Reference no: EM131702975

Case Scenario: Blu-Ray versus HD DVD

Between 2004 and 2008, there was a format war in the consumer electronics industry between two different versions of next generation high-definition DVD players and discs. In one camp, there was Sony with its Blu-ray format; in the other was Toshiba, who was championing the rival HD DVD format. Both high-definition formats offer a dramatic improvement in picture and sound quality over established DVD technology and are designed to work with high-definition television sets. However, although each new format plays old DVDs, the two standards are incompatible with each other. Blu-ray players will not accept DVDs formatted for HD DVD, and vice versa. Format wars like this have occurred many times in the past. VHS versus Betamax in the videocassette market and Windows versus Macintosh in PC operating systems are classic examples. If history is any guide, format wars tend to be "winner-take-all contests," with the loser being vanquished to a niche (as in the case of Apple's Macintosh operating system) or exiting the market altogether (as in the case of Sony's Betamax format). Format wars are highstakes games. Aware of this, both Sony and Toshiba worked hard to ensure that their format gained an early lead in sales. A key strategy of both companies was to line up fi lm studios and get them to commit to issuing discs based on their format. Initially, it looked as if Sony had the early advantage. Prior to the technology being launched in the market, Columbia Pictures and MGM (both owned by Sony), along with Disney and Fox Studios, all committed exclusively to Blu-ray. By late 2005, several other studios that had initially committed exclusively to HD DVD, including Warner Brothers and Paramount, also indicated that they would support Blu-ray as well.

Warner and Paramount cited Bluray's momentum among other studios and its strong copyright protection mechanisms. This left just Universal Studios committed exclusively to HD DVD. To further strengthen its hand, Sony announced that it would incorporate Blu-ray technology in its next generation PS3 gaming console and its Vaio line of PCs. HP and Dell also indicated that they would support the Blu-ray format. Sony even licensed the Blu-ray format to several other consumer electronics firms, including Samsung, in a bid to increase the supply of Blu-ray players in stores. Then things began to go wrong for Sony. The company had to delay delivery of its P3 gaming console by a year due to engineering problems, which sapped some of the momentum from Blu-ray. Microsoft took advantage of this misstep, announcing that it would market an HD DVD player that would work with its own gaming console, Xbox 360. In mid- 2006, the first Blu-ray and HD DVD players hit the market: the Blu-ray players were more expensive, as much as twice the price of entry level HD DVD players. According to Toshiba, HD DVD players and discs are cheaper to manufacture, although Sony disputes this. To complicate matters, one of the first Blu-ray players, made by Sony licensee Samsung, was shipped with a bad chip that marred its image quality.

By late 2006, some firms were beginning to hedge their bets. HP reversed its earlier position and said that it would support both standards. Then in mid- 2007, Toshiba persuaded Paramount to switch from Blu-ray and exclusively back the HD DVD format, paying it $150 million to do so. Paradoxically, Sony claimed that the Paramount defection was a sign that it was winning. The fact that Toshiba had to pay Paramount $150 million showed how desperate they were, claimed Sony. As it turned out, Sony was right. By late 2007, sales of Blu-ray DVDs were outselling HD DVDs by a margin of two to one, primarily thanks to the P3, which after arriving late to the market, was selling reasonably well. To further accelerate its lead, Sony cut prices on stand-alone Blu-ray players. Then in early 2008, Warner announced that henceforth it would back Blu-ray exclusively, citing Blu-ray's market momentum. This proved to be the coup de grâce for HD DVD. Very quickly, the remaining fence sitters backed Blu-ray, and HD DVD was effectively dead. Some wonder, however, whether Sony's triumph might be something of a pyrrhic victory, for another technology was emerging that promised to make HD DVD players obsolete: video on demand and video downloads onto computer hard drives over the Internet.

Case Discussion Questions

1. Why did both Sony and Toshiba perceive it to be so important to get an early lead in sales?

2. What strategies and assets enabled Sony to win this format war?

3. What might Toshiba have done that might have led to a different outcome?

4. The companies that developed first generation DVD technology decided not to compete on technology, instead harmonizing their technology under the auspices of the DVD Forum. Why do you think they chose a different approach this time around?

5. What are the risks associated with fighting a format war like this?