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Battle of the formats in high-definition DVDs

Thursday, April 27, 2006
By Leslie Brooks Suzukamo
Knight Ridder Newspapers

T. PAUL, Minn. — Every so often, technology comes to a crossroads, and nobody knows which direction will win out. A generation ago, Betamax and VHS battled over which format would dominate for video. Those who bet on Betamax won't soon forget the experience of getting stuck with irrelevant technology.
Now, a format war is brewing over high-definition DVDs, and Oakdale, Minn.-based Imation Corp., maker of all kinds of data storage, is in the thick of it.

Normally, creation of a new data-storage format would make Imation jump for joy. As anyone who's gone through the process of replacing tapes with CDs or videos with DVDs knows, new formats generally mean more sales. That's good for Imation, which makes DVDs, CDs and other removable media.

And there's a fair amount of excitement over high-definition DVDs, which promise a life-like sharpness on video conventional DVDs can't match, fans say.

But which high-definition DVD would Imation make?

On one side is a format called HD DVD, backed by technology giants like Toshiba, NEC Corp., Intel and Microsoft.

On the other is Blu-Ray, a format created by Sony that had support from Phillips, Dell and Apple Computer.

As the giants of technology chose sides in this winner-take-all battle, both factions tried to recruit Imation. But choosing sides makes Imation uncomfortable. Historically, Imation has tried to make sure its products work with the equipment of as many technology providers as possible.

"Both formats clearly would have liked us to take their side, and we knew early on that we couldn't do that," said Stephen Bradley, who maps out Imation's product strategies worldwide. "Our customers expect us to deliver solutions based on what they need, whether they choose HD DVD or Blu-Ray."

So the answer was clear: Imation decided to make both.

With worldwide sales of recordable DVDs at 3 billion and growing, most consumers are only dimly aware that a new DVD standard is on the horizon.

But the industry is betting consumers will start shelling out top dollar to get movies and TV shows in a format that has been described as practically three-dimensional in clarity.

By the end of this year, 22 percent of the TV sets in the United States will be capable of receiving high-definition signals, according to Solutions & Understanding, a technology consultancy in Great Britain.

"That's a large percentage of the U.S. population, and they're waiting to feed the high-definition monster," said Jim Bottoms, joint managing partner at Solutions & Understanding.

But which type of high definition to use?

Movies made for Blu-Ray will not work on a video player made for HD DVD, and vice versa. And since both formats are read with a blue laser instead of the red one in conventional DVD players, neither of the new formats will work on the old players. That means if consumers want to watch a high-definition video on DVD, they will have to buy a new player that can cost upwards of $1,500.

Few consumers will buy both kinds of high-definition players, so the electronics and entertainment industries have been warily choosing sides.

Movie studios are divided. Blu-Ray is backed by Sony and Disney studios, while HD DVD has NBC-Universal in its corner.

Tellingly, Warner and Paramount have hedged, saying they will release movies in both formats. Studios on both sides have committed to releasing only a handful of their titles so far.

At least one analyst thinks the makers of the new high-definition DVD players ultimately may have the most influence. "It probably comes down to who's going to be more aggressive on the hardware side — who's going to subsidize losses on the short term to try to drive adoption," said Dan Renouard, an analyst for Robert W. Baird in Milwaukee. A $2,000 high-definition player may not sell, but one for $500 might, he said.

Analysts say it may not be until after 2007 at the earliest when they can declare a clear winner.

Until then, Gartner Inc., a technology consultancy in Stamford, Conn., is advising companies to "be an arms merchant to both sides" if they are large enough to manage both, said Laura Behrens, a Gartner analyst. That's Imation's strategy.

Manufacturers of blank discs like Imation are captives of the hardware makers and movie studios, Renouard said. They can only wait and follow.

First, they must figure out how to make two new formats. Imation outsources its manufacturing of CDs and DVDs but decided to take on the manufacture of the new formats, despite their being more complicated than anything it's made before.

Both high-definition formats hold far more information than conventional DVDs—three to five times as much. That means a high-definition movie can fit on one DVD, but there are some differences in how the DVDs are put together.

The HD DVD is slightly easier to make than Blu-Ray because its architecture is most like a conventional DVD — it sandwiches its data on a metallic layer in the middle of the disc and is assembled like an Oreo cookie. It can hold 15 gigabytes of data — 30 gigs on a double-layer format. But it has to fit on a disc that is exactly the same size as a conventional disc, so it must be even more precise.

The Blu-Ray disc carries 25 gigabytes of data on a single layer and 50 gigs on a double. But the Blu-Ray is more complicated because it puts data on a metallic layer at the bottom of the disc to be closer to the laser that reads the data. It protects that data with a thin adhesive film that is stamped out cookie-cutter style and smoothed onto the disc, not unlike applying a decal.

Taking on two new manufacturing processes is a more calculated bet for Imation than it might sound. Decades ago, as a division of 3M, Imation helped develop the optical disc, and it believes its patents on the mastering process give it an edge over competitors.

Imation spent $10 million on the patents and a new manufacturing facility. That's not a bet-the-farm investment for a company that had sales of $1.2 billion last year, especially not compared to the $55 million it spent to build its next-generation magnetic tape plant in Weatherford, Okla.

The company's high-definition DVD manufacturing operation is buried in the bowels of the Discovery Building, where the company conducts research and development on optical discs.

Jim DePuydt, the manager in charge of developing the company's advanced optical products, pointed through a clean-room window to two DVD "mastering benches," which are long, unremarkable-looking rectangular boxes. But the benches are key to the manufacturing process, because they mold the glass masters or "pucks" used to make the discs.

One glass master, etched with tiny tracks to position the data, can make millions of DVDs, but it needs to be perfect.

"Quality is of the utmost importance to us," DePuydt said. "Our philosophy is to drive quality to zero defects."

Although the assembly process is designed to run 24 hours a day and seven days a week, Imation so far is only firing up the line for one shift a week, switching from Blu-Ray one week to HD-DVD the next. The company was able to build a modular manufacturing process, so the two formats have some steps in common.

The process is largely automated, so few workers are needed. When it's running, a mechanical arm picks up a newly molded blank hi-def DVD hot off the presses inside a clean room and moves it to a spindle to cool every 9 seconds.

The low volume is a sign of how new high-def DVD is. High definition DVD burners aren't due out for several more months, and even then, the company expects sales to be slow. It plans to outsource manufacturing when demand picks up.

A few makers of recordable DVDs have declared allegiances for one side or the other. TDK, for instance, has sided with Blu-Ray. But Imation is firmly agnostic.

It's a studied neutrality, driven by caution. "We don't know who's going to win," CEO Bruce Henderson said.

In the short term, the stakes will be small. Solutions & Understanding, the technology consultancy, estimates the global market for high-definition DVDs at 250 million units or roughly $1.5 billion by 2010 — a fraction of today's DVD market. Even then, there's no way to say how much of that market Imation will end up with.

Eventually Imation thinks high-definition DVDs will overtake DVDs, just as DVDs are eroding the market for CDs.

But what if they held a war and nobody came?

Henderson, a self-confessed gadget addict, said the first buyers will be the "early adopters, like me. The people who can't wait to get the latest and greatest."

Personal technology gurus are advising consumers to sit on the sidelines for now to avoid getting burned the way Betamax buyers did decades ago.

That's bad news for Imation and everyone involved in the high-definition DVD struggle. For them, war isn't hell; waiting may be.

Imation accepts that growth will be slow. It won't say how many discs it can produce on its equipment but said the Discovery Building plant should be adequate through the end of 2007. That's when everyone expects the fog of this latest format war to clear.
Battle of the formats in high-definition DVDs - Thursday, April 27, 2006 -

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