Best Buy, Netflix Deal HD DVD Double-Barreled Blow

Toshiba late Monday reacted to the day’s developments with understated pragmatism, but stopped well short of throwing in the towel. “It’s unfortunate to see a valued partner like Best Buy make the decision to push consumers toward Blu-ray,” Vice President Jodi Sally said in a statement. “We're also aware of the Netflix decision to only stock Blu-ray movies for rental going forward. Given these developments, Toshiba will continue to study the market impact and the value proposition for consumers, particularly in light of our recent price reductions on all HD DVD players.”

Best Buy’s decision “to shine a spotlight” on Blu-ray is “a strong signal to our customers that we believe Blu-ray is the right format choice for them,” President Brian Dunn said. “Best Buy has always believed that the customer will benefit from a widely accepted single format that would offer advantages such as product compatibility and expanded content choices. Because we believe that Blu-ray is fast emerging as that single format, we have decided to focus on Blu-ray products.” But Best Buy said it will continue carrying HD DVD products. Best Buy’s Blu-ray emphasis will manifest itself in more floor space and signage compared with its HD DVD rival, a Best Buy spokeswoman said.

Netflix, in a quarterly earnings call less than three weeks ago, resisted analysts’ invitations to declare Blu-ray the winner over HD DVD. But Monday, Netflix did just that, saying it will phase out HD DVD this year and support Blu-ray only.

In Blu-ray, the industry has “picked a winner in the face-off between the two competing high-definition DVD formats,” Netflix said in a statement. Citing Warner’s pre- CES announcement that it will abandon HD DVD May 31 (CED Jan 7 p1) and with four of six major studios supporting Blu-ray only, it “makes sense for the company to initiate the transition to a single format,” Netflix said.

“The prolonged period of competition between two formats has prevented clear communication to the consumer regarding the richness of the high-def experience versus standard definition,” Ted Sarandos, chief content officer for Netflix. Now, “the industry can pursue the migration to a single format, bring clarity to the consumer and accelerate the adoption of high-def,” he said. “We expect that all of the studios will publish in the Blu-ray format and that the price points of high-def DVD players will come down significantly. These factors could well lead to another decade of disc-based movie watching as the consumer’s preferred means.” Though “only a portion” of Netflix subscribers have rented Blu-ray or HD DVD movies, most Netflix high-def consumers prefer Blu- ray, Sarandos said.

In an e-mail Monday to subscribers who had listed HD DVD as their preference, Netflix said “most of the major movie studios have recently decided to release their high- definition movies exclusively in the Blu-ray format. In order to provide the best selection of high-definition titles for our members, we have decided to go exclusively with Blu- ray as well.” The “current selection” of HD DVD will be available for rent for several months, but “we will not be adding additional HD DVD titles or reordering replacements,” Netflix said. “Toward the end of February, HD DVDs in your Saved Queue will automatically be changed to standard definition DVDs. Then toward the end of this year, all HD DVDs in your Queue will be changed to standard definition DVDs. Don’t worry, we will contact you before this happens.”

Netflix’s paean to Blu-ray contrasted sharply with restraint that CEO Reed Hastings showed Jan. 23 when analysts asked him if Warner’s decision made Blu-ray the winner. Blu- ray “has the advantage in the format war, and consumer adoption of Blu-ray will likely accelerate if Blu-ray can maintain the advantage,” Hastings said then (CED Jan 25 p1). Still, at that time Netflix wasn’t ready to declare Blu-ray the winner over HD DVD, Hastings said in the quarterly call. If Blu-ray reaches such “milestones” as getting hardware prices below $200 and landing Universal and Paramount support, Netflix will reconsider that judgment, Hastings said. Only then will Blu-ray consumer adoption “take off,” making it the winner, he said. “This would be a positive for the studios and a positive for Netflix, as it would fuel another decade of robust disc-based entertainment.”

At our deadline, we were awaiting reaction from the Blu- ray and HD DVD camps to Best Buy’s late-afternoon announcement. But earlier in the day, the HD DVD Promotional Group responded to the Netflix setback with familiar sentiments. “We have long held the belief that HD DVD is the best format for consumers based on quality and value,” the group said. “With more than a million HD DVD players on the market, it’s unfortunate to see Netflix make the decision to only stock Blu-ray titles going forward.” The Blu-ray Disc Association was understandably ecstatic and sees the Netflix announcement as an “important new development,” it said in a statement. “When a company as significant to consumers as Netflix makes a move of this magnitude, it sends an unmistakable message that Blu-ray is the obvious choice of high definition formats. If anyone is still on the fence, this announcement should remove any doubts.”