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Technology Strategies in the Recent Format Wars

Posted on June 10, 2009 / 1 Comments / Permalink

Abstract

Many regard Betamax vs. VHS formats as the classic example of a standards war. VHS format emerged as the winner not because it was a superior technology but due to various tactics, such as being a fast follower, its marketing strategy, complimenting goods, industry alliances and market influences. Four decades on, a new format war materialised—Sony’s Blu-ray vs. Toshiba’s HD-DVD. This time Sony utilised varied strategies to ensure Blu-ray becomes the standard format. Sony invested in development of the technology to increase Blu-ray’s disc storage capacity. Sony used its advantage in the gaming consoles and high-definition TV sets to push Blu-ray-compatible PlayStation 3 consoles. Sony developed Blu-ray’s interactivity around an open source Java-based solution. Sony even went as far as buying a movie studio to ensure titles for its Blu-ray’s format. But the key ingredient to Blu-ray’s success was support from major market leaders such as Warner Brothers, which earlier this year announced it will no longer support the opponent format, HD-DVD. Discussion of format standardisation is inevitably a discussion of patent rights and licensing, which holds great financial benefits to the owning company. Furthermore, as with any standards war, the consumers are the victims along the way. Until one format becomes the standard, consumers are left on the fence, confronted with the dilemma of which format to select and the danger of being locked into a format that did not become the standard.

Many regard the competing formats Betamax vs. VHS in the ‘70s as the classic example of a standards war. Sony was the first to introduce a compact videocassette recorder called Betamax. By mid-70s, six other major designs had been proposed, JVC’s VHS as one of these six. Although Sony had a few advantages such as being a first-to-market, superior position in the market and a technological lead, it lost sight of the importance of alliances and marketing to enforce a new standard and its advantages were short-lived. By Mid-80s, Sony’s Betamax had fallen behind JVC’s VHS format and Sony conceded and began producing VHS equipment. Certain factors were key to VHS’s success such as JVC’s willingness to create alliances and complimentary goods for VHS. JVC invited alliance partners to participate in the development of the format design (Jakobs and Wallbaum, 2005). JVC together with its alliance partners had bigger manufacturing capabilities and were able fulfill consumers’ demands and gain decisive edge in the VCR market. JVC reacted to consumers needs and provides longer recording time and improved technical performance. Furthermore, as a result of the unexpected appearance of video market with more video titles being available for VHS, consumers were motivated to purchase VHS hardware instead of Betamax. Since the days of the videocassettes, compact discs and their players became among the world’s most successful consumer electronic products. Today, four decades after the battle between Betamax and VHS, a new format war has emerged between Sony’s Blu-ray and Toshiba’s HD-DVD for the High-Definition (HD) video format. This time around, Sony employed varied business strategies and tactics to make sure its format came out on top.

The format that replaced VHS, DVD, had a very peaceful beginning. The DVD format is the result of an unprecedented agreement reached in late 1995 among all the hardware manufacturers (Bell, 1996). DVD is a transitional technology and a technical compromise forged specifically to avoid another format war (Greenstein, 2006).

Today the market has virtually exhausted all possibilities for growing sales through new users with most present sales are replacement purchases (Greenstein, 2006). Now that sales of regular DVDs have reached a plateau, the movie studios have started marketing high-definition (HD) DVDs and players as a way to make consumers buy their favourite movies all over again. A high-definition DVD, as the term implies, has a clearer picture than a regular DVD (when viewed with an HD player on an HD display).

The next generation, post DVD standard for high-capacity, high-definition optical discs uses blue-laser technology. Blue-laser optical discs pack more data than CDs and DVDs. The wavelength of the laser’s light limits the number of pits that can be stored on the disc. The data pits constitute the digital 1s and 0s or basically the amount of data on the disc. The shorter the wavelength, the smaller the pits it can read (Gunshor 1996). Blue diode lasers have a shorter wavelength than red laser and thus they can read far smaller data pits and increase the information density with tighter focus and less distortion (Fischetti, 2007).

Disk makers have released two very similar yet competing high-definition formats: Sony’s Blu-ray and Toshiba’s HD-DVD. “Both Sony and Toshiba used this one scientific principle, yet they created different and incompatible formats” (Cherry, 2008). Blu-ray Disc was developed by the Blu-ray Disc Association, a group headed by Sony. HD-DVD was developed principally by Toshiba. Both formats use blue lasers to read and write data, support high-definition video resolution and leverage the same video encoding formats. Furthermore, the interactivity potential of both is comparatively similar; going far beyond what one can do with a regular DVD (Sauer, 2007). In 2005 the DVD Forum (which was chaired by Toshiba) approved HD-DVD as the next-generation high-definition format standard. However, when the formats are so similar and neither format incorporates outstanding advantages to make it the obvious standard, the standards war is ultimately determined in the marketplace and not by a formal organisation.

Shane Greenstein believes that in some respects modern format wars seem more complicated than those of the past, not because the technologies become more complex, but because contemporary strategies and tactics concerning standardisation do (2006). As in most pioneering technologies, a good product can help the standardisation process but it does not determine the final outcome. The firms fighting for their technology to be accepted as a standard employ detailed plans for achieving their commercial goals (Greenstein, 2006). Since being the owner of the technology to be accepted as standard holds major financial benefits to the owner firm, these firms leverage as many cross-market advantages as possible. However, processes in multiple markets inevitably become interlinked and standards often morph in response to market conditions.

Although the DVD Forum selected HD-DVD as the official standard, Sony continued to develop its Blu-ray technology and worked hard to build enough momentum to ensure Blu-ray becomes Hollywood’s preferred standard for high-definition content. Sony has gone to great lengths to diminish the role of luck and to generate a coalition of firms to ensure sufficient support to its Blu-ray format technology. Sony even bought a Hollywood movie studio—Sony Movies—so it could effectively guarantee titles for its format (Greenstein, 2006).

Sony worked on increasing the capacity of Blu-ray storage discs. In 2004, both discs only offered a single-layer of data storage with HD-DVD discs holding 15Gb and Blu-Ray discs 25Gb of data—both sufficient to store full-length movies plus some extra features (Fischetti, 2007). Today, Blu-ray discs offer dual layer discs with 50Gb disc capacity while Pioneer develops Blu-ray discs that will use 16 and up to 20 layers of data.

Sony banks on PlayStation 3 in the gaming arena to assist with Blu-ray adoption. Sony sells its Blu-ray compatible PlayStation 3 games consoles at a loss in the hope to establish Blu-ray in the marketplace. Furthermore, last Christmas, Sony began bundling free PlayStation 3 consoles with its Bravia flat panel high-definition televisions. Sony uses this strategy to advance Blu-ray as HD movie distribution. But as much as Sony plans for every PlayStation 3 to be Blu-ray compatible, much will depend on how many compatible games exist and on their subsequent popularity. One of the problems in this respect is that PlayStation 2 games are not compatible with the new console. Many game owners keep their previous game console and are not upgrading to the new PlayStation 3 for this reason.

Sony believes that interactivity is just as important as high-definition content and developed Blu-ray’s interactivity around an open Java-based format called BD-J. BD-Java (BD-J) incorporates Java Applets that can be triggered to start automatically and has far more capabilities than DVD in placing information in front of the viewer (Sauer, 2007). An example for BD-J is Disney’s BD-Live Network which offers high-quality interactivity during movie playback. The new service will connect BD-Live enabled movies to the Internet (via an Ethernet or Wi-Fi connection) allowing a variety of interactive features to be downloaded to the disc. The BD-Live Network will allow viewers to sync up their machines and watch a movie in real-time together from distant locations. Its interactive features will include Movie Chat, allowing text chats on the TV using a keyboard, a cell phone, or even the remote during the film, Movie Mail, allowing the viewer to record a personalised short video using a webcam or any other video camcorder and embed it in a scene in the movie and Movie Challenge, a trivia game to be played personally or against others in real-time online.

Quite a few companies offer HD content download services for either rental or purchasing purposes. For example Netflix relaunched its service last January offering more than 6000 titles to download. Netflix and Microsoft recently joined forces to stream movies and television programs to Xbox360 consoles. Last February Apple’s iTunes store began offering a new service for renting movies with 1000 movies on offer (Cherry, 2008). Amazon also offers its ‘Unbox’ video download service that works with any broadband connected Tivo. Sony is not staying back of this game and recently launched a new video delivery system on its PlayStation store, where consumers can download full-length movies and TV shows in either Standard- or High-Definition formats.

With all the new methods of watching television and movies, some believe that many consumers would not rebuild their video collections yet again. Why would consumers even bother investing in physical media and hardware when HD content streaming will become more available and common? Erica Ogg says:

“Blu-ray won’t enjoy the same decade-long dominance DVD did after it succeeded VHS. But that’s not because there will be other challenger physical disc formats. Rather, instead of buying discs from Amazon, Best Buy or Wal-Mart, people will begin getting their entertainment in the form of digital downloads in larger volumes.” (2008)

As the distribution of media evolves through growing technologies such as HD content and the Internet, companies are fighting fierce battles to control these distribution methods and formats along with the royalties that come with them. Streaming HD content and digital downloads raise the issue of managing rights for digital content. Digital content includes not only movies and television shows but also music files, games and software applications among others. The battle for Blu-ray format is also a fight for the future of the not-so-free world of video and visual content distribution.

Looking back at DVD technology development, region encoding and Content Scramble System (CSS) were implemented on the request of the Motion Pictures Association of America (MPAA) to try and combat content piracy (Zardis, 2007). The motivation behind this decision was to enable movie studios to keep control of where their products are distributed. However, region-free DVD players were quick to follow impairing the movie studios’ original intentions. DVD technology is just one example of digital content being protected by security measures, which simply act as an inconvenience to technically minded users.

Blu-ray vs. HD-DVD format war has slowed down the adoption of either technology. “Consumers have been hesitant to jump into the high-definition market, waiting to see which format wins” (Fischetti, 2007). Some analysts have argued that the format war could bring publicity, and therefore popularity, to high-definition formats (Weinman, 2007). Nevertheless, the existence of two imperfect formats made it less likely that the consumers pick either. Instead, the competition between the formats has left the consumers indecisive in regards to which technology to go with, while being concerned not to end up with the losing technology.

Moving from DVD to either high-definition technology means consumers need to upgrade to a new player and HD-capable TV set. Blu-ray and HD-DVD can be shown only at full resolution on high-definition digital displays while current Standard-Definition TVs will display a signal only a quarter of the resolution of the new high-definition format. As a result, both next generation video formats will be incompatible for hundreds of thousands of TV sets. Furthermore, both technologies produce equally sharp images. The quality of images as compared with that produced by standard DVD is not as dramatic as the improvement DVD provides over videotape and coupled with the fact that not many TV Networks offer HD content, not many consumers select to purchase the new required and expensive HD hardware.

One solution to the consumers’ problem is using backward-compatible players. Backward compatibility with DVDs is one of HD-DVD’s major plus points, which eliminates the need for consumers to stack two machines, or discard their old DVDs. The industry has prototyped backward-compatible high-definition discs and players that could read both formats. But having backward-compatible players does not encourage new sales of appropriate hardware or new movie discs.

There are many decisive factors that can affect the end result of a standards war. One such factor is business alliances. Through out the battle between HD-DVD and Blu-ray, Time Warner Brothers supported both formats but it was the one that eventually ended the formats war by choosing Blu-ray. In January earlier this year, Time Warner Brothers announced just before the Consumers Electronic Show (CES) in Las Vegas, that it would no longer release its movies in HD-DVD format. “In Hollywood, where the line between perception and reality can be thinner than a laser beam, this was taken as a complete victory for Blu-ray” (Cherry, 2008). A few weeks later, other major retailers, including Wal-Mart, gave up HD-DVDs shelf space to stock Blu-ray titles in their place. Toshiba, instead of announcing the fourth generation HD-DVD, cancelled their annual press conference and reception at CES. Not long after, Toshiba announced that its HD-DVD format would be discontinued and thus Blu-ray format became the de-facto standard for high-definition content.

Although Toshiba’s HD-DVD format was initially selected as the standard by the DVD Forum, it did not end up as the de-facto standard. Toshiba had the advantages of early market penetration as well as DVD format’s ubiquity and backward-compatibility. As with the Betamax vs. VHS and any competitive situation, many factors shape the final outcomes: superior technology, first mover advantage, complimentary assets, company’s brand name and perceived potentials, production capabilities, alliances and more. Furthermore, being the patent owner of the standard format, especially with digital content, encompasses substantial financial benefits and the fight to establish one’s format as the standard becomes intense than ever before. In any case, it appears that Sony learnt its lesson with the Betamax format and it did not repeat its previous mistakes. Sony’s tactics to establish its Blu-ray format as the standard reflects learning over the last four decades about standards wars, where a smart competitor may outmanoeuvre its rival by employing more than one strategy and in various markets to win the battle and to emerge as the winner, ready to enjoy the fruits of success.

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Comments

  1. Sony has lost many other standards battles since betamax and will keep fighting and attempting to create more standards victories in the future. It is still surprising to me anytime they win one, I think.

    Dr Nic , June 11, 2009

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