Why there can be only one winner in the battle of Blu-ray

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The protracted battles to provide internet access or control the obsessions of players of computer games are the Thirty Years Wars of the business world, with advantage switching frequently among shifting alliances.

You probably have not heard of Blu-ray yet, but you will.

Toshiba will next month launch a high-definition video disc player in the US. This is the first shot in a new standards war. One alliance, led by Toshiba, fights under the banner HD-DVD. The Blu-ray consortium is led by Sony. Standards battles have been a feature of the consumer electronics industry. The war of video formats, in which JVC’s VHS system triumphed over Sony’s Betamax, is a staple case in MBA courses. A decade later, Microsoft routed Apple in the battle of personal computer operating systems. The triumph of MS-DOS, forerunner to Windows, gave the Redwood company a dominance that continues today. The rewards of victory can be great.

Video cassette recorders and operating systems for personal computers need compatibility standards because software must match hardware. If there is competition between many producers in both hardware and software, convergence on a single standard is almost inevitable because most companies in both segments will want to produce for the most popular standard. The market leader therefore gains still more market share, and dominance becomes reinforcing and ultimately insurmountable. Even a superior product cannot overcome the incumbent’s advantage.

Most compatibility standards are the result of regulation or custom, and no private business owns them. Governments determined the format of television broadcasting, and sets and programmes were made to this common standard. Different standards were chosen in Europe and the US: the French even developed their own.

Local monopoly is inevitable and globalisation of both hardware and software markets creates pressure for a single worldwide standard, as happened with video cassettes and computer operating systems. But developments in the modern global economy replay the experience of Victorian times. Most railway lines around the world are 4ft 8½in apart because that was the choice of George Stephenson.

That railway standard is common property. Proprietary control over a market standard is most likely to be achieved if the owner allows ready access to the standard by other companies. JVC pursued open licensing while Sony’s policy was more restrictive, and that was a major element in JVC’s success. MS-DOS was available to every computer manufacturer, while Apple attempted to retain exclusivity. Sony and Apple gambled for high stakes and lost – their strategies would have been very profitable if they had succeeded, but the factors that made these strategies potentially rewarding reduced their chances of success. Microsoft’s expansive profits from MS-DOS and now Windows are derived from low royalties on large volumes.

In video games, hardware and software are controlled by the same company: the distributor of the console is also publisher of games. This market structure demands very different pricing policies, supporting the strategy King Gillette discovered a century ago. Give away the razor and scalp them with the blade: set a low price for the box and gain profits from captive consumers of your game. Entry for new products and manufacturers is easier here than in a competitive compatibility standards market. So the battle of the games consoles has continued for years, with different companies – first Atari, then Nintendo, now Sony and Microsoft – vying for market leadership.

The market for gateway products, such as portals and search engines, is similarly characterised by powerful, but transitory, market dominance. Few companies can expect to have the best product decade after decade. This is why Google is no Microsoft or JVC.

The battles to provide internet access or control the obsessions of computer game players are the Thirty Years Wars of the business world, with advantage switching frequently among shifting alliances. But markets with compatibility standards see a dramatic fight to the finish.

Compatibility is the key to the new war between Sony and Toshiba. So who will win the battle to put high-definition movies into our living rooms? I will come to that question in next week’s column.

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