COLUMN ONE : Disc Wars: a Global Game of Chicken : Video CDs promise to be a boon to consumers and a business bonanza. But it may never happen if the industry can’t resolve its formatting feud.

Once upon a time, some of the most powerful entertainment and consumer electronics companies in the world figured out how to do a cool new thing.

They came up with a way to squeeze a movie onto a compact disc. The movies looked and sounded much better than they did on videotape. The silvery disc was sexier than the clumsy videocassette, 1980s relic that it was. And the disc was cheaper to make, so it could be priced lower, around $20.

That’s not all. Computer software, such as games and multimedia encyclopedias, could be imprinted on the discs, which could fit 10 times more pictures, words, sounds and video footage than today’s CD-ROMs.

And the recording industry--whose phenomenal success with CD technology makes movie executives salivate--could use the new discs to release albums with more music, better sound, videos and written lyrics.

The companies knew they could make a lot of money on these discs and the machines that play them. A new, high quality entertainment medium would be made available to the public. The merger of television and computing would begin. A new consumer electronics standard would be set. A new market would be born.

But as the summer of 1995 opens, it seems this high-tech fairy tale may never come to pass. A much more cynical story, this one involving personal crusades, corporate ego and capitalist greed, has intervened. Absurd as it may seem, one of the most important new technologies of the decade thus may end up on the scrapheap.

The problem is simple enough. Everyone agrees that there must be one technical standard for the new discs to be successful. But Sony Corp. and Philips Electronics NV have developed one digital video disc system, and Time Warner Inc. and Toshiba Corp. are promoting another. Instead of joining forces, they are engaged in a game of chicken, each side determined to control the standard and the dollars that go with it.

Each says its format is superior. Each has promised to have its products in stores next year. Each is feverishly lobbying potential allies, from CD-ROM drive makers to movie studios, to endorse its respective standard. Each is doing its best to manipulate public perception, orchestrating media campaigns across three continents. And each appears less willing to compromise with each day.

It is a situation that infuriates entertainment and computer executives, for whom billions of dollars in potential new business hangs in the balance. And it might well infuriate consumers too, if they knew about the behind-the-scenes machinations that may result in their being asked to invest in a product that will later gather dust, next to the eight-track tape player and the Betamax.

“The argument for a single format is so compelling, so overwhelming, that I can’t believe sensible business people won’t find a way to compromise,” said Richard Cohen, president of MGM/UA Home Entertainment and head of a video disc advisory committee formed by the major movie studios. “But that doesn’t appear to be happening.”

“This is not a technical problem; it’s a business problem,” said Tom Blank, a program manager at Microsoft Corp. “Every meeting I have with both sides, I start with the same words: One format. They roll their eyes. It’s getting to be almost a joke.”

Dualing Discs

The Time Warner/Toshiba entry took the early lead when the power struggle went public late last year. The team’s double-sided disc held more than twice as much data as the competition, and thus could accommodate even the longest movies. A formidable alliance of consumer electronics manufacturers and movie studios have lined up behind it.

The Sony/Philips team has won the endorsement of the majority of CD-ROM drive makers and one computer manufacturer. They maintain that consumers will not want to flip over a disc, and that their one-sided version will be easier and cheaper to make.

Meanwhile, even some of those who have endorsed one format are holding out the possibility of releasing products for both. And a number of key firms, including Walt Disney Co., Microsoft and all the major computer manufacturers, have yet to cast a vote.

No one has more vociferously proclaimed the need for one format than the rival disc developers themselves. But each side blames the other for refusing to come to the negotiating table. And each is taking its accusations to a new level, charging the other not only with stubbornness and greed, but with dishonesty and even betrayal.

In public, they trade barbs, their protestations of innocence and sincerity belied by their own words.

“If they say they want one format, then I would like to hear what they propose,” sniffs Jan Oosterveld, Philips’ Netherlands-based point man for the digital video disc. “We have invited people to join us since last year. We have never turned anyone away.”

“We’ve issued three invitations to them to talk and we’ve had no response,” counters Warren Lieberfarb, president of Warner Home Video. “This is about Sony and Philips trying to maintain their hegemony over optical disc technology.”

“Do you want to turn over your CD?” asked Nobuyuki Idei, in town last month for his first studio tour in his new post as Sony’s president. “We have no intention to compromise on that. That would not be to the benefit of the consumer.”

“He always says that about turning over the disc,” said an agitated Koji Hase, a senior manager at Toshiba. “It’s so craftily done. But it’s not true. Ours has more room on one side than theirs. How can we support a lesser format?”

Meeting Canceled

Behind the scenes, relations are even worse, and attempts by neutral parties to bring the sides together have ended in disaster. In May, representatives from the major computer manufacturers, including IBM, Apple, Hewlett Packard and Compaq, flew to Japan after getting both camps to promise that they would attend a meeting at IBM’s offices near Tokyo.

But the day before the get-together, the computer executives were informed that the Toshiba/Time Warner camp had concerns about the antitrust implications of such a meeting and would not attend. It was a puzzling explanation, coming so late.

Hollywood executives, meanwhile, accuse the Sony/Philips team of arrogance and turning a deaf ear to pleas for compromise.

“I’m almost ready to conclude that they’re deliberately trying to screw this up,” said one studio executive. “They have such a vested interest in the status quo with their royalty streams on CD and related patents that they’re willing to screw up DVD [digital videodisc] in order to preserve the monopoly they have.”

‘Selecting the Pope’

Creating a new consumer electronics standard is never easy. The process seems almost mystical at times, combining years of technical development, proselytizing, negotiating and, ultimately, marketing. Compromise sometimes has to be ruthlessly forced.

“It’s like selecting the Pope,” said Gaston Bastiaens, who led Philips’ effort to launch the audio CD in 1983.

Skeptics question the need for any new video format, saying it’s just a way to dupe consumers into buying new gadgets. And others argue that even if a new product is desirable, standards should be set by the market, for example by consumer choices, and that multinational companies should not be teaming up to control the development of technology. (Indeed, earlier this year the Justice Department was probing allegations that the Sony/Philips CD alliance violated antitrust laws.)

But for many basic electronics technologies, the efficiencies of being able to produce the music or movies or software for a single format offer more benefits--for producers and consumers--than competition among largely similar products.

When it works, standards can yield enormous power, prestige and financial rewards for the standard-setters--and popular new products for consumers. In the 1980s, Sony and Philips worked out a compromise on the underlying technology for audio CDs and CD-ROMs. They have licensed their technology to more than 400 firms and built a $50-billion industry--and receive a nickel for every disc that is sold.

When standard-setting doesn’t work, there often are many losers--and consumers are usually among them. The most spectacular battle in recent decades pitted Sony’s Betamax videocassette recorder against the VHS format backed by consumer electronics giant Matsushita Electric Industrial Co. Beta was considered technically superior, but Matsushita was bigger and wealthier and agreed to share its technology to gain the support of other vendors.

Forced to bet on one or the other, many consumers held off buying either until it became apparent that VHS was going to win. Those who chose Beta got stuck with a machine for which they eventually could not find tapes.

In the VCR case, there at least was a winner and, therefore, a standard. When Philips and Sony several years ago went to war over a digital music format to replace the cassette tape--Philips had a new kind of digital tape and Sony had a new kind of miniature disc--consumers ignored them both.

The digital video disc warriors risk just such an outcome.

“The reality is if they go the way they’re going right now they’re both going to lose,” said Malibu-based new media analyst Jonathan Seybold. “It’s absolutely insane that they can’t work this out.”

Aggressive Underdog

Philips and Sony, which have dominated CD technology for over a decade, have more to lose. Toshiba and Time Warner are less likely candidates to sponsor a world consumer electronics standard, although their underdog status seems to have worked to their advantage. Many in the industry resent the Sony/Philips CD duopoly, and Toshiba and Warner have been more flexible and aggressive in seeking support.

A victory for the underdog would be the culmination of a decade’s work for Warner’s Lieberfarb, the product’s most fervent proselytizer, who has been pursuing the video disc idea since the mid-1980s. Blunt-spoken and hyperbolic in a distinctly Hollywood style, he was intrigued with the notion Time Warner’s legendary chairman Steve Ross described as “selling a movie on a piece of plastic for the price of two tickets, parking and a box of popcorn.”

Philips was a logical technology partner for such a project, and Lieberfarb approached the Dutch company in 1990 with collaboration in mind. That effort was quickly aborted when it became clear the technology was not advanced enough to make the picture quality better than VHS.

But Lieberfarb never really put the idea away.

In 1992, he began to work with Toshiba--which had just acquired a minority stake in Time Warner’s entertainment businesses for $500 million--on a new optical disc technology, dubbed SD for “super density.” It featured two discs half the thickness of a traditional CD sandwiched back to back. More densely placed pits on the disc allowed more data to be stored on it--5 billion bytes on each side.

With advances in the technology that turn images into the ones and zeros of computer code, it was possible to store the movie “Batman” on one side of a five-inch disc and “Batman Returns” on the other, with multiple audio tracks to boot. (The large-format video disc systems available today use older analog technology, which is more expensive and far less flexible than digital.)

Sony and Philips, meanwhile, had developed a digital video disc based on the original CD format. Their disc held 3.7 billion bytes, or gigabytes, of data, which they said was more than enough to store most movies.

In July, 1993, Toshiba and Time Warner again went to Philips and proposed pooling resources. A letter of intent was signed to jointly develop a worldwide digital video standard. But the next March, Philips Chairman Jan Timmer called Time Warner Chairman Gerald Levin with some startling news: Philips had decided to work on a videodisc with Sony instead.

Time Warner and Toshiba chose to forge ahead on their own. Lieberfarb began organizing allies in Hollywood, which promised to have a major role in determining which format would succeed. He helped form an ad-hoc committee of seven studios.

In September, the group saw demonstrations from both sides. The Sony/Philips technology received a lukewarm reception, according to participants. Studio executives were concerned that long movies wouldn’t fit on the disc, or would have to be so compressed that quality would suffer.

“I asked about what happens with longer movies and their answer was, in effect, I shouldn’t worry my pretty little head about it because what difference did it make, 90% of them would fit,” said one home video executive. “Well, that’s not good enough. If there’s a consensus on anything, there’s a consensus on that.”

The SD format, on the other hand, provided ample room not only for movies, but for a “parental lockout” feature, subtitles in several languages or even a video game. But computer and music industry officials worried that CDs and CD-ROMs, based on the established Sony/Philips format, could not be played on SD machines.

Compromise Elusive

Through 1994, officials from the four companies tried to hammer out a compromise. Sources close to the talks said Toshiba proposed an even swap: the Sony and Philips basic CD technology--which the Toshiba/Time Warner camp had used in developing their disc--in exchange for the higher-capacity, two-sided SD disc.

But sources say negotiations broke down when Sony/Philips decided that the deal wasn’t worth it. Given time, they told Toshiba, they could develop a better disc without the rival team’s help.

In addition, there was the question of face-saving. “Would they say Sony and Philips bought the rights to the other’s technology and included some little features from it? Or would they say Sony and Philips conceded their technology was inferior? Everything about pride in American culture and Japanese culture came to the forefront,” one source said.

With the idea of a compromise on hold, Sony and Philips were eager to beat Toshiba/Time Warner to the punch. They set a news conference for Dec. 19, 1994, in which they hoped Matsushita, the world’s largest consumer electronics firm and a linchpin in any standards effort, would join them in announcing a format.

But at the last minute, Matsushita declined to participate.

Toshiba/Time Warner’s decision to incorporate some Matsushita technology into their disc probably played a role in the reversal, observers say. But Matsushita officials say it was MCA/Universal, the studio Matsushita owned at the time, that prevailed upon its parent firm to switch sides.

In January, a month after Sony and Philips went public with their format, Time Warner and Toshiba held a news conference at the Nikko Hotel in Beverly Hills. Matsushita of America Chairman Kunio Nakamura was there. So was Clint Eastwood, adding the requisite celebrity endorsement.

So were representatives from over a dozen major entertainment and consumer electronics firms, including Pioneer, Hitachi and Thompson. The alliance said that they would bring digital video disc players to market for under $500, and that they would be compatible with conventional CDs.

It seemed that Time Warner and Toshiba had pulled off a coup, potentially fatal to the Sony/Philips camp.

But the fight was far from over. Sony and Philips immediately retrenched, focusing their attention on a technology they had licensed from 3M Corp. that addressed their format’s biggest weakness: 3M had found a way to double the disc’s capacity by adding an additional layer of material to the disc and adjusting the laser so that it would read both levels. (Toshiba/Time Warner say they can do the same.)

Sony and Philips also turned their attention to the computer industry, which until then had been overshadowed by Hollywood.

In late April, they held a media event in San Francisco, in which they announced that the manufacturers of the majority of the world’s CD-ROM drives had lined up behind their format. But missing from the announcement were the well-known names that had been rumored to be attending, such as Compaq and Hewlett Packard.

Although initially attracted to the Sony/Philips technology, the computer industry decided that it was best to try to broker a compromise. After meetings with both sides, a group that had formed to study the technical merits of both formats engineered what it believed was the ideal combination. Neither side has accepted it.

Studio executives have perhaps even more at stake than their computer industry counterparts. They see a rare opportunity to do what the music industry did: resell their entire library on a different format. Although some kind of high-capacity computer storage medium is sure to emerge eventually, for the movie industry the format war could mean no market at all.

New Competition

Adding urgency to the situation is new competition from other forms of video delivery, including telephone and cable networks and direct broadcast satellites. If the video disc doesn’t make its mark soon, it may be rendered irrelevant.

“We have an intense interest in this product being successful,” said Phil Kent, president of Turner Home Entertainment.

“I have expressed to Sony and Philips officials in the strongest possible terms and to Time Warner and Toshiba officials in the strongest possible terms our desire for a single standard. But it’s very much driven by money and very much driven by--I guess there’s no nice word for this--corporate egos. There’s a lot of financial investment and pride involved for both sides.”

As the day nears when they have to begin building machines, both sides are sticking to their guns.

“Time Warner’s dominant economic motivation is to have the optimum carrier for digital information. And that’s the one with the highest capacity and lowest cost,” declared Lieberfarb.

“The single format should be the one that suits the customer best,” said Sony Corp. of America president Michael P. Schulhof. “And we believe we have a format that does that.”

‘Why should either of them back down?” asked Microsoft’s Blank. “They both think they’re winning.”

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Two Spins of a Disc

Today’s CD, the kind you slip into your computer or play on your audio player, holds 680 million bytes of data, roughly the equivalent of 74 minutes of music or VHS-quality video. The next generation of the shiny discs will look the same but hold far more data. Two competing formats are vying to set the new standard:

Multimedia CD

Developed by: Sony Corp. and Philips Electronics NV.

Endorsed by: The major CD-ROM drive manufacturers and one personal computer manufacturer.

Diameter: 5”

Number of sides: 1

Capacity: 3.7 gigabytes, or 7.4 gigabytes with use of “dual layer” technology. It can hold 135 minutes of video with three six-channel soundtracks and four subtitle languages.

Super Density

Developed by: Toshiba Corp. and Time Warner Inc.

Endorsed by: 15 consumer electronics and entertainment firms, including Matsushita Industrial Electric Corp., Hitachi, Pioneer, Thomson, MGM and MCA.

Diameter: 5”

Number of sides: 2

Capacity: Five gigabytes per side, or Nine gigabytes on a single side with “dual layer” technology. It can hold 135 minutes of video on each side, with three six-channel soundtracks, four subtitle languages and high-quality video.