Newsflash: Blu-ray has killed HD-DVD. Something which I and many others have been noting for a long time now (prediction #3 for 2008, and I was talking about it long before that – hell, in March 2006 I wrote “There likely won’t be a clear winner in the format war until next year at the earliest, but if I had to guess my money is on Blu-ray.”) is finally making the mainstream press with Toshiba’s formal surrender coming as soon as this week. But that is not what I want to talk about right now – quite frankly after the past year of talking about it, I’m almost entirely talked out about the war (again, almost). I want to talk about something that was has been brought up again this weekend by Wired, and then by Mashable: that digital downloads will kill Blu-ray before it gains steam.

While I first started talking about this possibility several months ago, and was reiterating it as recently as December/January here, here and here – I now believe a combination of factors will help Blu-ray be a success over digital downloads for the foreseeable future.

Back in May of last year I wrote:

It really is becoming more of a possibility that neither HD-DVD nor Blu-ray will win their war – Digital HD Video Downloads could come seemingly out of nowhere and take the crown. Digital music downloads have been chopping away at CD sales for the past few years, but neither HD-DVD or Blu-ray has nearly the legs to stand on that the CD did. This is all coming together at just the right time…

So don’t expect huge back catalogs of films on HD-DVD or Blu-ray anytime soon. In fact we could be seeing them much sooner in digital format as various studios have already shown with iTunes just how easy it is to setup and distribute older films digitally.

Once the broadband gets just a little bit faster and the cost of storage drops just a little bit more, the fully-digital age may start a rapid ascent to the top of the movie mountain.

Back catalog films are now coming to services like iTunes much faster than the high-definition discs just as I predicted, and while broadband is creeping up in speeds and storage prices continue to drop, Blu-ray was able to gain a decisive victory much sooner than I imagined. Thanks to this, the format definitely has a chance to grow those legs – especially with encouraging sales figures finally coming in from Sony on the Playstation 3 (which of course has a Blu-ray player built in).

But here is what I see as the main problem currently for digital distribution: while the digital movie rental services by Apple and Microsoft are very good – they are far from great, especially with regards to HD content. The last part is key there – you really can’t call this stuff ‘HD’ content – it is simply not. George Ou has written a few great posts about this, and I’ve talked about it here as well.

I downloaded an ‘HD’ rental over Xbox Live this weekend – there is no question that the convenience was great, but the quality was far from HD. While most of the time it was better than regular DVD quality on my HD TV – it was just barely better. Other times, especially during dark scenes, it was noticeably worse than DVD – again this is an ‘HD’ download. While it’s true that for a lot of people this won’t matter, and they’re perfectly happy to be tricked into thinking they are downloading a real HD movie on par with a Blu-ray or HD-DVD HD movie, the fact that it is not the same experience still means something.

This difference is part of what is going to keep Netflix in business while they transition over to the digital realm (their LG box you connect to your TV will be ready later this year, and there is whispers of downloads right to game systems). When the public at large hears about Blu-ray winning the format war, they are going to buy Blu-ray players. They are going to rent Blu-ray discs via Netflix and in Blockbuster stores just as they do now with regular DVDs. Digital downloads just aren’t there – yet.

None of this is to say that digital distribution won’t eventually kill Blu-ray and DVD just as in the music industry it is killing the CD – eventually it will. Steve Jobs knows it, even Bill Gates knows it, but we’re not there yet.

Would Steve Jobs even want digital distribution to kill Blu-ray right now? After all he is the largest shareholder in Disney – a studio which has backed Blu-ray from the beginning and stands to make a lot of money off of selling their entire catalog on the new standard format. If he was trying to take out Blu-ray right now, Jobs could start by implementing something like a rent-to-own system that I laid out for iTunes in which you could rent a movie via your computer or Apple TV, and then if you like it, buy it minus the price you paid for it – that’s not happening just yet.

Hollywood isn’t stupid. Part of the reason why this format war is ending so quickly is that they all got together and realized that having one unified HD format is the only thing that was going to bring in the customers for all of them. Sure, they’re allowing for digital distribution to start, but are putting a lot of restrictions on it (24-hour expiration periods, etc) – they know it’s the future as well, but why not make a ton of money off of a new format (Blu-ray) rather than just go straight to digital?

Hollywood is in fact so smart that they’re doing something I never thought they’d actually do when I wrote a post about it back in May: release DVDs (and presumably soon Blu-rays) with digital copies of films right on them for a user to utilize. Who wouldn’t buy an HD version of a movie Blu-ray that came with an easy-to-transfer digital copy, rather than just the sub-HD digital copy itself? This will keep physical units moving.

So even though I’ve touted digital distribution as a potential Blu-ray/HD-DVD killer for a long time now, I now think Hollywood acted quickly enough to make Blu-ray a legitimate heir to the DVD. That doesn’t meant digital distribution won’t kill it eventually, but it’s a few years farther down the road.