by: Federico Albini, Nick Fountas, Melissa Calvario, Nikolay Dimitriev
Although for some time HD-DVD was winning ground in sales, the Blu-ray format was able to make different alliances with other companies to offer a wider range of products such as games, movies, series, and entertainment videos and in the end to win this war.
Strategies are what really matters in a format war. Even the losers will have to adopt strategies in order to deal with the outcomes of their losses. Winners, of course, are in most cases those that put together and implemented the best portfolio of strategies. It is undeniable that both Sony and Toshiba, with Blu-ray and HD-DVD respectively, were really careful in carrying out the most important strategies for this kind of competition. They both built strong alliances with the producers of the content (movies studios) and with the retailers. They both managed the costumers’ expectation so well, that for a long time, most of the people didn’t want to commit to one particular format. They both made sure to build backward compatible players in order for the costumers to be able to watch the DVD movies they already had in their homes.
However, Blu-ray discs sales were going well since the beginning of 2007. This is probably the factor that determined the tipping point and the emerging of Blu-ray as the dominant design in the industry. On 4/1/2008 Warner Bros announced his exclusive support to Blu-ray and just one month later the largest US retailers Wal-Mart and Best-buy decided to sell only Blu-ray discs (11 & 15/2/2007). From that moment the market locked in the Blu-ray format.
Source: Home media magazine
The Blu-ray format as dominant design
The definition of the new technology for the next generation video format passed through several stages in a competition between two different standards and companies: Sony and Toshiba, with Blu ray and HD DVD respectively. Sony, which had lost a format battle in the 80’s against JVC, this time is the absolute winner and Blu-ray has established itself as the dominant design in the high definition video.
Both companies managed costumers’ expectations by trying to convince the public that their product is, not only superior to the DVD, but also superior to the rival format.
The economist Hal Varian explains this strategy when he says: “The product that people expect to win will win.”(The New Yorker, 16/10/2006) Consumers know that if they back the loser in a standards war they will be stuck with an obsolete product, so convincing them that your product is a winner is essential.
The economist Hal Varian explains this strategy when he says: “The product that people expect to win will win.”(The New Yorker, 16/10/2006) Consumers know that if they back the loser in a standards war they will be stuck with an obsolete product, so convincing them that your product is a winner is essential.
Although for some time HD-DVD was winning ground in sales, the Blu-ray format was able to make different alliances with other companies to offer a wider range of products such as games, movies, series, and entertainment videos and in the end to win this war. To empirically show the victory of Blu-ray we can refer to the graph of annual production of discs of the two formats
Source: Julian P. Christ and André P. Slowak “Why Blu-ray vs. HD-DVD is not VHS vs. Betamax: The Co-evolution of Standard-setting Consortia” in University of Hohenheim, Stuttgart-Hohenheim, 2009
As we can see in the graph above, the market ‘tipped’ in January 2008 when Warner Bros decided to exclusively support Blu-ray and, furthermore, when Wal-Mart announced the same decision. Companies promoting HD-DVD were no longer able to compete therefore the production of HD-DVD started plunging until no more HD-DVD were produced.
Figure 1 Rate of Major Innovation – The Abernathy and Utterback Model
In Figure 1 we can see until January 2008 we were in the fluid phase with a high market uncertainty about the dominant design of high-definition discs: prices of players were very high and consumers were afraid to choose one firm, until the winner appeared in the market.
In January 2008 Blu-ray officially won the war and from that point we entered the transitional phase. Producers have learnt more about how to meet customer needs and a dominant design has emerged. The emphasis shifted from product to process innovation. To better understand this, the price of the main complementary good, the Blu-ray player, in 10/4/2003 was 3800$ (Maxim Liado, 19/10/2007) and now, after 7 years, the price is 128$ (Jeff Bertolucci 11/6/2209)
We believe we have not seen the specific phase yet because of the existence of DVD, which is much cheaper and also meets the customer needs. Blu-ray discs and players are still relatively expensive compared to DVD discs and player.
Strategies that lead to the Sony’s Victory
Strategies are what really matters in a format war. Even the losers will have to adopt strategies in order to deal with the outcomes of their losses. Winners, of course, are in most cases those that put together and implemented the best portfolio of strategies. It is undeniable that both Sony and Toshiba, with Blu-ray and HD-DVD respectively, were really careful in carrying out the most important strategies for this kind of competition. They both built strong alliances with the producers of the content (movies studios) and with the retailers. They both managed the costumers’ expectation so well, that for a long time, most of the people didn’t want to commit to one particular format. They both made sure to build backward compatible players in order for the costumers to be able to watch the DVD movies they already had in their homes.In the end, as it normally happens in all situations of uncertainty, what really made the difference were single important events that quickly changed the shape of the situation. Those events relate in particular with the alliances and the peculiar inducement strategy that Sony was able to carry out due to its strong position in the game consoles market. We will concentrate on those.
How Sony achieved the winning alliances with content producers and retailers.
Sony learned from the Betamax fiasco in the 80’s and this time built strong strategic alliances that lead to the victory over HD DVD. In May 2002 Sony created the Blu-Ray Foundation with exceptional members like Hitachi, LG, Panasonic, Pioneer, Philips, Samsung Sharp and Thomson (Sony Press release, 20/5/2002). One year later, Mitsubishi joined the Blu-ray Foundation. Later, Dell, HP and TDK also announced their support for the Blu-ray format. These alliances led to the creation of Blu-ray association with 14 executive members including 20th century fox. Sony not only made alliances with the potential producers of Blu-ray players but also tried to collaborate with the content producers who would create their complementary products, the movies. Although the Big Six of entertainment factory were divided until the end of 2007, Disney, Columbia and 20th century fox were already supporting Blu-ray. At this time Warner Bros, the biggest player in this market was producing its movies in both formats. Nevertheless, things started to look bad for Blu-ray when, in 2005, Microsoft and Intel announced their support for HD DVD and when in 2007, Paramount and DreamWorks dropped Sony’s format. Also many more Blu-ray supporters, like LG (7/1/2007) and HP (16/12/2005) announced that they would use both formats in their products.
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However, Blu-ray discs sales were going well since the beginning of 2007. This is probably the factor that determined the tipping point and the emerging of Blu-ray as the dominant design in the industry. On 4/1/2008 Warner Bros announced his exclusive support to Blu-ray and just one month later the largest US retailers Wal-Mart and Best-buy decided to sell only Blu-ray discs (11 & 15/2/2007). From that moment the market locked in the Blu-ray format.
Source: Nielsen Videoscan
The peculiar inducement strategy of Sony
Another killer strategy by Sony was to give to its game console, the PlayStation 3, the capability of playing Blu-ray discs. This strategy was designed to take advantage of the consumer base constituted by the video gamers, which partly overlaps with the consumers attracted by new technologies like Blu-ray.
In response to this move by Sony, Microsoft allied to Toshiba in support of the HD-DVD format and decided to offer an external HD-DVD player for its console, the Xbox 360.
But Sony’s strategy to have the player built in proved more successful and accounted for a big part of the company final victory for the format. In the period of eight months following the launch, Sony sold 6,2 millions PlayStation 3 while Microsoft only sold 155,000 external HD-DVD players for the Xbox 360.
Sony’s approach can be seen as an inducement strategy because it consisted in an implicit discount, disguised as a free or very low price extra feature. In fact, not only the price for an Xbox 360 with and external HD-DVD drive was higher than that of the PlayStation 3 (with the built in drive) but also the PlayStation 3 itself was a newer console with better technology.
Moreover these extra costs were also incremented by the transaction costs, in particular the time and efforts needed for the purchase of the HD-DVD drive separately.
A multiple dimensions of value analysis
According to the multiple dimensions of value framework, the competition between Blu-ray and DVD, the old standard format, shows us that DVD has still the edge in value for the costumers due especially to its larger installed base. The DVD format, which is certainly in the specific phase, has reached the maturity that leads to a large availability of complementary goods and to achieve dominant preference within the consumers.
In the diagram below we analyze, following the multiple dimension of value framework, the Blu-ray and DVD formats.
Blu-ray DVD
According to higher capacity of storage, upgrades in the graphics quality, compatibility with different devices and products, the technology used in the Blu-ray format constitutes an improvement compared to the technology used by DVD. The installed base and complementary goods are in the Achilles’ tendon of Blu-ray. The DVD is stronger because of its maturity in the market. There are now more than 90000 movie titles in DVD while there are about 1000 Blu-ray titles. Where Blu-ray really falls behind is in its installed base, even though Sony tried to expand it with its successful PlayStation 3 move. The gap in prices is still high and moreover consumers may be reluctant in changing to the new format and the complementary goods involved, such as the new HD television, and the Blu-ray players.
The value of Blu-ray could quickly increase under the effect of the self-reinforcing cycle. The increase in the installed base would lead to the consequent rise in availability of complementary goods such as content (movies, games) and Blu-ray players.
The bad news for Blu-ray is the expanding streaming industry; with Apple TV, Hulu, Netflix and many other entrants maybe Blu-ray has to fight a different battle this time.
Source: CNET comparison Blu-ray and DVD
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