Looking back to 2005, HDTVs were finally available everywhere, but not everyone had one yet. A study by Leichtman Research Group would put the adoption rate at about 12 percent by the end of the year, and Nintendo even declined to make an HD-ready version of its new game system, the Wii. It was nearly impossible to buy movies in high definition, with cable or satellite broadcasts left as the only easy options. DVD player-based upscaling promised to make movies look better on HDTVs, but couldn't quite compare with the resolution of the real thing. There was a light on the horizon, however: Sony and Microsoft were both ready to place calculated bets on the "HD Era" of gaming, and the PS3 would even arrive with a Blu-ray player built-in. Microsoft stuck with plain DVDs, but promised an HD DVD add-on for the future.
The consoles' arrivals turned out to be particularly welcome too. The first dedicated players to ship were crudely designed, made from leftover laptop parts, with slow and glitchy performance and retailed for around $500 (HD DVD) or $1,000 (Blu-ray). At the time, concerns over DRM like the "Image Constraint Token" that could block HD playback on TVs without copyright-protected HDMI jacks ruled the day and we weren't sure 50GB Blu-ray discs would actually appear -- neither issue amounted to much. In time, the players got better and cheaper, and after a while, it was actually normal to see new movies released on HD formats alongside DVDs. In the end, Sony's Blu-ray format eventually prevailed and is still going strong as we speak. But the path to that victory was a costly one for Sony.
The Competitors: Sony vs. Toshiba
On one side, Sony promised its Blu-ray format could handle capacity (50GB) and even interactivity (BD-J) that we'd never seen before. While Toshiba claimed HD DVD could make up the gap in capacity (30GB max) and technology by being cheaper and easier to manufacture with plants that were already making DVDs. As for content, major studio support weighed heavily in Blu-ray's favor, whereas only Universal stood in HD DVD's corner. I hedged my bets by purchasing both the HD DVD add-on for the Xbox 360 (it was bundled with Heroes season one -- a decision I stand by) and a PS3. Considering the content advantage, it's really no surprise that HD DVD failed, as the only viable alternative was some sort of hybrid push that incorporated Blu-ray. That was a gap both LG and Samsung tried and failed to close with hybrid players. Warner Bros. considered making a play for the space with expensive dual-sided discs, but never actually put them on sale.
And the winner is...
Once Warner Bros. dropped support for HD DVD on the eve of CES 2008, the war was over. Sony had successfully pushed Blu-ray into millions of homes with its PS3 Trojan horse; this, despite trailing Xbox 360 and Wii in sales during the early days of the console war. Effectively, it was Sony's decision to make HD discs standard for the PS3, as opposed to an optional add-on, that led to a hardware gap HD DVD could never surmount. Add in the overwhelming studio support on the Blu-ray side, and it's clear in retrospect that only stubbornness (and a few contractual obligations) kept things going as long as they did. Toshiba threw in the towel just over a month after Warner Bros.' CES announcement, and the fledgling HD DVD library was rendered obsolete; now mere collector's items for a scant few.
The price of success
So to the victor go the spoils, right? Not quite. While Sony's Blu-ray format prevailed, it never quite turned into the cash cow its backers originally predicted. Blu-ray still hasn't unseated DVD as the primary physical movie-delivery format, and it's being squeezed out of relevance on the other end by the rise of video on-demand and streaming. This year, Sony took a $240 million hit because of "demand for physical media contracting faster than expected," something that's not helping its ongoing attempts to dig out of a massive financial hole. It could be worse though, as Toshiba is suffering the indignity of selling Blu-ray players of its own and facing the same declining PC and TV sales that have hit and crippled Sony.
LG and Samsung took a different approach to the format war with (token) attempts to support both sides and, by shifting focus to mobile, the two companies have seen significant growth. Microsoft failed to see the HDi interactive tech it contributed to HD DVD catch on, but its Xbox 360 led the video game console sales charts for years -- and never once, despite many rumors, appeared with an internal HD DVD drive. Microsoft also jumped on the Netflix streaming fad early in 2008 before even the PS3 and Wii scored access. Now, the Xbox One plays games and movies alike from Blu-ray discs, to go along with cable TV hooks and streaming apps, and it's almost not weird.
Despite years of rumors it would jump into the format war, Apple never did, and never has. It ran the other way, largely ditching support for optical discs on its machines and to this day, it still doesn't make a Blu-ray drive for Macs. Its iTunes video on-demand store is a leader in digital movie sales, and the Apple TV hockey puck has ridden a rising tide for streaming boxes to sales of over $1 billion last year. Internet movie services and connected devices are rising rapidly in popularity, with Netflix topping 40 million subscribers and Google's Chromecast dongle selling "millions" of units.
Sony's win has its benefits though, and the company has definitely turned things around with the PlayStation 4. The console hasn't ushered in a new format, but it's enjoying a sales lead that continues to grow. The PS4's also built with an eye to the future: Sony's hosting a beta program (PlayStation Now) for streaming games and promising an internet-delivered TV service later this year, adding to its Blu-ray movie playback and healthy suite of streaming video apps.
Blu-ray isn't ready to be written off either, as disc sales continue to grow slowly, and studios pack in digital copies to increase their appeal. The advent of Ultra HD could also be a bonus, as execs have told us a spec bump is being discussed.
So what did we -- the consumers who actually buy all this stuff -- get?
Unfortunately, the format war separated content for exclusives and caused studios to stagger movie rollouts. Partially as a result, even now, some classics (or cult classics) are either still unavailable in HD or are just hitting shelves. Also, copy protection is both as tight as ever, and as ineffective. Movies are consistently available as rips at or before their disc release. And even the PS4 requires a workaround just to enable video capture for games, among other DRM headaches. While schemes like digital copies and Ultraviolet have provided some portability, promised features (managed copy) have never arrived and moving content beyond the disc is still far more complicated than it should be.
On the other hand, we were promised a movie experience at home that finally truly rivaled what's available in theaters, and I think that bar has been met. The streaming push is bringing set-top boxes that support more than one service, but that doesn't mean the days of the video format war are over; they've just changed battlegrounds. Every delivery service (e.g., Netflix, Amazon, Hulu, cable TV) has its own exclusive content, and it's nearly impossible to get them all in one place -- with the amount of money at risk, it seems we'll never learn a different way to do this.
[Image credit: Gary Gardiner/Bloomberg via Getty Images (Store shelves), Associated Press (Peter Moore), Justin Sullivan/Getty Images (Cases close-up), Associated Press (Kazuo Hirai), BUILT Images/Alamy (Home theater)]
Sony’s Blu-ray Triumphs over Toshiba’s HD-DVD
Competitive Equivalence, Competitive Advantage, and the Role of Price
The four-year war over the next-generation DVD format for home videos that deliver picture clarity matching newer HDTVs has come to conclusion. The final nail in the coffin took only 8 days to sink. Sony and the team backing Blu-ray have defeated Toshiba and the team backing HD-DVD.
What lent advantage to the Blu-ray team over the HD-DVD team? The two sides were somewhat equally matched. Early battles in the war left the ultimate conclusion quite muddled. Yet Blu-ray’s eventual dominion over the market was not due to luck. In this article, we examine the evolution of this standards war to identify strategic actions that led to the making of a champion.
Content Providers Choose Sides
By the end of 2004, two years before the first next-generation DVD player was to be marketed in the US, the movie studios had mostly chosen sides. From the perspective of the movie studios, each format would deliver compelling benefits, and each subsequently attracted a similar number of strategic stakeholders.
Blu-ray, the more revolutionary of the two standards, was slated to hold a greater digital capacity, thus enabling studios to deliver greater user interactivity within it titles. Blu-ray was backed by Disney, Sony’s Columbia Pictures, and Sony’s Metro-Goldwyn-Mayer, and early in 2005 by Twentieth Century Fox.
HD-DVD, the more evolutionary of the two standards, relied on more proven technology, thus reducing time-to-market risk and reducing player manufacturing costs and manufacturing-line upgrade costs for replicating content onto discs. HD-DVD garnered the support of Paramount Pictures, Universal Pictures, and Warner Bros.
PC Manufacturers Also Choose Sides
Joining many movie studios, major PC manufacturers as well as core-component suppliers of Microsoft and Intel entered the fray by the fall of 2005. While HP and Sony had both established plans to include Blu-ray drives in forthcoming PC shipments, Microsoft and Intel jointly decided to include HD-DVD capabilities in their basic operating system and chipset solutions for computers. Over the course of the following year, Sony and other PC manufacturers were able to convince Microsoft and Intel to support both formats, yet the skirmish provided a brief moment of expectation that the standards war would favor Toshiba’s HD-DVD.
Not Unlike Other Industries
By the fall of 2005, neither of the two principal next-generation DVD format teams had a clear advantage. Each side had been garnered support of an array of major studios and device manufacturers and posed an array of compelling benefits for selecting their standard.
In telecommunications, silicon circuits, enterprise software, green energy, alternative engine designs, and other industries, vendors competing for a major contract often find themselves in a similar situation as that of Sony’s Blu-ray and Toshiba’s HD-DVD in 2005.
Leading companies naturally develop competitive yet differing technologies. These differing technologies result from different tradeoffs each vendor makes in selecting the bundle of benefits that is most likely to gain market adoption. Those competitors who made abhorrently poor tradeoffs usually are weeded out of the customers’ selection set, leaving only those technologies that meet a majority of the customers’ needs.
Likewise, competitive companies approach major contracts with a reference list. Just as HD-DVD and Blu-ray both gained support of major content providers and manufacturers, competing companies will both present track-records and back-stories to support the adoption of their solution.
A solid solution and references are table-stakes in many businesses. In these cases, other levers must be explored to create a decisive win. Finding themselves in what appeared to be a level playing field, both Sony and Toshiba sought other dimensions to explore in establishing their technology as the de-facto standard.
Early to Market, Early to Gain Critical Mass
Perhaps because Toshiba’s HD-DVD format relied on more standard technology, Toshiba anticipated launching its player’s production model before Sony’s went to market. Toshiba expected to launch their first player in the winter of 2005 ahead of the Christmas season. By October, Toshiba had realized that it would miss its deadline. Shortly thereafter, the cracks began to show in the foundation of backers for the HD-DVD format. First, Paramount Pictures announced that they would select a dual-platform strategy and release titles in both formats. Shortly thereafter, Warner Bros. joined Paramount. This left only Universal Studios, a subsidiary of GE, as the lone dedicated HD-DVD supporter.
Despite the delay, Toshiba released its HD-DVD player three months ahead of Sony’s Blu-ray. Priced at $499, 10,000 HD-DVD players were initially marketed along with four titles from Warner Home Video in the spring of 2006. Later that summer, Samsung released a Blu-ray player priced at $999 along with seven titles from Sony Pictures.
The initial launch of the Blu-ray player and titles was not without technical glitches. One noticeable shortcoming was that first batch of Blu-ray discs were restrained to only 25 gigabytes, or half the specified capacity. The lowered capacity meant that studios could only release movies less than 2 hours long, taking the Lord of the Rings trilogy out of the running.
Hernán Cortés & Strategic Commitment
With a high-priced player coming second to the market and holding serious limitations in benefits, one may have expected the team supporting Sony’s Blu-ray standard to have imploded in the summer of 2006. Yet the team held together. Unlike the HD-DVD team, where major studios elected a dual-platform strategy, effectively hedging their bets, no member of the original Blu-ray team defected towards HD-DVD. The Blu-ray team had strategic commitment.
An early example of strategic commitment comes from Hernán Cortés, the Spanish conquistador who overthrew the Aztec empire. Cortés’ expedition was in defiance of the Governor of Cuba. To return to Cuba would yield imprisonment or death. To avoid this fate, he had himself elected as chief administrative officer for Veracruz, a legal maneuver that removed Cortes from under the authority of the Governor of Cuba. To ensure the commitment of his men, Cortés scuttled (sank) his fleet, leaving only one ship to maintain communication with Spain. In doing so, he quashed any attempt of rebellion and return to Cuba, ensuring his men would not defect their allegiance. Having no other place to turn, his army was sufficiently motivated to support Cortés’ campaign into Tenochtitlan.
In a like manner, Sony put the full weight of its product portfolio behind establishing Blu-ray as the next-generation DVD format. In the fall of 2006, Sony released its PS3 game console priced at $599, each equipped to play Blu-ray content as a standard feature. Sony had not only staked out its strategy, but promised to sink other products in its portfolio if the standards war was not won by Blu-ray.
Unlike the Blu-ray team, the HD-DVD team continued to hedge their bet even in the game console arena. Microsoft, a HD-DVD backer, allowed Xbox 360 customers to upgrade their game consoles with a HD-DVD add-on for approximately $200, but did not include HD-DVD as a standard feature within its next-generation player.
Sony’s strategic commitment backed by tangible actions with clear financial implications was perhaps the largest deciding point in shaping the outcome.
By the start of 2007, less than a year after their introduction, 425,000 Blu-ray players were in the market, 400,000 of which were bundled PS3 game consoles. In contrast, 170,000 standalone HD-DVD players and 150,000 HD-DVD upgraded Xbox 360s were in the market. Before the release of the PS3, HD-DVD’s were outselling Blu-ray titles by two-to-one. By early 2007, the gap had narrowed significantly.
Another Minor Skirmish
2007 began with another minor skirmish. Adult film studios believed they had a new market in releasing titles on the next-generation format, however, they were having difficulty finding replicators (companies who imprint content onto discs). Rumor had it that no Blu-ray replicator would take their content, preferring the more high-brow titles (Americans tend to be less squeamish about murder and violence than they are about sex). Meanwhile, adult film studios were able to find HD-DVD replicators, making it the de-facto standard of this key early market influencer. This was a clear victory for HD-DVD for the adult entertainment industry had heralded many prior technology standards (i.e. the Internet).
Divining from this skirmish which team would be the ultimate winner approaches reading fortunes from tea leaves. Interesting, yet the adult entertainment industry does not always foretell standards.
The War Crescendos Then Abruptly Ends.
The war between Blu-ray and HD-DVD intensified throughout 2007. Toshiba cut the price of their HD-DVD players to below $300 by the summer of 2007. Likewise, Sony had lowered its PS3, which played Blu-ray discs, to below $499. Both companies were trying to carve out a permanent place in the market by expanding their install base.
In June of 2007, Dallas based Blockbuster announced that they would only stock Blu-ray titles, effectively ditching HD-DVD. In their announcement, Blockbuster cited the larger number of titles available on Blu-ray, thus making HD-DVD redundant.
In contrast, Paramount and DreamWorks both announced in August of 2007 their choice to drop Blu-ray in favor of HD-DVD.
Sensing that the war was nearing a decisive moment, Toshiba pulled harder on the price lever and lowered the HD-DVD players below $200 in time for the 2007 holiday season. To explain this action, Yoshihide Fujii, head of Toshiba’s HD-DVD team, stated “Right now, we need to increase the size of the market.” Install base was always known to be the deciding factor in the contest, and Toshiba sought to sell one million units in the remainder of the year. Yet, the action may have come too late.
In January 2008, Warner Bros. joined Disney, Twentieth Century Fox, and Sony in exclusively distributing titles in the Blu-ray format for next-generation DVDs. On February 12, both Netflix and Best Buy elected to sell only Blu-ray titles and players respectively. By February 20th, Toshiba admitted defeat.
Sony’s Blu-ray victory over Toshiba was never assured, but this case study does reveal two distinct areas where Sony outmaneuvered Toshiba in this war, both are related to the issue of strategic commitment and destroying the path of retreat.
First, we have the impenetrable commitment of the Blu-ray consortium in contrast to the hedging practiced by members of the HD-DVD team. By exclusively backing the Blu-ray format, Disney, Twentieth Century Fox, and Sony’s Studios all signaled to the market that the format would not go gently into the sunset. In contrast, Paramount and Warner Bros. signaled indifference. If one platform has a majority of committed backers and the other has a majority of indifferent backers, those committed to the cause are more likely to win than those going along for the ride.
Second, we have the built-in market coercion by Sony in the form of forcing the Blu-ray player on its PS3 game console. It is strongly suspected that the PS3 at $599 was overpriced as a game console alone. In contrast, the Nintendo Wii was priced at that time at $299 and the Microsoft Xbox 360 was $399, both much lower than the PS3. Although Sony may have ceded much-needed market share within the gaming business by saddling the PS3 with supporting the Blu-ray player, the PS3 did seed the market with much-needed Blu-ray players.
By the time Toshiba attempted to catch up in market share by lowering the price of its HD-DVD players to $199, it was too late. Between March 2006 and February 2008, about one million HD-DVD players had been sold globally, far short of Blu-ray’s 6.3 million players.
In any major campaign, all competitors are likely to suffer setbacks and injuries. It is useful to note which dimensions are key to winning. For Sony, it was the firm commitment of a handful of major studios coupled with its own commitment to seeding the market with Blu-ray players in the form of a game console. It was not that Toshiba was uncommitted to winning the standards war, it was that the team backing the HD-DVD standard collectively placed less at risk in their commitment than the team backing Blu-ray. In a winner-take-all game, hedging one’s bets is equivalent to admitting that defeat is acceptable.
The Role of Price
Throughout the standards war, price played a key role in determining the victor.
From a theoretical perspective, companies launching a new-to-the-world technology have an incentive to use penetration pricing, or pricing below the value of the delivered benefits, if there are significant downstream cost advantages in the form of scale, scope, or learning, or if there are significant network externalities which disproportionately reward the product with the largest user base.
In the standards war for defining the next-generation DVD format, pricing theory implies that both the Blu-ray and HD-DVD teams had significant incentive to enter with a low price and capture high volumes early in the war. Cost reductions from scale and learning would arise directly in the form of manufacturing players and discs, as would be associated with most any manufactured good. More significantly, network externalities encourage disproportionate rewards to the leading user base. These network externalities came not only in the obvious form of the tie-in between the player and the discs, but also in less obvious forms in the struggle for shelf-space in the distribution of discs and the struggle for software to enhance the user experience with digital content.
Toshiba clearly understood the importance of penetration pricing in a standards war. HD-DVD players entered the market at half the price of the Blu-ray players and were consistently priced lower than Blu-ray players throughout the war. Alone, this may have tilted the market towards crowning the HD-DVD format.
Sony also understood this issue. However, Sony was at a cost disadvantage to HD-DVD in that the Blu-ray players cost more to produce. To overcome this cost disadvantage, Sony bundled Blu-ray with PS3. Notice that the initial price of the standalone Blu-ray player from Samsung was $999 while three months later the PS3 with Blu-ray was only $599, a $400 discount. One line of argument could attempt to claim that Sony effectively enhanced the value of the majority of their basic Blu-ray players over HD-DVD players by positioning them as PS3 game consoles. An alternative line of argument could claim that Sony significantly discounted its Blu-ray players in the PS3 game console. Either way, the resulting bundle of PS3 and Blu-ray yielded a better tradeoff in perceived price to perceived benefits for more consumers than the lower-priced stand-alone HD-DVD players.
The Blu-ray victory is not without its downsides for Sony. In July of 2007, the European Commission increased its investigation into anticompetitive practices within the format war as Hollywood studios began to line up behind Blu-ray. Expect a legal battle to pursue long after the relevance of their line of inquiry has faded. European antitrust authorities are routinely suspicious of market standards which are established through the competitive market rather than bureaucratic committees.
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