Sony wins format war, but real battle lies ahead

By Kiyoshi Takenaka - Analysis

TOKYO (Reuters) - Sony Corp (6758.T) won the home movie DVD format war, but the consumer-electronics giant faces an even tougher battle persuading shoppers to buy Blu-ray discs in an industry which is looking to the download era.

With Sony's current three-year business plan set to end on March 31, Chief Executive Howard Stringer also has to convince investors it has a new growth strategy for the maker of PlayStation game players and Bravia flat-screen televisions as it gets squeezed hard by rivals.

"The end of the format battle does not automatically guarantee a swift shift to Blu-ray," said Kazuharu Miura, an analyst at Daiwa Institute of Research.

"The big challenge is how they communicate Blu-ray's benefits to the potential users who already own DVD machines."

Toshiba Corp (6502.T) called time on its rival HD DVD format this week, leaving the Sony camp free to pursue a home movie market worth up to $24 billion a year.

But Sony has become heir to that fortune at a time when more consumers are bypassing stored movies and games altogether and downloading them.

"We believe it is highly likely that the Internet will become the mainstream method of distributing visual content, in the same way as with music," Mitsubishi UFJ Securities analyst Yukihiko Shimada said in a research note.

Industry specialists say, however, it will be quite some time before telecommunications infrastructure becomes strong enough to allow people to download high-resolution feature-length movies with reasonable time and costs.

Sony does have its eye on this market too. Stringer said in December he sees its PlayStation 3-based online content distribution service, the PlayStation Network, as a key growth driver for the Japanese company.

Both Microsoft (MSFT.O) and Apple Inc (AAPL.O) already offer downloading services for non-game entertainment content such as TV programs. Sony's PlayStation Network now mainly offers videogame software and game-related promotional video clips.

GAME PAUSED

Sony announced that its PlayStation 3 game console would be equipped with a Blu-ray player more than two years ahead of the actual console launch in a bid to win support for the format from hardware as well as software providers.

But Sony is paying the price of seeding the market with future high-definition movie buyers. The cost of the console's Blu-ray function and its high performance chip forced Sony to take a loss on each console sold even though it was initially priced twice as high as rival Nintendo Co Ltd's (7974.OS) Wii.

Sony's game division is expected to post an operating loss in excess of more than $900 million for the full year, making it together and the flat TV business Sony's two biggest earnings drags.

"By eliminating losses in these two operations next business year, Sony's profit could get a boost of some 150 billion yen," Credit Suisse analyst Koya Tabata said.