China pact perks up HD DVD

Cheaper hardware seen as plus in format war

Chinese consumer electronics companies are one step closer to producing inexpensive HD DVD players. Format backers hope the move will ultimately lead to victory in their fight with rival next-generation format Blu-ray Disc, but Blu-ray supporters decry the news as insignificant.

The steering committee of the DVD Forum has approved the final draft of a memorandum of understanding with the leading Chinese developer of optical discs, paving the way for the creation of a Chinese HD DVD format.

The deal, with China's Optical Memory National Engineering Research Center, marks the first time China is participating in a standardization process for content within a global entity, the DVD Forum, which also gives its stamp of approval to standard DVD.

Although a Chinese HD DVD format would have some differences from the global HD DVD format, backers maintain that similarities in manufacturing would make it easy for Chinese consumer electronics companies to then also produce HD DVD players for a worldwide market, including the U.S.

That could tip the scale in favor of HD DVD, according to Ken Graffeo, executive vp high-definition strategic marketing at Universal Studios Home Entertainment and co-president of the North American and European HD DVD Promotional Group.

Graffeo said that it was inexpensive Chinese DVD players retailing for less than $100 that really spurred the DVD to mass adoption, and he is hoping the same thing will happen with HD DVD. Currently, the lowest-priced HD DVD player, from Toshiba, can be purchased for $299 after a $100 mail-in rebate, while the cheapest Blu-ray Disc player, from Sony, sells for $499.

"Hardware drives software," Graffeo said. "Why do you think they give away the razor? It's because they want you to buy the blade."

Graffeo noted that when Toshiba began offering its $100 rebate on HD DVD players in May, player sales soared 70%. "We sold 70,000 units in seven weeks, from a base of 100,000 units," he said.

The Blu-ray Disc set-top count is unclear, but Sony's PlayStation 3 comes with a built-in Blu-ray Disc drive. About 1.4 million PS3s have been sold to U.S. consumers since the pricey next-generation game machine's retail debut in November.

However, dedicated high-def disc players, Graffeo said, tend to have "the highest attach rate" and thus drive software sales. And if economies of scale -- HD DVD is based on existing DVD technology, so players are cheaper, and easier, to produce -- leads to a flood of low-priced Chinese HD DVD machines, consumer response could be so overwhelming that the studios that don't support the format would have no choice but to switch.

At this point, Universal is the only studio to exclusively support HD DVD. Paramount Home Entertainment and Warner Home Video support both HD DVD and Blu-ray, and 20th Century Fox Home Entertainment, Buena Vista Home Entertainment, Sony Pictures Home Entertainment and Lionsgate are exclusively in the Blu-ray camp.

"Everybody will admit this, that the consumer will ultimately decide (which format wins)," Graffeo said. "Wherever the consumer goes, the studios will follow."

Blu-ray Disc Assn. spokesman Andy Parsons dismisses the importance of the announcement. "The memo is for a Chinese HD DVD format only, so it's a bit of a stretch to suggest that this will translate into cheap HD DVD players being exported into the United States."

A high-ranking studio executive on the Blu-ray side, who asked not to be named, agreed.

"Why would companies that happen to be based in China look at the format war any differently than any other company outside China?" he said. "They are business people, and watching the rest of the market very closely. If HD DVD is losing steam in the United States, Europe and Japan, what would interest them in exporting players that have less market potential than Blu-ray? The whole thing smacks of desperation."
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