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.