Sony

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could be among the casualties if an incipient battle over the next generation of DVD technology turns into a full-blown format war.

With sales of DVD movies poised for a slowdown and Sony's electronics division already struggling, the Japanese electronics giant could use another big hit. Next-generation DVD technology -- with its ability to store high-definition video and vast amounts of data -- could be that next big thing. But it won't be if consumers are faced with a confusing choice between a format pushed by Sony and a rival one offered by

Toshiba

.

"The impact is pretty simple," says Van Baker, an analyst with Gartner, an industry research group. "In the short term, nobody buys anything."

In order to head off that outcome, the rivals have been negotiating to come up with some unified standard. But Toshiba broke off those talks last week, according to published reports.

Although Sony and its allies remain open to negotiating, a resolution likely won't come until after the holidays, if then, analysts say. And the longer it takes to resolve the issue, the bigger the impact could be, delaying mass adoption or potentially sabotaging the market all together.

"It's not to anybody's advantage to have a format war out there," adds Baker.

The next-generation DVD formats could meet a number of needs. Unlike the typical player, a high-definition DVD player could play movies that take advantage of the resolution of high-definition television screens. And computer users looking for a place to back up movies or music libraries would find much more space on a next-generation DVD disc than on current CDs or DVDs.

But the new formats differ in some important ways, including storage capacity, cost and industry support. Blu-ray, the format backed by Sony, would store up to 25 gigabytes of data on each disc, compared with about 15GB for discs in the Toshiba-backed HD-DVD format. The HD-DVD group argues that its technology is closer to that of current DVD technology, meaning the discs would be cheaper to produce.

Blu-ray has the support of such companies as

Apple

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,

Dell

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and

Walt Disney

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.

Along with Toshiba,

NEC

( NIPNY),

Viacom's

(VIA.B)

Paramount Studios and

Time Warner's

(TWX)

Warner Home Video division are backing HD-DVD.

Sony, of course, has been here before. In the 1980s, the company's Betamax technology famously lost out to the rival VHS format in the consumer video cassette wars, despite being an arguably superior format. In more recent years, the company has similarly struggled to gain mass adoption for media formats ranging from the MiniDisc to the Memory Stick.

But the fight over next-generation DVDs comes as Sony is under siege on a number of fronts. The company's overall sales fell 4% last year, due in part to declining electronics sales. On the bottom line, the electronics division posted an operating loss of about $310 million, as gross margins slipped.

Because Sony has been struggling, the outcome of the format war is important to the company from a financial standpoint, says Josh Martin, an associate research analyst at IDC.

A Sony representative declined to give the company's expectations for Blu-ray-related sales. "Optical disc devices" -- such as Blu-ray-based ones -- "will continue to be important business for Sony," a company representative said in an email.

Although the company has a potential hit with its upcoming PlayStation 3 video-game console, analysts expect tough competition from

Microsoft

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, which plans to release its own new console later this year, some three months or more before Sony's product will appear on store shelves. And even if PlayStation 3 fends off Microsoft, consoles are typically sold at a loss initially, meaning that sales of the device could weigh heavily on the company's results next year.

Meanwhile, Sony could start to see the effect of an expected industrywide slowdown in DVD disc sales. In recent months, rival studios such as

Pixar

( PIXR) and

DreamWorks

(DWA)

have reported slower-than-expected sales of some titles.

Indeed, as a company that both owns movie studios and manufactures consumer electronics equipment, Sony is in a position to be doubly hurt by a slowing of DVD sales -- or doubly helped by mass adoption of a new format.

However, Sony's prospects in the next-generation DVD battle could be better than in past format wars. Unlike with Betamax or Memory Stick, where the company was largely standing alone, Sony has some powerful allies this time around.

Plus, the PlayStation 3, which will play Blu-ray discs, may give it a strategic advantage over its HD-DVD rivals, since the new PlayStation will be the only one of the three new consoles that incorporates next-generation DVD technology.

Sony is the leading video-game console maker, having sold some 90 million PlayStation 2s worldwide, and most analysts expect the company will remain the leader as the next-generation consoles come out.

"Given the choice of having console or not having it, you would rather have it," says Martin.

And some analysts believe Sony won't actually be hurt by a format war. Current DVDs gained popularity as a movie medium, notes Mark Stahlman, an analyst for Caris. But home movie distribution will be a much less important application for the next generation of DVDs, he says.

Instead, they'll be used more for personal and individual applications, such as for storing information or as game discs in the PlayStation 3. As such, compatibility issues won't matter as much as they do with current DVDs, he says.

Instead, it's probably important that Sony maintain as much control as it can over Blu-ray and hold out for the best standard it can, Stahlman says.

"I suspect that by sticking to their guns and broadening the future applications of Blu-ray, Sony's going to come out stronger," says Stahlman, who doesn't own the stock and whose firm has not done investment banking business for Sony.