Speculation is heating up that Warner Bros. will pick a side in the high-def format war in time for the 2008 Consumer Electronics Show, which kicks off January 7th in Las Vegas. (I’ll be there.) And the speculation is that they’re leaning toward Blu-ray Disc. The smoldering rumors had gasoline poured on them by this BusinessWeek article on Thursday.

“The rumor is that Warner is coming aboard soon,” says Michael Burns, vice-chairman of studio Lionsgate (LGF), which makes its movies available on the Sony-backed format. “That will make it awfully tough for HD DVD to stay in this game.”

There have been some signs. Warner, which has always been on the fence, abandoned their proposed TotalHD dual-format disc last month. Warner has also joined groups that promote Blu-ray Disc. Back in September Warner stated that they’d be watching sales in 4Q07 closely and then evaluate their dual-format position based on that information.

In October, speaking to Home Media Magazine, Warner’s Dan Silverberg indicated their dual-format strategy could be changing.

Also there was Dan Silverberg, VP of high-definition media for Warner Home Video, which since Paramount’s move to the HD DVD camp is the only studio to support both next-generation formats.

That may not be for long, Silverberg said. “One thing that may be changing is our strategy,” he said. “When both formats launched and hardware prices were high, we made a decision to support both formats and let the consumer decide. But now that hardware pricing is affordable for both Blu-ray and HD DVD, it appears consumers no longer want to decide — so the notion of staying in two formats for the duration is something we are re-evaluating now that we are in the fourth quarter.”

Silverberg noted that Warner has the top-selling Blu-ray title of all time with 300 and is consistently No. 1 or No. 2 in both Blu-ray sales market share and in number of Blu-ray titles in the market.

“We can definitely talk Blu-ray,” he said. “We are committed to the format.”

As I said at the time, if staying with both formats is something that might be changing, and they’re committed to Blu-ray, then the answer seems fairly clear – they’re considering dropping HD DVD.

Why would Warner want to do this? Because they’ve never liked supporting two formats, they really want to see a single format win the war. Why? Because two formats divides and confuses the market, and slows down adoption. If a single format ruled, it would allow for a focused marketing effort, and it would eliminate consumer confusion. And in the end all Warner wants is to sell more discs, and they take a long view. They might lose some sales in the short term, but if one format wins the war then adoption should pick up more rapidly, leading to increased disc sales sooner.

So why Blu-ray and not HD DVD? BD has outsold HD DVD roughly 2:1 in the US, 3:1 in Europe, 5:1 in Australia, and 9:1 in Japan. HD DVD hasn’t been able to beat Blu-ray in any market, except for times when it launched before BD and had the market to itself. But then BD always caught up, and outpaced, HD DVD once it launched. So the consumer momentum is already behind Blu-ray.

And you have to consider their goal – to push one side or the other into a clear lead to win the war, to unify the market. Warner is the big dog. They account for 24.54% of BD titles, second only to Sony’s 24.80%. And 34.02% of HD DVD titles, second only to Universal’s 39.30%. In the overall market, if Warner were to pull out of HD DVD and release only on Blu-ray, that would give BD over 70% of the titles in the market. Conversely, if Warner were to pull out of BD and release only on HD DVD, that would give HD DVD only roughly 50% of the titles in the market. Sony, Fox, and Disney, all Blu-ray exclusive studios, collectively release nearly half the titles on the market. Universal is the big anchor for HD DVD. While Paramount switched from dual-format to HD DVD this year, their output is fairly small. So if Warner wants to help end the war, backing Blu-ray would decisively tip the balance in the market – and it would likely push Paramount into re-joining the BD camp once their 18 months of exclusivity is up (if not sooner). That would leave Universal the sole major HD DVD backer, and they’d be unlikely to try to fight the war alone. But backing HD DVD would simply split the market almost evenly, and would likely serve to increase confusion and prolong the war.

And Warner need only look at their own sales figures. The titles they release on both formats routinely sell 2:1 or better in favor of Blu-ray. So the short term hit of dropping HD DVD is less than the hit from dropping Blu-ray. If they’re going to pick a side, going with Blu-ray is better for Warner Bros. in both the short term and the long term – less of a short term hit to sales, and a better chance at ending the war and increasing adoption.

If they were really waiting to see how sales went in 4Q07, so far BD has handily kept its lead – even the release of Transformers couldn’t give HD DVD the edge that week. If Warner was looking for some big move by HD DVD to turn the tide, it hasn’t happened yet.

Sure, Warner could shock everyone and side with HD DVD. Toshiba could shovel money at them, like they did Paramount and DreamWorks, to buy the deal. But it is likely that the Blu-ray camp would not go down without a fight, and they’d be willing to buy Warner’s allegiance as well. Toshiba has already dipped into their war chest for the Paramount/DreamWorks deal, while the BDA has more members with deep pockets.

Either way, it is certainly interesting to watch. And if they do make an announcement at CES, it will be a huge news.