How Sony won the high-def DVD war
HD DVD was cheaper and backed by powerful companies. But Sony knew where the ultimate decision would be made: Hollywood.
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LOS ANGELES (Fortune) -- The Oscars were a non-event this year for Sony - the studio took home only one gold statue - but Sir Howard Stringer was in town with plenty to celebrate.
The globe-trotting Sony Corporation chief was fresh off his company's triumph in the high-stakes, high-definition video player wars. On February 19, Stringer was en route from Tokyo to London, to attend a movie premiere and then a party for his 66th birthday, when Toshiba held a press conference announcing it would stop producing less expensive, Microsoft (MSFT, Fortune 500)-backed HD DVD players and would cede the battle to Sony-led Blu-ray.
It was somehow fitting that Sir Howard's next stop on his world tour would be Hollywood, because it was here that the Blu-ray battle was ultimately won. Toshiba only threw in the towel after the Warner Brothers studio decided last month to stop releasing its DVDs in both formats and go exclusively with Blu Ray. The victory was not only crucial to proving Stringer's strategy of showing that Sony's entertainment, electronics and games businesses could work together but - perhaps more critically - helped exorcise the ghosts of its failed Betamax video tape format that has haunted Sony for two decades.
"I was a pain in the ass on this," Stringer told me in his office on the Sony Pictures lot. "Because of the Betamax experience, we made it clear to everyone that this was a Sony corporate mission."
The legacy of the Betamax saga can't be overstated. The early years of Sony's ownership of the Columbia movie studio in the early 1990s were legendarily disastrous. Brian Roberts, now the head of cable giant Comcast, recently recounted to Stringer his first visit to Sony as part of a U.S. cable industry group. Sony chief's at the time, Akio Morita, grew enraged when asked by one of the visitors whether he was unhappy with buying Columbia, which had resulted in a $3.2-billion write-down in 1994. "You Americans don't understand." Morita shot back. "We clearly had the best product with Betamax - but Hollywood picked VHS." In an e-mail, Roberts recalled the encounter as very un-Japanese in its emotion. "And I vividly remember, with fire in his eyes what he said next: 'That will never happen to Sony again'."
Fast forward to 2005, when Sir Howard was the surprise choice to lead troubled Sony (SNE) as its first non-Japanese CEO. Here was a former journalist and media executive who moved easily in Hollywood circles. Sony had already taken the huge gamble of deciding to build a Blu-ray player inside its PlayStation 3 game console, which was a big factor in getting the big studios Disney and Fox to commit exclusively to it. (The idea was to help the technology gain consumer acceptance and provide consumers a bargain way to buy a Blu-ray player since a PS3 alone was less than half the price of the first Blu-ray players.) The only problem was that by building a new, unproven technology into a highly anticipated game unit led to the kinds of production delays and cost increases that were hobbling Sony. The PS3 came out in late 2006 to a mixed reception, and, initially, no one was sure whether anyone who bought one really cared whether it came with a newfangled video player.
Of course, any new product lives or dies by its relationship with retailers and its appeal to consumers. Stringer contends that Blu-ray was a better, more advanced technology with more storage capability that would come in handy down the road. HD DVD had the advantage of cheaper players and mighty backers from the get-go. The result was that sales of high-def video players became a steady trickle, with most consumers not wanting to commit to a format that might end up quickly obsolete.
It's now clear, though, that the biggest factor behind Sony's success was its efforts to get as many of Stringer's Hollywood mogul pals as possible to commit exclusively to Blu-ray and stay. And, he said with a laugh: "Nobody does anybody a favor in this town." When it began selling the players nearly two years ago, Sony had signed on Walt Disney and Fox, and later wooed Lion's Gate and secured the library of MGM by leading a consortium to buy that studio. That left Warner Brothers, Paramount and Dreamworks (which subsequently merged) and NBC Universal to win over. The latter was exclusively supporting HD DVD from the get-go, while Viacom-owned Paramount/Dreamworks jolted Sony last August and announced it would no longer release discs in both formats and was going with HD DVD.
Both camps knew that Warner Brothers was planning to make a decision about whether to continue supporting dueling formats by the end of 2007. If it went with HD DVD, the stalemate would have gone on for years - or worse, other studios might have followed its lead. Before Warner's announcement, Blu-ray had about 46% of the market for new releases exclusively, while HD-DVD had around 24%. Warner, which released movies in both formats, represented about 20% of the market in DVDs last year.
It was clear going into the last quarter of the year that consumer confusion over which format to buy was holding sales of next-generation DVD players back at a time when the DVD market overall was running out of steam, and with it an important source of studio profits. Sony went into high gear. The avuncular Sir Howard worked the phones with top executives at Warner Brothers and its owner, Time Warner (TWX, Fortune 500) (which also owns Fortune, where I work). To jump start use of the PS3 as a low-cost movie player, it began throwing in free Blu-ray discs of Sony flicks like "Talledega Nights" with new PS3s. Also, newer versions of the PS3 released last year began to include remote controls to bolster the device's appeal to home cineastes. Sony made sure to put a few extra billboards touting Blu-ray strategically around Tinseltown where key execs would see them.
So: a perfect Hollywood ending? Perhaps. Sir Howard acknowledges that he still has a marketing challenge ahead convincing consumers that they need a HD player to go with their fancy new high-def displays. Indeed, no sooner was the format contest decided that critics were wondering if people will just hold out for a next generation of HD video-on-demand that bypasses video players entirely. Asked if he might offer trade-ins for the 1 million people who have bought soon-to-be-obsolete HD DVD gadgets, Stringer grimaces. "Steady," he jokes: "If I have any more success, I'll be bankrupt."