Warner: DVD format war hurt movie sales

January 7, 2008: 4:06 PM ET

LAS VEGAS - Why did Warner Bros. choose last week to exclusively back the Blu-ray format for high-definition DVDs and ditch HD DVD, a move that could end the bitterest battle in the electronics industry?

Kevin Tsujihara
Warner Bros. Home Entertainment President Kevin Tsujihara said there's evidence that holiday DVD sales were a casualty of the format war between Blu-ray and HD DVD. Image: Warner Bros.

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Partly because the studio's research turned up an alarming trend: the next-generation format fight hurt overall DVD sales this holiday season.

DVDs have become an important piece of Hollywood's revenue pie, and an unexpected dip in sales can be painful. And that's exactly what happened in the fourth quarter, according to Warner, when DVD sales fell from the previous year.

And you can't just blame the economy, or the popularity of video games. Here at the annual Consumer Electronics Show, Kevin Tsujihara, president of Warner's Home Entertainment Group, told Fortune that with high-definition TVs selling briskly and a strong summer at the domestic box office that topped $4 billion for the first time, Hollywood executives expected a merrier Christmas than the one they got.

"We saw evidence that the format war was actually hurting standard definition," Tsujihara said. "The industry had very high expectations for the fourth quarter. The summer was the highest box office quarter in history. We ended up the year somewhere down 2 percent or a little bit more than 2 percent. That was a little disappointing, given the summer we had." Warner Bros. and Fortune are both owned by Time Warner (TWX).

Market research showed it wasn't just NetFlix (NFLX) or Apple's (AAPL) iTunes hurting traditional DVD sales, either. Consumers who bought HDTVs were so afraid of backing the wrong high-definition movie format that they decided not to buy movies at all.

"Consumers were confused by the format war, and they were saying they weren't going to make a decision on either for a while, until they could figure out which one to buy," Tsujihara said. "Salespeople were having a hard time telling people why they should convert to HD."

So Warner Bros. made a call. Based on consumer trends, which have shown Blu-ray movies outselling HD DVD 2 to 1, Blu-ray was the obvious choice.

Still, Hollywood's not out of the woods yet. Though Warner's move gives Blu-ray a clear advantage over HD DVD, there's no guarantee the masses will embrace either disk format. It's up to industry marketers to devise a way to convince consumers that it's a good idea to keep buying movies on discs, rather than rent or download them.

Those strategy sessions are increasingly at the heart of CES, a show that used to focus on the nuts and bolts of electronics. Hollywood dealmakers descended on Las Vegas in force this week to hobnob with technology and retail executives in the hotels along the Strip and, they hope, hit upon a formula that will reinvent the business of entertainment.

"It's become more important to us, especially as it relates to digital distribution," Tsujihara said. "Longer term we believe that the growth for our industry is going to come from transitioning that standard definition player base to higher definition, and transitioning some of that to digital distribution as well."

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