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Blu-ray Victory Won't Budge Microsoft

Sony's winning DVD format likely won't affect plans for Xbox online downloading.

Despite the emergence of

Sony's

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Blu-ray high-definition video format as the new industry standard,

Microsoft

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is likely to go its own way, analysts say.

Instead of offering a Blu-ray player as an accessory to Xbox 360 buyers, Microsoft, which was closely identified with the HD DVD high-definition format, hopes to win the battle for the digital living room by developing its Xbox Live online download service.

That strategy is designed to get consumers to bypass standalone players and hooked to downloading high-definition video content, analysts say.

Microsoft is unlikely to ever manufacture a Blu-ray player itself, says Matt Rosoff, an analyst with Directions on Microsoft, an independent research firm. "Historically Microsoft hasn't been willing to pay royalties," he explains, "so they will never build a Blu-ray player directly into the Xbox."

To be sure, Microsoft was taken back last week when

Toshiba

announced it was abandoning the HD DVD format. Both companies were identified with the format, but the Redmond, Wash.-based software giant had cleverly hedged its bets.

Unlike Sony, Microsoft didn't build a high-definition player into its console systems. Instead it sold the HD DVD players as an accessory to the Xbox 360.

As of November, 269,000 HD DVD add-ons to the Xbox 360 console were sold since the launch a year ago, representing a 3.4% attach rate, according to a report in High-Def digest. Overall 750,000 HD DVD players were sold as of November, said the North American HD DVD Promotional Group.

That's just a fraction of the total Xbox 360 user base. "Microsoft's commitment to HD DVD has been never 100%," says David Mercer, principal analyst for Strategy Analytics. "They have always treated it as an accessory to the game console business, which has been their priority."

Not surprisingly, Microsoft has tried to downplay its HD DVD commitment since Toshiba's announcement last week that it was dropping the format.

"We do not believe the recent reports about HD DVD will have any material impact on the Xbox 360 platform or our position in the marketplace," Microsoft said in a statement. "It is games that sell consoles."

For the last few years, Microsoft has been quietly building out its Xbox Live marketplace, offering games, TV shows, and movies for download. The service has more than 10 million users now, most of whom use it to play games online.

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Xbox Live could now become the cornerstone of Microsoft's strategy against Blu-ray.

"The fundamental problem with Blu-ray from the Microsoft point of view is that it uses Java from

Sun

(JAVA)

," says Mercer. "I don't think Microsoft will ever introduce a Blu-ray player for the Xbox. They will just concentrate on downloads."

Microsoft had a long-standing battle with Sun over the licensing and integration of Java in its products and later built its own competing products, virtual machine and virtual J++, a Java development tool.

Microsoft could choose to build on Xbox Live marketplace, a service it has used to distinguish itself from other console makers. Both Sony and

Nintendo

have been struggling to strengthen their online offerings.

"Xbox Live is already the No. 1 source of downloadable high-def content," says Rosoff.

A partnership with

Netflix

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to offer more content through the Xbox Live service is also likely, Rosoff says.

That's why though HD DVD may have lost out to Blu-ray, Microsoft could emerge a winner, analysts say.

Sony has a long way to go towards building demand for Blu-ray players. Most consumers are happy with the DVD format and convincing them to move to a high-definition player won't be easy.

"DVD to some extent is a victim of its own success," says Josh Martin, an analyst with The Yankee Group. "Consumers don't see Blu-ray as a substantial leap over DVD, as DVD was over VHS."

And despite winning the format wars, adoption of Blu-ray players will be slow, says Martin.

That could play right into Microsoft's strategy, says Martin's colleague, Michael Goodman, an analyst for The Yankee Group who covers games, media and entertainment.

"Microsoft's thought has always been that the future of movie distribution is not in the player but in digital adoption," says Goodman. "If they can delay Blu-ray adoption, build out Xbox Live and get a segment to download high-def movies, then they have won."