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Economy and DVD sales slip drove Warner to Blu-ray

LAS VEGAS (Reuters) - Fears of a deteriorating U.S. economy and falling DVD industry sales helped drive Warner Bros’s decision to back Sony’s Blu-ray next generation DVD format exclusively, a top executive told Reuters on Monday.

Technicians set up a booth promoting the Blu-ray format at the Consumer Electronics Show in Las Vegas, Nevada January 6, 2008. Time Warner Inc's Warner Bros studio on Friday said it would exclusively release high-definition DVDs in Sony Corp's Blu-ray format. REUTERS/Steve Marcus

Hollywood's biggest seller of home movies tipped the balance of power on Friday in favor of Sony 6758.T in a fight for the next generation of DVDs between the electronics giant and Toshiba Corp. 6502.T, developers of the HD DVD format.

“We’ve typically been recession proof,” Warner Bros Entertainment Group President Kevin Tsujihara said in an interview at the annual Consumer Electronics Show in Las Vegas.

“But the thing that we saw in the fourth quarter...was gas prices beginning to affect sales. And since we’re considered an impulse purchase, it’s beginning to impact us,” he said.

Tsujihara said the company needed to quickly erase consumer and retailer confusion over dueling DVD formats before economic conditions deteriorated.

Toshiba vowed the format war was not over, but Warner’s move was seen as a major setback, at least, in the race to develop a potentially multibillion-dollar market for high-definition discs.

Warner executives said the consortium of companies backing Blu-ray, including five of the seven big Hollywood Studios, could spend more than $50 million in 2008 to convince consumers to upgrade, or more than the amount spent by the backers of both HD DVD and Blu-ray in the 2007 holiday season. Budgets have not been finalized, Warner Bros said.

The movie division of media conglomerate Time Warner Inc TWX.N, out of respect for Toshiba, has kept a low profile at the annual Consumer Electronics Show in Las Vegas, the neon-lit gambling oasis in the Nevada desert not known for its subtly.

Even Sony Chief Executive Howard Stringer kept his remarks about Warner brief in public presentations.

Warner’s decision is seen cementing Blu-ray’s victory in what could possibly be the last physical format for movies and TV shows as technology and Internet companies race to build online distribution channels, according to Citigroup analyst Tony Wible.

A 2007 decline in DVD sales, which account for half of Hollywood’s profits, and anticipated further declines in 2008 sped Warner’s decision making process.

Merrill Lynch said on Monday the United States had entered its first full blown recession in 16 years.

The economy had little impact on the fourth quarter’s higher sales of high definition televisions, which in turn helped boost sales of next generation DVD players, Warner Bros Home Video President Ron Sanders told Reuters.

But worsening conditions in 2008 could scupper sales of new players, and movies, even if only one format survived.

“We’ve hit the first 30 million” households with high definition televisions, Tsujihara said. “As we go in deeper, they’ll be more cost conscious.”