DVD Wars: Episode IV -- Breakdown

Failure alert! The effort to supplant the dictatorship over the Home Video Republic has been set back by a breakdown in negotiations. The monolithic corporations Sony (NYSE:SNE) and Toshiba have abandoned calls for unification of their two powerful technologies. Without this sacred joining, the current DVD dreadnought will continue to run rampant across the marketplace, with nothing to keep its monopolistic lust in check until a new hope arrives .

Or so would go the opening scroll if the upcoming home-video format wars were filmed as a George Lucas-esque cinematic extravaganza.

Here's some background: Sony and Toshiba are interested in taking out the existing DVD paradigm and replacing it with an updated technology. Sony's version is called Blu-ray, while Toshiba is pushing a platform dubbed HD DVD. Both of these formats hold much more information than current video discs and will definitely give viewers a better home-theater experience than they are currently receiving.

Hollywood was hoping that the two companies would agree on a single standard so that two competing technologies wouldn't be out in the marketplace. Several formats would yield fragmented consumer support, making it difficult for media companies like Sony, Disney (NYSE:DIS), and Time Warner (NYSE:TWX) to efficiently promote their celluloid properties and generate large sales. These companies want to go through their current DVD catalogs and port them over to the new medium to begin another round of monetization -- such is the value of libraries.

Unfortunately, a recent report suggests that, for now, a unified format does not seem feasible, though negotiations could resume at any time. The report also shows how the big boys have taken sides, supporting one or the other format (e.g., Disney's behind Blu-ray, Time Warner favors HD DVD). The upshot is that no matter what, the entertainment industry is getting close to a major shift in the home-video landscape. The aforementioned conglomerates will obviously be pleased when this happens (as a shareholder in Disney, I can't wait to see all of their classic cartoons colonize the new discs), but there are other, smaller companies that might benefit in a more direct fashion.

Some of these might include Lions Gate Entertainment (NYSE:LGF), which is definitely into library investments, and Marvel Enterprises (NYSE:MVL), which depends on home-video revenues not only as a hedge against box-office failures but also as a nice ancillary revenue source. Another smaller media player that has significant library assets is World Wrestling Entertainment. This company is also getting into the mainstream movie biz as a way to expand beyond its cult demographic of squared-circle fanatics. And let's not forget Pixar (NASDAQ:PIXR) and DreamWorks Animation (NYSE:DWA), which cannot wait to bring Woody, Nemo, and Shrek over to the other side.

I'm not suggesting you buy these companies just because of Blu-ray or whatever is coming along. (You should look at other aspects as well, such as cash flow and the like.) I'm merely pointing out that the eventual replacement of the DVD as we know it will become part of a long-term thesis on some of these companies -- the ones who hold the title to engaging content will prosper. It will be interesting to see which of the two formats comes out on top, but I'm confident some sort of unification will occur eventually.

The power of the Format is all around us:

• R.I.P. VHS
• You Think Blu-ray Is Exciting?
• A Blu-ray Compromise?
• Apple Enters Blu-ray Fray

Time Warner, Marvel, Pixar, and DreamWorks have all been recommended by David Gardner in the Motley Fool Stock Advisor newsletter service. Want to see what else David has his eye on? A free trial is yours for the asking.

Fool contributor Steven Mallas owns shares of Disney and Marvel Enterprises. The Fool has a disclosure policy.