The Betamax of DNA sequencing?

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NEW YORK (Fortune) -- The world of technology is filled with epic face-offs: Betamax vs. VHS, Netscape vs. Microsoft's Windows Explorer, Blu-ray vs. HD-DVD.

To that list, add the brewing battle between microarrays and next-generation DNA sequencing.

Okay, so a forthcoming duel in the biotech world may not be as captivating as some of those other tech conflicts. (It certainly doesn't roll off the tongue, either.) But this scientific showdown is very much front and center in the research community, and in some ways, far more important than a debate over movie players.

Today, researchers use microarrays to study how our genes work and to learn more about how diseases like cancer develop. Microarrays are relatively easy-to-use microchips that contain thousands of spots of genetic sequences.

The technology could someday provide scientists with a powerful tool to uncover strategies to treat genetic diseases. And thanks to improved manufacturing processes, microarrays are relatively affordable and often less than $100 per sample.

Here's how they work: Say you want to know if you have a certain cancer-causing gene variant in your DNA. First scientists would load a microarray with thousands of known cancer gene sequences. Then they would check if your DNA sample hybridizes (or sticks) to one or more spots on the microarray. If it does, you likely possess that cancerous gene variant.

Microarrays can also give researchers an idea of how much of a given gene is in your DNA sample.

Santa Clara, Calif.-based Affymetrix (AFFX) is a leading maker of microarrays and was the first company to commercialize the technology. Other makers of microarray technology include Illumina (ILMN), Roche and Agilent (A, Fortune 500).

Now a new technology called next-generation sequencing is threatening to encroach on microarray territory. Sequencing technology is used to determine the exact order of nucleotides in a DNA sample. Nucleotides are the building blocks of DNA and include adenine, guanine, cytosine, and thymine.

Most research labs have not been able to afford the high-priced equipment and labor-intensive processes necessary for conventional sequencing techniques, so instead, many have opted to use microarrays. But companies working on the next-generation technology are trying to bring down costs and promise that later platforms will one day marry the affordability of microarrays with the advantages of traditional sequencing.

What can sequencing offer that microarrays can't? Although microarray technology can offer some assessment of how often a gene is expressed in a particular sample, sequencing tells scientists how often a DNA sequence actually appears in that sample, be it once, ten times, or a thousand times.

Sequencing also allows researchers to review an entire genome (all of your DNA) to find interesting sequence variants they did not know existed - unlike microarray experiments, in which researchers can only study genes loaded onto the microarray. In other words, they have to know what they are looking for.

"If you are looking for genes or polymorphisms that you don't know about yet, or anything that is yet unknown, you will find it effectively by sequencing but you won't find it by arrays. That is just an inherent limitation of microarray technology," says Chad Nusbaum, the co-director of the Genome Sequencing and Analysis Program at the Broad Institute of Harvard and MIT.

Sequencing gives a much more precise measurement of gene activity. That means that once costs come down, next-generation sequencing could help doctors determine which treatments more precisely match an individuals' DNA makeup.

Researchers are also excited by the vast amount of data sequencing produces. Clear-cut data could help them identify all of the gene variants that contribute to illnesses like cancer. This would give scientists unprecedented insight into the biology of certain diseases, which could also be the basis for developing better drug therapies.

But most researchers won't be able to get their hands on sequencing platforms until costs come down. The next-generation players are currently striving for ways to reduce the price and Illumina, for one, says it plans to unveil technology allowing researchers to generate 25x coverage of a human genome for under $10,000 sometime this year. Other top contenders in the field include Roche, Life Technologies, and Applied Biosystems.

The buzz around affordable next-generation sequencing certainly has taken a toll on microarray maker Affymetrix. In the fourth quarter of last year, Affymetrix saw its total revenue fall to $78.6 million, down from $107.6 million in the fourth quarter of 2007. Over the past year Affymetrix's stock has taken an 81% dive. That compares to a drop of 37% on the S&P 500 during the same time period. Isaac Ro, an analyst at Leerink Swann expects the biotech company's revenue to fall 13% in 2009.

To date, Affymetrix doesn't seem to have a response to next-generation sequencing. The company says it has an eye on competing technologies, but it is keeping mum on whether it will dive into the arena.

Affymetrix will say, however, that it continues to innovate. The microchip pioneer is eager to talk about some of its new products, including its GeneTitan System, which would improve the quality of microarrays.

And indeed, for now microarray technology remains a staple in many research labs, and Affymetrix maintains a firm grip on that segment of the market.

"Microarray experiments are doable, they are more definable. That is absolutely not to say that sequencing won't give microarray technologies a run for their money," says Aravinda Chakravarti, a member of Affymetrix's Scientific Advisory Board and a professor at Johns Hopkins Institute of Genetic Medicine.

Still, not everyone is confident that Affymetrix is innovating at the rate necessary to stay afloat. "Inevitably the stuff they are investigating may allow them to kind of play the next technology wave, but we won't know that for a very long time," says Ross Muken, an analyst at Deutsche Bank.

Whether next-generation sequencing platforms quickly gain traction in research labs remains to be seen. Regardless, microarray manufacturers will have to respond: Even Affymetrix admits that falling sequencing prices will force down the price of microarrays.