Fate of high-def DVD may lie with Microsoft

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Fate of high-def DVD may lie with Microsoft



MADISON, Wis. — After months of intense wrangling between the competing Blu-ray and HD-DVD groups, the battle lines in the war over a next-generation high-definition DVD format have moved to the doorstep of Microsoft Corp.

Several industry sources last week told EE Times that Microsoft is muscling into the optical-disk fray by leveraging its operating-system clout to bundle HD-DVD within Vista, the company's next-generation OS. There is also talk that the software giant may be planning to offer cash incentives — in the form "coupons" — to system vendors or retailers if they agree to support HD-DVD. Such coupons would provide "credits" or "memos" for each PC that is sold with HD-DVD inside.

Many consumer electronics companies in the Blu-ray camp are scrambling to figure out, respond to and possibly preempt the next move by the world's largest — and richest — computer software maker.

Microsoft would neither confirm nor deny such reports. Asked about financial incentives the company might be dangling in front of PC OEMs to lure them into the HD-DVD camp, a spokesman said, "Microsoft doesn't comment on the details of meetings we've had with our partners."

One fact, however, is hard to miss: In the short span of two months, Microsoft has gotten through to Hewlett-Packard Co. HP, which still sits on the board of the Blu-ray Disc Association and previously supported the Blu-ray format exclusively, joined the HD-DVD Forum earlier this month. This semi-reversal came in the wake of a series of meetings with Microsoft, said Maureen Weber, general manager of HP's Personal Storage Business.

In October, when Microsoft and Intel Corp. announced their support for HD-DVD, Weber warned of "legal implications, if Microsoft is using its dominance in the operating system market — virtually a monopoly — to play favorites and hurt the competition" (see http://www.eet.com/news/latest/showA...eID=171202192).

Asked whether Microsoft is now doing just that, Weber said that in the end, "It's about money and the cost to the PC industry." Whereas the overall Blu-ray royalty structure adds up to $30 per PC drive, she said, everything a PC vendor needs to support HD-DVD "comes free, shipped and integrated with Vista — Microsoft Corp.'s next-generation operating system."

Most PC companies have no choice but to support Vista in the Microsoft-dominant OS market.

Still, many consumer electronics executives involved in negotiations with PC OEMs believe there is more to the story of HP's flip. Some sources expect clarifications and new developments to emerge within the next several weeks, shedding light on the decision.

Dell Inc., for its part, has no intention of switching its support from Blu-ray, Brian Zucker, a Dell technology strategist who sits on the Blu-Ray DVD committee, told EE Times. "The only reasons we would make a change would be if we saw significant customer demand not to back the format we have been working on," he added.

Dell, which was not involved in defining the original CD or DVD specifications, decided a couple of years ago that it was important to get involved in the current format discussions. "This time we wanted to work upstream a little bit more, particularly as we are getting more interested in the digital home," Zucker said.

Dell chose Blu-ray for two reasons: its higher capacity (25 Gbytes for an entry-level disk, compared with about 15 Gbytes for a basic HD-DVD) and its longer list of industry backers. Two years later, Dell now feels it has a vested interest in Blu-ray because it helped make sure the spec represented its customers' interests, Zucker said.

Zucker added that he has no idea why Dell's major partners — Intel and Microsoft — are opposing Blu-ray and backing HD-DVD. In his opinion, slight differences in the copy protection scheme for Blu-ray will not prevent users from making so-called "managed copies" of content on the disks, a feature that he said was a priority for both camps.

Intel provides no optical-disk technology, so a difference of opinion between Dell and Intel on the subject has little impact on the PC maker. Likewise, Microsoft, which does not make optical drives, has a history of letting third-party software companies supply key optical-disk support rather than write its own optical-disk code into Windows.

Given that history, the overarching question for many industry watchers is: Why is Microsoft now siding with HD-DVD, a format that has generated relatively little enthusiasm among Hollywood studios and hardware vendors?

While Dell may have no idea about Microsoft's motives, those in the consumer electronics industry have several theories.

Many, who spoke on condition of anonymity, believe Microsoft is committed to prolonging the format war, not necessarily winning the battle for HD-DVD. Rather, they say, HD-DVD is a Trojan horse, rolled into the format war to create advantages in battles yet to be fought — especially against Sony Corp.

Xbox vs. Playstation

Consider, for example, Microsoft's Xbox 360. The new game console is already on the market despite the absence of a high-definition strategy, said one source. The Xbox 360 is based on a current-generation DVD drive. The longer the next-generation high-definition DVD format battle persists, the better the opportunity for Microsoft to downplay the HD capability scheduled for integration in Sony's upcoming Blu-ray-based Playstation 3 game machine

Second, a drawn-out high-definition optical-disk format battle helps Microsoft buy time to promote its connected-home strategy. By undercutting the value of standalone prerecorded media devices, Microsoft hopes to accelerate a consumer electronics transition into the brave new world of "downloadable" content, some observers say.

As Peter Barrett, chief technology officer of the Microsoft TV Division, explains it, the company believes that "the point of integration, the point of convergence, is the service, not the device" (see Interview, page 1).

In Microsoft's view, next-generation consumer devices will no longer be simply connected to one-way broadcast or removable media. Rather, the company envisions HD-DVD players tied to the network via subscription services. In essence, said a longtime Microsoft observer, by leveraging its .Net strategy, Microsoft "wants to become the telephone company of the living room."

Third, the classic battle between Microsoft and CE companies always comes down to the stickiest issue: to Java or not to Java.

For Microsoft, hoping to establish control over the software platform in the living room, support for HD-DVD is critical in this regard. The format uses iHD, an XML-based technology, to add interactivity, rather than Sun Microsystems Inc.'s Java language.

In contrast, consumer electronics companies are committed to deploying the Java-based Multimedia Home Platform in the Blu-ray format. MHP has already established itself in the TV world as the standard platform upon which to offer interactivity. MHP is widely used in Europe, and is the foundation of CableLabs' Open Cable Application Platform and the Advanced Television Systems Committee's Advanced Common Application Platform in the United States.

"For MHP, the industry already has development tools, experience and a growing installed base that will grow regardless of any DVD decision," said Stu Lipoff, partner at IP Action Partners (Newton, Mass.).

The Java-averse Microsoft "is trying to displace MHP so that they have a big dog in the fight," he said.

Meanwhile, Microsoft is blaming Blu-ray's use of Java for its potentially much higher royalties. Java-based Blu-ray format royalties include the licensing of the Globally Executable MHP standard, the cost of a Java test kit from Sun Microsystems and the cost of BD-Java, the version on which the Blu-ray Disc format is built, said HP's Weber.

PCs don't need Java because they already offer interactivity. In contrast, consumer electronics companies do need Java to make their end products interactive. Just as consumer electronics manufacturers regard integrating Microsoft's Windows as overkill, HP feels that Java in a PC platform is too costly.

Big backers

Until Microsoft stepped into the battle, the Blu-ray Disc format was gaining ground steadily over HD-DVD, with support from a majority of major studios in Hollywood — with the exception of NBC Universal — and a much longer list of hardware companies than HD-DVD can boast. Besides Dell and fellow computer maker Apple, supporters include Hitachi, LG Electronics, Matsushita (Panasonic), Mitsubishi, Philips, Pioneer, Samsung, Sharp, Sony, TDK and Thomson.

But even with that list of heavyweights, nobody is declaring a Blu-ray victory, because everyone understands the sheer power Microsoft can — and often does — exercise, all by itself.

Among familiar Microsoft tactics is to offer incentives — promotions, discounts and credits — to PC OEMs. If a certain percentage of an OEM's systems use Windows, Microsoft typically chips in on advertising campaigns and co-sponsors promotional events. When a PC manufacturer is living on a 3 percent margin, such market-development payments or volume-discount rebates can be make-or-break factors. Some industry observers have termed these in-kind subsidies from Microsoft "the heroin of the PC industry."

Asked whether Microsoft was offering Dell or anyone else financial incentives to join the HD-DVD consortium, Dell's Zucker said, "I have not heard anything about that, nor would I comment on it."
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