NEW YORK (CNN/Money) -
Wondering what all the hullabaloo's about in the battle over next generation DVDs?
Here's what consumers need to know: one of the two formats under development, called HD DVD and due out later this year, is compatible with existing DVD players. That means all those ultimate editions of Arnold Schwarzenegger as the pre-gubernator-Terminator will play on the new HD DVD players.
The other DVD format, called Blu-ray, is a different technology that can store more movies and data than its rival, but only recently did its leading developers, among them Sony, announce that Blu-ray machines will also play old DVDs.
The big question now is whether the new DVDs will play on both of the rival format machines. Much to Hollywood's dismay, consumers might have to choose between the two formats.
"We have a classic market-dividing format war just like we had with VHS and Betamax," said Forrester Research vice president Ted Schadler, referring to the old struggle between the first mass-market videocassettes, ultimately won by VHS, but at a price.
Then -- as now -- a hugely lucrative business is at stake. In just a few years DVD sales have become a bigger moneymaker than the box office. Studios pocket up to 80 cents of each dollar from DVD sales, compared to about 50 cents of each box office dollar. Industry data on market size vary, but estimates for DVD sales and rental revenue top out at $26 billion.
The longer the battle wages over the two competing technologies, however, the more Hollywood executives and some analysts fret that the DVD cash cow is about to take a major hit.
The Betamax-VHS rivalry "slowed the market adoption and left a lot of consumers really grumpy," said Schadler. "The same thing will happen here, especially since consumers were burned once. They know if they make the wrong choice they'll be stuck holding the bag" if one format becomes obsolete.
Hollywood takes sides
Something else consumers should know: regardless of which format prevails, they're going to pay more for DVDs.
Peter Chernin, president of News Corp. (Research) and its Fox Entertainment unit, estimated recently that high-definition DVDs will sell for about $20 to $25 apiece, compared to around $15 for today's DVDs.
"I think you'll see high-def DVDs come out a higher price point," Chernin said recently at a Citigroup Smith Barney media conference. "I think we have an opportunity to win back a couple of bucks of (improved profit) margin on high-def DVDs."
But in the hunt for meatier profits, Hollywood finds itself caught in fierce fight between equipment makers over which high-definition standard is better. Both technologies are meant to capitalize on growing demand for high-definition television, or HDTV, as well as data storage.
In recent months, Walt Disney President Robert Iger and other Hollywood titans have said they would like to see a single format emerge. But like all new technologies that affect more than one industry, the tug-of-war over new DVDs is fraught with competing interests and strange bedfellows.
For now, Hollywood's allegiances are split. Disney and major video game makers like Electronic Arts and Vivendi/Universal Games say they favor Blu-ray, which equipment makers led by Sony have spent years -- and about $1 billion -- developing.
Toshiba and other HD DVD developers have won the backing of more movie studios in recent months, with Warner Bros., Universal and Paramount all publicly embracing the technology.
Other studios so far have been noncommittal. "We are trying to play both of them off against each other," said Fox's Chernin. Calling today's DVD "one of the leakiest copyright protections known to man," Chernin said the company is leaning toward Blu-ray but will ultimately pick whichever format is more secure.
Both technologies claim to have strong piracy safeguards. Their primary differences are in price and storage capacity.
Memory versus cost
The beauty of Blu-ray is its massive memory, which makes it incredibly expensive but is the main reason the video game industry has embraced it, according to Aditya Kishore at Yankee Group and other industry analysts. HD DVD, on the other hand, is far cheaper and simpler to introduce, given its compatibility with existing DVD players.
Quality-wise, analysts are split on which format is superior.
"HD DVD is just an extremely elegant extension of today's existing technology," said Gerry Kaufhold at In-Stat/MDR, a technology industry research firm, "and it arguably can sell a lot of (discs) over the next three or four years. But looking to 2009 and beyond, Blu-ray is really the technology that gets you the higher storage that you need."
For now, a format war appears inevitable.
"It's starting to look as though both camps have sufficient backing to stick around for awhile," said Yankee Group's Kishore. Working in everyone's favor, however, is the relatively slow adoption of high-definition television. Yankee Group estimates that 15 percent of American households now own one, with Forrester estimating 10 percent at most. Both market research firms expect sales to grow, with Yankee group estimating that 60 percent of U.S. households will own an HDTV by 2009.
And without an HDTV, there's no need for a high-definition DVD player. Which means there appears to be time to avoid Betamax-VHS redux. One option, albeit an expensive one, is to design DVD players with dual compatibility.
Another possible fix: consumers stick with their existing DVD players -- and keep all those Schwarzenegger titles intact -- for now.