Sony-NEC Optical Merger May Be An Uneasy Alliance

Updated: The two companies will combine their optical-storage component operations under Sony's leadership.

Sony and NEC agreed to merge the optical disk-drive operations of both companies on Thursday, a move that will combine members of the two opposing next-generation DVD camps.

Beginning in April 2006, the two companies will combine their optical-storage component operations under Sony Corp.s leadership, which will own 55 percent of the combined operations and name the president of the combined business. Sony will continue to supply its optical pickups to drive makers, with NEC Corp. taking responsibility for the assorted controllers and other chips.

Although NEC has publicly backed the rival HD DVD standard developed and promoted by Toshiba Ltd., Sony will almost certainly shift NECs development to its own Blu-Ray format, analysts said. However, one analyst said that the combined venture could end up selling drives in both formats, provided products were available and shipping by the time the merger became official.

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The combined business will represent about 20 percent of the global market, NEC said, trailing only a second joint-venture between Hitachi Ltd. and LG Electronics Inc., known as Hitachi-LG Data Storage. That company controls about 28 percent of the market, a Hitachi spokesman said, as quoted by Reuters.

Since Sony will continue to manufacture the optical components used in the drive, it should still control its Blu-Ray technology, which use next-generation blue lasers and dedicated optical read/write components to achieve capacities of between 23GB to 54GB, depending on the format of the disk. The press release announcing the deal did not specify whether the JV would be responsible for next-generation products, noted Michelle Abraham, an analyst with In-Stat, Scottsdale, Ariz.

NEC representatives in the U.S. were unavailable for comment. However, a Sony official left open the possibility that the merged company could indeed produce HD DVD drives, even though he referred to any potential plans as "speculation".

"This joint venture relates to the creation of joint manufacturing operations," said Rick Clancy, senior vice president of communications for Sony Electronics, San Diego. "It is conceivable that there could be a variety of disk-drive requests produced, based on requests for a variety of customers." Those drives include CD-based drives, DVD drives, Blu-Ray, and "perhaps even that other format," Clancy said.

"We could end up doing [HD DVD], but that doesnt change Sonys commitment on Blu-Ray one bit," Clancy said.

"Optical disc drives are key components for a broad range of devices and we are strategically focusing our development resources in this sector," Ryoji Chubachi, Sonys president and chief executive of its electronics division, said in a statement. "By teaming with NEC which has excellent technology in areas such as DVD drives, I believe we can work effectively to enhance our product lineup and quality on a global scale."

Both Sony and Toshiba have been frantically recruiting CE, PC, and media companies, hoping to achieve a critical mass that will result in market dominance. Both sides have recruited industry heavyweights into their camps; Toshibas converts have included Microsoft and Intel, which have pledged non-exclusive support to the Toshiba format, since it supports recording and playback on multiple devices.

Dell Inc. and Hewlett-Packard Corp., meanwhile, have supported the allegedly stronger digital-rights-management technology found in Blu-Ray, which has attracted MGM and Warner Bros., among others, to join Sonys coalition. However, HP has also asked Sony to include two technologies into the standard: managed copy, which will allow users to back up copies of movies they have purchased, and iHD, which adds some interactivity to next-generation content. That support has still not been included, leading HP to publicly consider the opposing HD-DVD standard in comments made Tuesday.

Although NEC Electronics Inc. has publicly backed HD DVD, a representative from Toshiba said NECs decision to shift its optical-drive operations under Sonys control has not changed NECs stance on HD DVD.

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"NEC has informed Toshiba that it will continue to support HD DVD and that its position on the next generation DVD format remains unchanged," Toshiba said, in a statement provided by a company representative. "We do not expect this announcement to have any impact on HD DVD standardization or market penetration."

Analysts said that the joint venture will give Sony additional clout in the marketplace, but that it will add little to its market battle with Toshiba and HD-DVD.

"I dont think its about the future-generation DVD business; I think its that the current DVD burner business is becoming more competitive," said Wolfgang Schlichting, a Miami-based optical storage analyst with IDC. "The new-generation drives take a lot longer to develop than ones based on older technology."

A number of other market leaders have had to partner up to grow market share, Schlichting added, including Hitachi-LG Data Storage and Toshiba Ltd.s joint venture with Samsung, which merged both companies optical businesses in 2003.

Because both Sony and NEC have already invested so much into their next-generation technology development, Schlichting said both firms would likely move ahead with their product plans. This could result in the unlikely scenario that a Sony-controlled company might ship HD DVD drives, he said.

"In the short term, I wouldnt be surprised," Schlichting said. "In the long term, its a different question. Sony is committed to Blu-Ray; its strategic for the entire company. NEC was looking for the next product to make some money off of."

Both NEC and Sony intend to manufacture drives for PCs, while Toshiba and Sanyo have targeted the consumer market, In-Stats Abraham said.

Editors Note: This story was updated to include comments from Sony.

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