Video and audio quality from the two formats are essentially the same. Both are based on blue laser light (rather than red as for DVD). Both use the same size disk. HD DVD players are, however, less expensive than Blu-Ray players. The differences -- other than capacity, which is irrelevent in practical terms since all movies fit on either disk -- are mainly in other than video and audio quality.
HD DVD has, from day 1 been based on a stable specification that has needed no changes because it was well developed from the start. Blu-Ray was initially released based on a rushed spec which is now in 3 versions, two of which -- BD-Video 1.1 and BD-Live 2.0 -- are still under development or not yet implemented. As one result studios don't know what spec to program for. See the links for details of this and other issues facing Blu-Ray.
Some differences worth mentioning:
- The HD DVD spec made picture in picture (PiP) and secondary audio madatory, while Blu-ray did not.
-The HD DVD spec made it mandatory for players to be backward compatible with Cd and DVD, while Blu-Ray did not.
-The HD DVD spec made a network port (for firmware updates and access to"extras" mandatory, while Blu-Ray did not. (Note that subsequent revisons to the BD spec will eventually include these requirements, but are not yet mandatory)
- Blu-Ray disks are more delicate than HD DVD because of the thinner plastic covering layer.
- Blu-Ray extra features are supported by Sun developed Blu-Ray Java (BD-J) -- relatively difficult to program for and the target of BD-Video 1.1 (and not expected to be final until at least November 2007 -- See links), while HD DVD extra features are based on Microsoft's HDI language, which is a) a part of the final HD DVD spec, and b) relativey easy to program for.
- Blu-Ray is based on new technology -- requiring a totally new, and expensive, production plant -- while HD DVD is an extension of existing DVD technology -- and can be manufactured after additions to existing plants -- and is therefore less expensive to manufacture. It has been estimated that Blu-Ray disks cost over $6 to produce, while a HD DVD costs about $1. Also, disk replicator firms are readily available for HD DVD, but because of poor yields (ca 10%) for Blu-Ray disks from most replicator plants, there is a shortage of capacity for replicating Blu-Ray disks ... which along with the need to build a whole new plant contributes to the high cost of Blu-Ray disks.
- Blu-Ray disks are encumbered by region coding (HD DVD's are not) and by a poorly tested BD+ DRM format -- which has led to the recent problem whereby some disks (e.g. Fantastic Four: Silver Surfer, Day After Tomorrow) are unplayable or slow loading on many existing players (See links).
- Blu-Ray recording is possible on (expensive) stand alone recorders, BUT Sony has ensured these disks won't play on a normal Blu-Ray player ... meaning that anyone planning to put their own HD video on a BD won't be able to play it. On the other hand Toshiba -- primary developer of the HD DVD -- has developed a line (search on term "Vardia") of HD DVD recorder/players.
I could go on, but the bottom line is that while the two formats give equivalent results for the consumer in terms of audio and video quality, Blu-Ray has significant problems behind the scenes. The result is that all (or at least most) existing players will fail to meet the new BD-Video 1.1 spec expected later this year (which, to be fair, impacts on extras not the main move), studios don't know what extra features to program for because every player implements blu-Ray differently, and in frustration some studios have delayed Blu-Ray versions of films (e.g. Matrix) pending finalization of the BD-Video 1.1 spec, or released versions with fewer feature (e.g. Blood Diamond), or (i.e. Paramount and Dreamworks) have abandoned Blu-Ray, and now there are more movies available in HD DVD than Blu-Ray.
So -- there are significant differences. But to put all this in perspective sales of HD disks (of both formats) are about 1% of DVD sales, and has only recently exceeded VHS tape sales! So venturing into either format at this time has to be considered as "early adoption". It is not at all clear that either format will ever succeed, and from a consumer perspective, while the video and audio quality can -- on the right equipment -- be compelling, few consumers currently have equipment that allow them to see much advantage over DVD.