Sony risks seeing another flagship product falling the way of its ill-fated Betamax video format after two technology powerhouses backed a rival’s vision for the next generation of DVD.

Microsoft, the world's largest software developer, and Intel, the largest chip-maker, today announced they would back Toshiba’s HD-DVD (high-definition DVD) format over Sony’s Blu-ray. The two companies will develop software and computer chips that will allow people to play HD-DVDs on their PCs.

The film industry is banking on this next generation of DVDs to boost the flagging home entertainment market. Sales of conventional DVDs have bottomed out, hitting the earnings power of the large Hollywood studios – including Sony.

The technology, expected to hit the market later this year, is being billed as offering cinematic quality images and promises to herald a new era of interactive entertainment and more sophisticated DVD-style extra features.

The stakes are equally high for Sony. The Japanese conglomerate has struggled to revive its electronics business in recent years. It has forecast a loss of 10 billion yen (£50 million) for the 12 months to March 2006 and last week the company said it would slash 10,000 jobs worldwide in a drive to compete more effectively. It can ill afford a re-run of the scenario that saw its Betamax video tape system lose out to the VHS standard developed by arch-rival Matsushita in the 1970s.

Meanwhile, for Microsoft and Intel executives venturing into the rarefied atmosphere of Japanese business dealings, the face-off between Sony and Toshiba has had all the makings of a diplomatic disaster. Each had refrained from backing either side untill the last moment as they sell software and components to both.

"We’d been hoping the two groups would find a common format for the sake of consumers’ benefit," a spokesman for Intel in Japan said.

Ryoji Chubachi, the Sony president, said: "Unfortunately we didn’t reach an agreement. We do not have any programme under which we will sit at the same table [as Toshiba]."

Sony could regret that outcome. HD-DVD's backers argue the format holds an advantage over Blu-ray because it will be cheaper to produce. Blu-ray discs, meanwhile, are expected to have a greater storage capacity than HD-DVD.

However, all is not lost. Blu-ray supporters include Apple Computer, Dell and Hewlett-Packard and Sony holds an advantage over Toshiba through its PlayStation games console. Blu-ray should reach millions of homes when the PS3 is launched early next year.

The Hollywood studios will also play an important part. Walt Disney and Sony Pictures Entertainment are backing Blu-ray. HD-DVD supporters include Paramount, Universal and Warner Brothers.

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