How I blew my money on the wrong video discs

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There are historic lessons to be learnt from the recent high definition format war: the importance of the installed base and the unpredictability of consumer markets.

Two years ago, I previewed the next battle of consumer electronic formats. Sony and Toshiba offered competing systems for high-definition video discs. I offered a wager on Toshiba and lost the bet. Last month, the company said it would cease production of HD-DVD players, leaving the field clear for Sony’s Blu-ray.

The war of the video cassette recorders is a classic of business history. Philips was quickly eliminated but Sony and JVC slugged it out until the latter’s VHS system emerged triumphant. The wars have continued. The current DVD standard is the product of an agreement between Sony and Toshiba, but that agreement left Toshiba dominant.

Whenever compatibility standards are critical – as with hardware and software – one system is likely to dominate, because both consumers and producers see advantages in the market-leading product. Product quality is rarely decisive: what matters is to be the first to secure wide use of your equipment. Sony’s error with Betamax was to believe its success in appealing to a professional market would lead to similar success with consumers. JVC’s correct judgment was that by open licensing they would create a mass market.

First-mover advantages are less common in business than many believe. Even with compatibility standards, what matters is not being first but launching at the right time. The video cassette recorder was not new, nor was Matsushita (JVC’s parent) the first manufacturer. But JVC was the company with the relevant technology, production capabilities and marketing skills in the mid-1970s when the consumer market was about to take off.

These historic lessons – the importance of the installed base, the unpredictability of consumer markets – proved equally relevant in the latest battle. If the judgment had been that of the technical press, Toshiba’s HD-DVD would have won. You can today buy an excellent HD-DVD machine for £50, although you will probably find yourself playing a small selection of 2007 discs over and over.

Sony realised the significance of content years ago: the company’s acquisition of Columbia was one response to its Betamax failure. Toshiba also lined up studios in its support. But Sony’s Blu-ray success was not the result of its better connections, rather of having the right product at the crucial moment.

Except it was not the one everyone expected. While demand for video cassette recorders grew explosively during the format war, high-definition video has been only modestly successful. Perhaps this was a result of the format war itself. Consumers have held back, waiting to see how the market would evolve. Perhaps there is not really much demand for a high-definition product. The films remain expensive and while they bring cinema-quality pictures into the home, a new generation of players offers high fidelity from conventional discs. Perhaps the battle over high-definition formats misses the point altogether. Consumers tend to give overriding priority to convenience, not quality. The big news in mass home entertainment is the substitution of downloaded content for discs.

The companies are not very forthcoming about their sales of high-definition DVD players, which tells us something. But the evidence that Blu-ray discs have outsold Toshiba’s format is clear. Not because of better sales of stand-alone players, which have been weak for both contenders, but because Sony’s PlayStation 3 video console incorporates Blu-ray capabilities. Most people who buy Blu-ray discs play them on their games consoles.

My error was to believe that the market would develop more quickly than it did and hence that Toshiba’s position, with rapid production of good, inexpensive equipment, would give it an early and unassailable lead. Yet I do not feel very apologetic. The history of consumer electronics shows that no one really knows what consumers will want. The only way to find out is to put products into stores. Everyone but chairman Akio Morita regarded the Sony Walkman as ridiculous, but it proved a runaway success. The company hoped to regain the initiative in audio products with its mini-disc format. Has anyone seen one recently?

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