How Blu-ray Lost, Then Won, And May Lose Again

Throughout 2006, Blu-ray continued to struggle as Sony focused on the launch of its new video game console, the PlayStation 3, which included a Blu-ray drive. The electronics giant hoped for a repeat of its PlayStation 2 success in making DVD discs ubiquitous. This eggs-in-one basket approach resulted in further product delay for standalone Blu-ray players And when the $500 and $600 versions of the PS3 launched during the holiday season, Microsoft countered with a $199 HD-DVD accessory for its Xbox 360 console. While Microsoft had the lower pricetag, the triple-digit price tag on the accessory did not elevate it beyond a luxury for the niche of videophiles. Though it was considered the best format at the time, only a few hundred thousand of the add-on would ever sell.

During 2006's holiday season, HD-DVD discs reigned, outselling Blu-ray discs. But in early 2007, after the shortage of PS3s and a drop in price for standalone players, Blu-ray films began selling 2:1. In an attempt to even the scale, the HD-DVD camp responded with a deal offering five free films to consumers who bought players. Around this time, LG and Samsung announced support for both formats, while Time Warner offered to release discs that would be compatible with either player. "I think the PlayStation 3 played en enormously important role. I honestly don't know if we could've won the format war without it," Parsons stated.

The Blu-ray lead convinced movie rental powerhouse Blockbuster to turn exclusively to Blu-ray. Superstore Target followed, announcing that the only high-definition players it would sell were Sony's Blu-ray players. When major consumer-serving outlets started turning to Blu-ray, the HD-DVD camp reacted frantically. The New York Times reported that Paramount and Dreamworks, which had initially released films in both formats, were paid $150 million to go exclusively HD-DVD. But it didn't matter as Blu-ray movies continued to outsell HD-DVD roughly two-to-one the rest of the year. And during the holiday season of 2007, the millions of PS3s sold continued to push Blu-ray films above its competition. Still, neither hi-def format reached the holiday sales numbers of DVD. Then the other shoe dropped. In the first week of the new year, entertainment titan Time Warner also turned Blu-ray exclusive.

At the Consumer Electronics Show in Las Vegas, the conclusion of the format war started to take shape. "I was at CES. There was a pall. You could feel the complete change in direction from what was parity between the two [formats], to a start of a landslide toward Blu-ray," Steve Swasey, director of corporate communications for Netflix said. Many websites and blogs declared that the format war was over and that Blu-ray was the victor. An event sponsored by the HD-DVD group was cancelled, further confirming the defeatist atmosphere.

Warner's defection was the last in a series of complicated back-room dealings. According to Gizmodo, Warner was set to go HD-DVD exclusive, but didn't want to be the only studio doing so. Toshiba had to get another studio on board as well. Toshibas was in talks with Fox when Sony paid Fox $120 million to join Blu-ray instead. Toshiba went back to Warner and offered $100 million to go exclusively HD-DVD, but as Gizmodo's Chen reported, the company instead took $400 million from Sony and jumped to Blu-ray. "Money was exchanged at the last minute, which explains why the HD-DVD press event was cancelled at the last minute," says Chen.

Not long after, Netflix, which had been supporting both formats, announced its move to Blu-ray exclusivity. "The trend line was going that way. We were convinced that soon HD-DVD would no longer be relevant or even in existence," Swasey said. The same day, Best Buy announced that it would promote Blu-ray over HD-DVD. And a few days later, Wal-Mart added it's voice to the chorus. HD-DVD was dead. In February, at a press conference in Japan, Toshiba broke its silence and announced that it would no longer market or manufacture HD-DVD players. With the official announcement, Universal announced plans to publish only Blu-ray titles, and Paramount followed. Soon after, Microsoft discontinued its Xbox 360 add-on.

"A lot of money was thrown around which prolonged the battle between the two formats," says Van Baker, Research VP at Garter. Toshiba announced that its loss was well over $600 million dollars.

Yet, the war accomplished what all-good competition does -- innovation. The lower price of HD-DVD players pushed Blu-ray makers to lower their costs. As for the interactive features that only HD-DVD had -- Blu-ray discs now offer them too.

"This is how innovation works. You have different approaches that are brought to market sometimes, and they don't ultimately agree with each other. The alternative is one company comes up with a proposal, and does everybody just get in line behind them? That is not necessarily the way to get the best technology out," Parsons said.