A fraction of a millimetre was all that separated Sony and Toshiba when the two companies made a last-ditch effort a year ago to avoid a dispute dreaded by everyone, from Hollywood to the computer industry and Wal-Mart.

At issue was the format for a new generation of high-definition DVD, a product that could generate billions of dollars in revenues for Hollywood studios and help decide who wins the battle to control the emerging digital living room.

As the two sides struggled to reach a compromise, talks focused on the plastic section of the disc that is read by the laser. In Sony?s Blu-ray format, it is 0.1mm thick, while in Toshiba?s HD-DVD, it measures 0.6mm. At one point, the Sony camp even thought it had a deal.

Yet that sliver of plastic contained two very different technologies, representing two very different corporate views about the future of the media business. They could not be reconciled. ?It was impossible to combine the two and come up with a happy medium,? one person involved in the discussions explains.

And so, the war is on. Toshiba, which has recruited Microsoft and Intel to its camp, is in the middle of a 40-city US tour to promote its HD-DVD format and hopes to steal a march on the competition by shipping the first $499 players to retailers later this month.

Sony, meanwhile ? along with Philips and Pioneer ? persuaded Dell, the world?s biggest personal computer maker, and most of the Hollywood studios, to back the rival Blu-ray format it began developing more than a decade ago. Its players are expected to go on sale a few months after HD-DVD and will cost twice as much. Yet the Sony coalition believes its technology is superior. It is also hoping to secure a boost from the November launch of the PlayStation 3 video game console, which has been fitted to play Blu-ray discs and is expected to fly off the shelves.

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While independent analysts such as the Yankee Group and Forrester Research believe the fight has shifted in Blu-ray?s favour, executives involved in the battle are wary of calling the outcome. ?Nobody can say it?s 100 per-cent certain that one side will win over the other,? says Kevin Tsujihara, head of the home entertainment group at Warner Brothers, the Hollywood studio that is supporting both formats.

Already the fight has turned in unexpected directions, with studios and technology partners jumping from one camp to the other. Throughout, there has been a fog of claim and counter-claim and allegations of underhand tactics. ?It?s been a smokescreen on both sides,? says one executive.

That seems to reflect the enormous stakes involved. Although only 20m US homes currently own high-definition televisions, that figure is expected almost to double over the next 18 months, as consumers sample resolution so sharp that even the blemishes on a news anchor?s face become visible.

The studios are hoping that quality will entice customers to replenish their film libraries and reinvigorate the $23bn DVD market ? their biggest source of cash ? which has begun to stall after years of double-digit growth. There is also the burgeoning games business.

Yet in a world of media convergence, the format war?s impact could extend well beyond those industries. It could determine whether Sony or Microsoft will get a leg up in the competition with Apple and other technology companies to become the hub of a whole host of new media products likely to define the digital home.

?You?ve got three companies competing ? Apple, Sony and Microsoft ? and the stakes are the home, and how digital media is going to get there, be stored and retrieved,? says one executive involved in the fight. ?It?s going to be the pillar.?

The outcome is crucial for Sony. The inventor of the Walkman and the Trinitron colour television has fallen on hard times as Korean and Chinese competitors have elbowed into the television business and its portable music player has been outdone by Apple. Sir Howard Stringer, Sony?s new chief executive, is betting on Blu-ray as a central piece of the turnround plan. ?Howard can?t afford to lose this one,? says the chief executive of a rival media company.

Yet the format war will create considerable headaches. The biggest fear is that consumers ? afraid of betting on the wrong technology ? will be paralysed. ?The retailers will have to stock both formats. The studios will have to produce both formats. And guess what? The consumer won?t buy either,? says Jan Saxton of Adams Media Research, a consultancy that specialises in the home video market. ?What a great way to grow your business.?

At its core, the format war is a classic management case study that poses the question of whether it is better for a company to soup up an existing technology or gamble on a wholly new one.

For the risk-averse, there is HD-DVD, which will offer 15 gigabytes of storage on each disc, more than three times the present standard. A second layer would double that. Because HD-DVD is an evolution of current DVD technology, it should be relatively easy and inexpensive to bring to market.

?It is a simple and low-cost step to go from manufacturing standard DVDs to producing HD-DVDs,?says Mark Knox, a Toshiba spokesman. ?The changes [for a factory] cost less than $150,000.?

While Blu-Ray is more expensive, its proponents say the technology represents a quantum leap. It promises 25 gigabytes of storage on each disc ? enough to fit an entire season of a television series. It also promises a whole suite of interactive features. Blu-ray discs, for example, could offer multiple versions of the same film, related video games, soundtracks and perhaps one day allow viewers to dictate plot.

?You open up a whole new spectrum of creative possibilities,? says Tim Baxter, senior vice-president of strategic marketing at Sony Corp of America. ?This format is about gearing up for this holiday season and the next 10 years.?

When HD-DVD backers question the need for so much capacity ? and the associated costs ? the Blu-ray camp argues that the original DVD quickly ran out of space to hold all the extra features that soon became staples of the format.

Yet the larger concerns surrounding Blu-ray are about nuts-and-bolts manufacturability. Even some studio executives who support the format are uneasy about Sony?s ability to mass-produce the discs at a reasonable price ? particularly a second layer that would bring capacity to 50 gigabytes.

Andy Parsons, director of advanced product development at Pioneer, a key Sony partner, insists that the technology is proved and that costs will come down as volumes increase. ?It?s not like this is science fiction,? he says.

As Blu-ray executives make their case, they are mindful of the last great format war in the 1980s, when Sony?s Betamax videotape lost out to VHS even though it was widely considered superior. Although some at Sony chafe at the mere mention of Betamax, it is clear that they have studied their home video history.

One thing the company neglected to do with Betamax was to build a broad coalition in the consumer electronics industry ? something that was a priority this time around. With the support of partners spanning the consumer electronics and computer industries, the company is hoping quickly to flood the market with millions of devices that are compatible with Blu-ray. ?It?s about industry support,? Mr Baxter says. ?That didn?t exist with Betamax. We didn?t have that industry support by any means.?

Ultimately, the kingmaker in the format war may be Hollywood, which produces the films that will be played in either HD-DVD or Blu-ray format. ?The number one issue is getting the support of the studios and getting their titles,? says Adi Kishore, director of media and entertainment research at The Yankee Group, a consultancy.

On that front, Blu-ray has pushed ahead. In addition to Sony Pictures and the MGM film library it acquired nearly two years ago, it has gone on to secure commitments from all but one of the remaining studios ? General Electric?s Universal Pictures ? leading Mr Kishore to believe that it is likely to prevail.

That support was the result of an intense lobbying campaign in which the companies targeted the studios on hot-button issues. As in political campaigns, there were allegations of dirty tricks. ?At least one studio was bought,? one studio executive complains.

For Disney, which signed on with Blu-ray two years ago, capacity was the decider. The studio believes that consumers will demand a host of new interactive features ? many of which have yet to be developed ? particularly as the media landscape becomes more crowded with competition from the internet and other entertainment options. ?We see a technology that is terrific that gives everyone greater flexibility,?says Dick Cook, chairman of Walt Disney Studios.

News Corp?s 20th Century Fox remained on the fence. But eventually it joined Blu-ray after Sony agreed to incorporate Fox?s own anti-piracy protections.

The watershed moment may have occurred in October, when Warner Brothers and Paramount, two early HD DVD backers, changed their stance and said they would support both formats. The Warner move was particularly significant since it is Hollywood?s largest home video supplier and was instrumental in developing the current DVD market.

?We got more comfortable with the manufacturability of the discs and the hardware. We also got more comfortable with the digital rights management,? Mr Tsujihara says.

Most expect that HD-DVD will gain the early advantage because of its accelerated launch and lower price. The race could shift, however, with the release of PlayStation 3 in November.

The console is expected to retail for about $500 ? which would require a generous Sony subsidy ? and could provide Blu-ray with a Trojan horse into millions of living rooms. (In response, Microsoft plans to sell an add-on HD-DVD drive for its rival XBox games console.)

Nonetheless, there are questions about whether Sony will be able to produce the consoles in sufficient quantity. PlayStation 3?s release date has already slipped, giving the company and its retail partners little cushion before the all-important holiday season.

It is also uncertain whether consumers will regard what has traditionally been a games console as an all-in-one media device. ?The $64,000 question is whether game players and purchasers of this platform will use it to play back movies,? says Mr Tsujihara.

Whoever prevails, they will have to move fast. Even before HD-DVD and Blu-ray arrive in stores, the studios are already experimenting with ways to distribute films to customers over the internet, bypassing discs altogether. The failure of one of the rival formats to establish a quick lead could be the downfall of both.

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