deal with Fox similar to one it reached in August 2007 with Paramount and DreamWorks in which it reportedly offered $50 million to $100 million for Fox to abandon Blu-ray, according to two industry sources. Fox ultimately walked away from the offer.

Toshiba had hoped to use the lure of a potential Fox deal as a sign of its continued turnaround in an effort to retain Warner's continued support for the HD DVD format.

Warner's Jan. 4 announcement that it could no longer support both HD DVD and Blu-ray triggered a major shift in momentum in a format war that has been likened to the epic Betamax-VHS videocassette battle of the 1980s.

Up until January, Blu-ray and HD DVD each accounted for an equal share of dedicated high-definition movie players, according to sales data tracked by NPD. In the week following the Warner announcement, Blu-ray sales skyrocketed -- grabbing 90% of all next-generation hardware purchased, according to NPD.

Toshiba responded with a price cut Jan. 15 on three models of HD DVD players, which helped it regain lost ground. But NPD numbers show that Blu-ray retained the edge, with 63% of sales. In an act that some called a last gasp, Toshiba touted its discounted players in an ad that ran during the Super Bowl, noting that they also worked as high-end DVD players.

This week Toshiba issued a statement saying it was studying recent developments and watching how the market would respond to its recent price cuts.

HD DVD movie sales have declined as well.

At the end of 2007, Blu-ray accounted for 64% of sales. The latest Nielsen VideoScan First Alert sales data show that Blu-ray represented 81% of all high-definition discs sold in the week ended Sunday.

Wal-Mart's decision, which it said came in response to consumer preference, may make Blu-ray's lead insurmountable. Wal-Mart accounts for roughly 40% of all DVDs sold in the U.S.

"It's difficult to see how the format could be viable without access to those movies at Wal-Mart," NPD's Rubin said.

Andrew Parsons, chairman of the Blu-ray Disc Assn.'s U.S. promotions group, said Wal-Mart's news signaled that the format war was all but over.

"People who've been holding back because they've been afraid to buy the wrong format have absolutely no reason to be afraid anymore," Parsons said. "There's absolutely no reason why anyone should be afraid to buy a Blu-ray player at this point."

Nonetheless, Envisioneering Group senior analyst Richard Doherty predicted that Toshiba would continue to support the HD DVD format, which it has also incorporated in products such as its Qosmio laptop computers. However, it may reduce the number of HD DVD players it manufactures to a single model.

"They will never admit this isn't working," Doherty said. "They'll just trim the inventory."

Taps for HD DVD as Wal-Mart Backs Blu-ray
HD DVD, the beloved format of Toshiba and three Hollywood studios, died Friday after a brief illness. The cause of death was determined to be the decision by Wal-Mart to stock only high-definition DVDs and players using the Blu-ray format.
There are no funeral plans, but retailers and industry analysts are already writing the obituary for HD DVD.

The announcement by Wal-Mart Stores, the nation’s largest retailer of DVDs, that it would stop selling the discs and machines in June when supplies are depleted comes after decisions this week by Best Buy, the largest electronics retailer, to promote Blu-ray as its preferred format and Netflix, the DVD-rental service, to stock only Blu-ray movies, phasing out HD DVD by the end of this year.

Last year, Target, one of the top sellers of electronics, discontinued selling HD DVD players in its stores, but continued to sell them online.

“The fat lady has sung,” said Rob Enderle, a technology industry analyst in Silicon Valley. “Wal-Mart is the biggest player in the DVD market. If it says HD DVD is done, you can take that as a fact.”

Toshiba executives did not return calls asking for comment. Analysts do not expect the company to take the product off the market but the format war is over. Toshiba had been fighting for more than two years to establish the dominance of the format it developed over Blu-ray, developed by Sony.

The combined weight of the decisions this week, but particularly the heft of Wal-Mart, signals the end of a format war that has confounded and frustrated consumers and that had grown increasingly costly for the consumer electronics industry — from hardware makers and studios to retailers.

Andy Parsons, a spokesman for the Blu-ray Disc Association, an industry trade group, said retailers and movie studios had incentives to resolve the issue quickly because it was costly for them to devote shelf space and technology to two formats. Besides, he noted, many consumers have sat on the sidelines and not purchased either version because they did not want to invest in a technology that could become obsolete.

Thus far, consumers have purchased about one million Blu-ray players, though there are another three million in the market that are integrated into the PlayStation 3 consoles of Sony, said Richard Doherty, research director of Envisioneering, a technology assessment firm. About one million HD DVD players have been sold.

Evenly matched by Blu-ray through 2007, HD DVD experienced a marked reversal in fortune in early January when Warner Brothers studio, a unit of Time Warner, announced it would manufacture and distribute movies only in Blu-ray. With the Warner decision, the Blu-ray coalition controlled around 75 percent of the high-definition content from the major movie and TV studios. The coalition includes Sharp, Panasonic and Philips as well as Walt Disney and 20th Century Fox studios.

Universal, Paramount and the DreamWorks Animation studios still back HD DVD; none of those studios responded to requests for comment Friday.

“It’s pretty clear that retailers consumers trust the most have concluded that the format war is all but over,” Mr. Parsons said. “Toshiba fought a very good battle, but the industry is ready to move on and go with a single format.”

Because movie and entertainment technology has become integrated into a range of consumer electronics, the high-definition movie format war has created unusually wide-ranging alliances. The battle included, for example, video game companies; Microsoft has backed the HD DVD standard and sold a compatible player to accompany its Xbox 360 video game console.

Sony has pushed vigorously for the Blu-ray standard, not just because it is a patent holder of the technology, but also because it has integrated the standard into PlayStation 3. Sony has argued that consumers will gravitate to the PlayStation 3 because of the high-definition movie player.

Any celebration over the victory may be tempered by concerns that the DVD — of any format — may be doomed by electronic delivery of movies over the Internet. The longer HD DVD battled Blu-ray, the more the consumer market has had an opportunity to gravitate to downloading movies. Such a move, coupled with the growth of technology that makes such downloading easier and cheaper, has threatened to cut into the long-term sales of physical movies in the DVD format.

Mr. Doherty, like Mr. Parsons, argued that digital downloads are not yet affecting the DVD market and that they would not for some time. They said that movie downloads face a host of challenges, chief among them that many consumers have insufficient bandwidth to download movies or move them from device to device on a wireless home network.

Mr. Enderle, however, argued that bandwidth was improving and that major telecommunications carriers, which are pushing to increase speeds, would like to be able to make their pipes the delivery mechanism for high-definition movies. Wal-Mart, Warner Brothers, Best Buy and all the others lining up behind Blu-ray realized they had to kill HD DVD — and fast, he said.

“The later it gets, the much worse it gets,” he said.

By contrast, Mr. Parsons said that downloading movies “is not a viable option now or even in the near future.”

“It’s something that will move very gradually in that direction.”

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