Cheers as Toshiba nears HD DVD surrender

Investors cheered an impending end to a format war for next-generation DVDs on Monday, pushing up shares of both Toshiba, on the verge of abandoning its HD DVD discs, and Sony, the leader of the rival Blu-ray camp.

Toshiba shares jumped 5,1% as analysts praised its decision to cut its losses, while Sony, whose technology is set to become the industry standard for the next generation of high-definition home movie DVDs, rose 2,7%.

“It doesn’t make sense for Toshiba to continue putting effort into this,” said Koichi Ogawa, a chief portfolio manager at Daiwa SB Investments. “It needs to cut its losses and focus its resources on promising businesses.”

A source at Toshiba said on Saturday that the electronics conglomerate was planning to give up on the HD DVD format after losing the support of key retailers and several movie studios including Warner Brothers.

Toshiba, which led a consortium promoting HD DVD, would suffer losses of hundreds of millions of dollars to scrap production of its equipment and other steps to withdraw from the business, Japanese public broadcaster NHK reported.

But analysts gave high marks to Toshiba’s seemingly quick decision to pull the plug on HD DVD because of the heavy costs involved in promoting the format.

Nikko Citigroup raised its rating on Toshiba to “buy/high risk” from “hold/high risk”. JP Morgan maintained its “overweight” rating while predicting the elimination of sales promotion costs would add ¥30-billion ($280-million) to Toshiba’s operating profit in the next business year from April.

“Since the business has no growth potential without video software, we think the company will probably withdraw completely rather than just partially,” JP Morgan analysts Yoshiharu Izumi and Masashi Hayami wrote in a note to clients.

Pressure for winner

While keen on a new format DVD that can hold more content and produce higher-quality pictures, movie studios and retailers want a single format that would avoid the cost of producing and stocking two different types of DVD.

Shoppers, faced with two formats and movies that might only play on one or the other, have tended to buy neither at a time when the entertainment industry was hoping the new generation discs would revive the $24-billion home DVD sector.

An end to the war means consumers can now be sure they won’t be stuck with a 21st century equivalent of Betamax—Sony’s videotape technology that lost out to VHS in the 1980s.

Shares of Toshiba hit ¥828 in morning trade, their highest since late December. Sony shares hit ¥4 980 but shares of Matsushita Electric Industrial, a key Blu-ray supporter, shed 0,7%. The benchmark Nikkei average was up 1,3%.

The defection of Time Warner’s Warner Brothers to Blu-ray from HD DVD in January was a heavy blow to Toshiba’s plans.

It took Hollywood’s biggest film library into the Sony consortium’s camp and meant 70% of Hollywood movies would be in the Blu-ray format.

When the world’s largest retailer, Wal-Mart Stores, said on Friday it would quit stocking HD DVD movies in its 4 000 US stores, both consumers and pundits said the war was over.

The decision matched earlier ones by consumer electronics chain Best Buy and online video rental company Netflix.

“Blu-ray won. It’s fantastic and I trust Sony,” said one customer who was browsing the DVD player aisles at the Best Buy store on New York’s Fifth Avenue.

Tania Bonetti, who works in the home theatre section of the store, where DVD players cost from $399 to almost $1 000, said, “Blu-rays are flying off the shelves, but we have to order if you want HD.”

Wal-Mart’s own movie and gaming blogger put the future of HD DVD in stark terms.

“If you bought the HD player like me, I’d retire it to the bedroom, kid’s playroom, or give it to your parents to play their John Wayne standard def movies, and make space for a BD [Blu-ray disc] player for your awesome Hi Def experience,” Wal-Mart blogger Susan Chronister wrote in a posting.

Stephanie Prange, editor in chief of Home Media Magazine, said the war’s end should boost high-definition DVD adoption.

“It would definitely help. The two formats, though both were good, have confused consumers and prevented them from moving into the high-def future,” she said. - Reuters



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