Microsoft is talking to rival Sony about the possibility of adding Blu-ray technology to the Xbox, according to The Financial Times. Sony Electronics U.S. President Stan Glasgow acknowledged talks with both Microsoft and Apple about adding Blu-ray drives to their hardware. Microsoft and Apple have been pushing the digital-distribution model, which analysts believe will eventually trump Blu-ray’s recent format victory.

“You have to remember that for Microsoft, HD DVD was always a delaying action. Microsoft doesn’t believe in Blu-ray and it didn’t believe in HD DVD,” said Mike Goodman, an analyst at Yankee Group. “Microsoft believes in digital distribution. Still, Microsoft wants to give the customers the option.”

A Catch-22 Decision

Sony’s discussions with Microsoft are particularly interesting considering it would put the Xbox 360 on a more level playing field with Sony’s Playstation 3, which has a Blu-ray drive. Yet Goodman said he wouldn’t be surprised to see a $299 or $399 add-on Blu-ray player for the Xbox

360. That may force a premium edition.

“The decision is sort of a Catch-22 for Sony. Bu-ray is a competitive advantage for the Playstation 3,” Goodman said. “On the flip side, not licensing the technology to Microsoft would be somewhat detrimental to Sony considering Sony needs and wants to increase Blu-ray penetration as quickly as possible.”

At the end of the day, Goodman suspects Sony is more intent on extracting as much value out of Blu-ray as it can in the shortest timeline. Sony is predicting it will sell 100 million-plus units of the Playstation 3, Goodman said, regardless of how the Xbox 360 performs.

How lengthy Will Blu-ray Last?

As the dust settles on the Blu-ray versus HD DVD battle, Sony’s moves point to its realization of another battle brewing — broadband World Wide Web and video on demand (VOD) as the pipeline for programming and movies into the…

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