Halsey Coughlin
Eric Snow
October 11, 2010
Ecosystem Strategy: Blu-Ray vs. HD DVD Format War
Entrepreneurship & Innovation Strategy, Professor Adner
History/ Intro
In 1993 while working for the Japanese company Nichia Corporation, Shuji Nakamura made a
discovery that would lead to the creation of a new technology that would positively affect the way
people all over the world enjoy video content. Nakamura’s development of the blue LED and blue laser
not only lead the way for major advancements in the next generation of disc formatted movies but also
sparked one of the largest format wars of the digital age. Players from across the entire industry,
including movie producers and distributors, consumer electronic and computer manufacturers, industry
organizations and retailers, squared off against one another in an attempt to align themselves with the
victorious technology. On one side was the Blu-Ray Disc Association (BDA) touting Blu-Ray technology
and on the other was the DVD Forum which believed that HD DVD was the appropriate successor
technology to the then current DVD. The two groups fought a vicious strategic battle spanning several
years leaving only one side standing when it was all over. The significance of the new technology that
both sides were utilizing lay in differences between the blue laser and the more standard red laser. The
former is the basis for DVD technology and consists of a larger wavelength than the blue laser. The
shorter blue laser has greater precision and allows for larger amounts of data to be squeezed into a
tighter space. The result is a disc that appears identical to a DVD at first glance but can hold up to five
times the data while delivering a higher quality video and audio experience.
Blu-Ray
Towards the end of the 1990’s Sony/Phillips and Pioneer worked to create two similar technologies
based on the blue laser: UDO and DVR Blue. These were available for display at the October 2000
Japanese tech trade show CEATEC. After further development it was decided to proceed with the DVR
Blue technology and on May 20th, 2002 the Blu-Ray Disc Founder Group (now the BDA) was formed. The
alliance was comprised of: Sony, Panasonic, Pioneer, Philips, Thomson, LG Electronics, Hitachi, Sharp,
and Samsung. Blu-Ray Disc playing devices were made available to consumers in 2003 but not on a
widespread basis until late 2006.
HD DVD
Lead by Toshiba, the DVD Forum was founded by Hitachi, Matsushita Electric, Mitsubishi, Pioneer,
Philips, Sony, Thomson, Time Warner, Toshiba and JVC. It is noteworthy that Sony and Pioneer were
part of both the BDA and DVD Forum. The DVD Forum also decided to pursue a blue laser-based disc
technology called Advanced Optical Discs which premiered at the October 2002 CEATEC. This
technology was later renamed HD DVD in 2003. The first HD DVD playing devices arrived in stores in
early 2006.
Other Players/Ecosystem
Aside from a few exceptions, the value chain of the home video industry has not changed a great deal
over the years as new technological advancements have been made. The basic structure of the
ecosystem can be traced back to the late 70’s and early 80’s during which VHS technology was gaining
popularity. The first link in the chain is comprised of the content creators; the motion picture producers
and distributors. The majority of these companies are represented by an industry association called the
Motion Picture Association of America which exists to advance and support the movie studios but has
most recently been charged with controlling issues of copyright infringement spurred on by
advancements in technology. The content then flows to the manufacturers of the latest distribution
platform (VHS, DVD, Blu-Ray) who often also manufacture the devices that play the movies. The final
link before the content reaches the consumer is the retailer. These can be segregated by rent-focused
retailers, Netflix and Blockbuster, and the more traditional consumer outlets such as Wal-Mart, Target
or Best Buy.
Motivations
By examining the factors that motivated each group in the value chain it is possible to get a better
understanding of why certain decisions were made that contributed to the final outcome. The media
creators, like most parties involved, were focused on generating profits not only in the near term but
also into the future. Blu-Ray and HD DVD were both trying to entice the movie studios to release
content in their respective formats which created an economically attractive competitive situation for
the studios in the short term. The danger here was if the studios partnered with one side because of an
attractive offer and that format turned out to be the losing technology there would be serious long term
negative repercussions. The MPAA was mostly concerned with copyright infringement and was applying
pressure to both sides in an effort to ensure that Digital Rights Management (DRM) was an integral part
of the winning format. The platform electronics and device manufacturers were separated on either
side of the battle but neither side was benefiting from the stalemate. Finally, the retailers were
interested in declaring a winner and moving forward because carrying both formats was becoming
cumbersome and costly but none of them were in a position to declare they was choosing one over the
other.
Strategy
It can be argued that Sony and Blu-Ray had an unfair advantage from the beginning given that it was
more vertically integrated than Toshiba. Since Sony is not only a consumer electronics manufacturer but
also a creator of media, it was able to leverage its ability to use its own Blu-Ray format for all of its
content. Not only that, but it was also able to leverage its relationships with other studios in order to
convince them to also use the technology. The second piece of their strategy was to position itself as
the technology that was most focused on copyright protection issues. Sony spent a great deal of money
and effort in creating a strong DRM front which played well when they approached studios and media
companies whose futures depended on this. The third, and some argue most important aspect of their
plan, was to release their PlayStation 3 gaming console with a Blu-Ray player. The immense popularity
of this consol paired with a strong marketing campaign proved difficult for their competition to match.
In a related decision, Sony also went ahead and launched a series of camcorders that operated with BluRay, further cementing the technology with their consumer base. Sony was also able to react well to a
major criticism of their technology which was the new discs were too susceptible to scratching. By
partnering with TDK who had developed a hard coating polymer they were able to remove this from the
list of drawbacks about their product.
Toshiba also sunk a great deal of time, effort and money into the battle but chose a slightly different
strategy. While they focused some energy on aligning with the movie studios they more focused on
partnering with tech companies such as Microsoft and Intel. This was a misstep because regardless of
what the downstream value chain companies did the media and studio companies upstream had all of
the leverage. By partnering with Microsoft Toshiba was able to get the HD DVD player into the Xbox 360
which was valuable but turned out to not be as quite a powerful force as the PlayStation 3 move by
Sony. Finally, the core of the Toshiba/ DVD Forum’s plan centered around getting first to market at a
lower price point than Sony. Since consumers were confused all along, the idea of a cheaper but
possibly soon-to-be-obsolete technology ultimately wasn’t that attractive and sales suffered.
Results
Many view the January 2008 announcement by Warner Brothers Entertainment Group to stop issuing
HD DVD movies and move exclusively to Blu-Ray as the final dagger in the heart of the Toshiba
technology and the DVD Forum. As Hollywood’s largest seller of home movies, Warner Brothers was
able to provide the fatal shot to HD DVD and allow Blu-Ray to finally assume the role of the industry
standard. In retrospect it can be argued that there were many more losers than winners in this battle.
The first is obviously Toshiba and its affiliates. Not only was Toshiba involved in a protracted format war
but they ultimately came away with nothing to show for it, except wasted money and opportunity costs.
The “winner” of the war was Sony and its affiliates but upon closer examination they may have not won
all that much. Sales of Blu-Ray discs will need to continue long into the future to make up for the
significant investment and opportunity costs of the stalemate and there is no guarantee of the longevity
of the format as the industry seems to be headed towards TV on-demand options and downloadable
content. The next losers were the media companies who were losing money as DVD sales were sliding
and were not able to benefit from the advanced technology as the battle waged on. The retailers also
sustained losses from declining sales and an inability to pick one technology over the other. The final
losers were the consumers. The consumers were left to pick which format to invest in which left the
early adopters making uneducated guesses and the majority of consumers on the sidelines due to the
confusion and uncertainty.
Consumer Electronics &
Computer Manufacturers
Retailers
Consumer
Content
Creators
Disc Manufacturers
MPAA
* Specific companies are for illustrative purposes only
http://www.computerworld.com/s/article/9055658/CES_Warner_s_Blu_ray_Disc_move_has_industry_
buzzing?taxonomyId=19&pageNumber=2
http://www.marketing-planet.com/studies/dvd-marketing-war-sony-s-blu-ray-against-toshiba-s-hddvd.html
http://reviews.cnet.com/4520-6449_7-6446304-1.html
http://freakonomics.blogs.nytimes.com/2008/03/04/what-are-the-lessons-of-the-blu-rayhd-dvd-battlea-freakonomics-quorum/
http://www.reuters.com/article/idUSN0742944620080109
http://en.wikipedia.org/wiki/High_definition_optical_disc_format_war
http://www.switched.com/2008/02/19/its-official-toshiba-ducks-out-of-format-war-r-i-p-hd-dvd/
http://en.wikipedia.org/wiki/Blu-ray_Disc_Association
http://www.blu-ray.com/info/
http://en.wikipedia.org/wiki/Blu-ray_Disc
http://en.wikipedia.org/wiki/DVD_Forum
Mini Project - Ecosystem Strategy
In addition to the main course project, students must also submit a shorter analysis of an innovation
ecosystem. The analysis has three main elements:
1. A brief description of the value vision that underlies the initiative.
2. An ecosystem map that diagrams the way in which the different actors and elements are
brought together.
3. An assessment of the strategy deployed to align the actors.
Unlike the main project, which is a retrospective analysis, the mini-project can consider strategies
prospectively.
The mini-projects will inform the corresponding class session.
Additional details and specific dimensions for analysis will be discussed during the first class meeting.