The Blu-ray Ecosystem
EIS
Asuncion, Villamor
Kenning, Steve
Natarajan, Anita
Sony’s Value Vision for Blu-Ray
The move up from standard DVD technology was inevitable for two key reasons. First, high
definition viewing was catching up and there was a growing demand to re-create a theater
experience at home. By 2005, film studios earned 40% of their revenue from DVD sales which
implied that the people were increasingly seeking to substitute watching movies in the theater
with watching a movie at home. Simultaneously, with the development of high definition
viewing it was projected that by 2006 an estimated 21 Million households would have HDTV
sets. This meant that DVD’s would now need larger capacity and enablement to store video at
HD resolution (1080 lines of resolution instead of 480 lines of resolution in existing DVD’s).
The second reason why the move up was inevitable was the gaming industry. HD allowed a
much higher level of interaction and of course created for a very “real” gaming experience. Also,
game developers began to need much more bandwidth as they created more elaborate games.
With an HDTV, speaker system and HD games, you could almost feel the vibration from the
latest games.
Sony’s vision was to lead this move to HDTV and help the user create a full-fledged theater
experience at home both for movies and games. As part of their official strategy they wanted to
create ‘Sony United’ by using this format to transcend all their business units and move the
consumer to the next stage of the digital viewing experience.
In the 1980’s Sony had lost a significant battle of formats with its Betamax technology losing out
to VHS. Sony knew from first-hand experience the advantages that stemmed from owning the
format. If they could establish and be part-owner of the new high-definition format then the
fastest growing media businesses of gaming, $16 Billion of film (2005), $57 Billion (2005) of
the adult film industry and more would have to adopt their format, thereby making Sony
platforms and systems a requirement.
Sony’s vision was to make Sony players, with the Blu ray format essential to every HD home
and to make more homes HD homes.
Map of the Ecosystem
Firstly, in terms of evaluating the adoption race between Blu-ray and HDDVD, it’s important to
state that there were two simultaneous competitions being waged. Firstly, even before asking the
question of which disc format would ‘win’ the eventual adoption as a consumer electronics
standard, there was the broader question of when, how, and by what means would high definition
content be adopted? And from that question, we can ask further, what systemically would be
needed to allow that adoption? How quickly would high definition cameras be adopted? Would
cable networks rush to adopt the necessary infrastructure? Would consumers demand it, or be
slow-movers on HDTV? Though important questions, this analysis will look specifically at the
ecosystem relative to the binary adoption of either Blu-ray, or HDDVD technology.
Having narrowed our scope, one is able to look at the actors who each played a part in shaping
the fight over which high-definition DVD format would be adopted as a global standard.
When looking at the development ecosystem for next generation digital disc technology there are
six key actor-groups whose support was needed to achieve full adoption. They are, in order:
1. Disc R&D and design players
2. Disc manufacturing firms
3. Hardware manufacturers (both capture and playback)
4. Content providers
5. Retail channels
6. Customer demand
Firstly, one must look at the ability to create the disc technologies themselves, in viewing the
entire ecosystem; without those firms explicitly tasked with designing the product, full
ecosystem adoption is relatively immaterial. In the case specifically of the Blu-ray disc, it was
not one, but nine firms who came together to develop the product jointly, building off the design
of the original patent holder Nichi Corporation.1 (Of interesting note, six of these nine firms had
worked previously on the joint development of the DVD, specifically they were: Hitachi,
Matsushita/ Panasonic, Philips, Pioneer, Sony, and Thompson, joined on the Blu-ray by
Sharp, LG, and Samsung.)2 Next, there were multiple firms tasked with co-innovating on the
technology, most notably the ability for partner TDK to develop a hard polymer coating able to
protect the Blu-ray discs’ greater thickness.
Second, there were the disc manufacturing firms like OC Oerlikon, mastering/ encoding firms
like Technicolor, and integrated supply-chain management firms like Cinram, who each
provided the production scale, technology, and expertise necessary to produce high volumes of
quality HD discs.3 Without the knowledge and capital of these firms, each format would be at a
significant disadvantage getting their product to market.
Third, a diverse mix of hardware manufacturers had a large role in which format became
standard. PC manufactures (Dell, Hewlett-Packard, etc.), gaming console manufacturers
(Microsoft, Sony, etc.), and disc player manufacturers themselves (Pioneer, Panasonic, etc.)
1
2
3
http://www.engadget.com/2005/09/19/blu-ray-vs-hd-dvd-state-of-the-s-union-s-division/
http://www.pcworld.com/article/84964/vendors_join_to_design_highcapacity_optical_disc.html
http://www.blu-ray.com/news/?id=47
each chose which format to support, and appropriately built that disc into their respective
technologies.
Fourth, and arguably most important for their ability to carry influence with multiple actors
along the innovation chain, content providers would decide on which format to release their
specific tv shows, films, games, etc. For example, Electronic Arts, the world’s largest game
studio, had the ability to materially impact the discussion in favor of Blu-ray by being an earlier
adopter of the format (they were largely exicted by the extra 20GB of storage per disc offered by
the technology).4 Also, if you look at the history of the disc race, each committed tremendous
resources to courting major movie studios, such as 20th Century Fox, Dreamworks,
Paramount, and Universal, to try to persuade each to support exclusively their specific format.
(Not to be understated when discussing the role of film studios is the impact the adult film
industry played in picking a DVD ‘winner’. Not having any large scale potential to deliver via
theaters, physical media has always been a critical distribution component for the adult industry.
In fact, much as was the case with Betamax losing out to VHS in the 1980s, early adoption by
the porn industry of Blu-ray gave it a significant boost on its way to beating out HDDVD).5
Fifth, were the major buyers and distribution networks of digital disc products, the big box
technology retailers such as Best Buy, and film rental companies such as Blockbuster and
Netflix. Specifically, in looking back on the eventual adoption of Blu-ray, the decision of major
4
5
http://ps3.ign.com/articles/110/1102136p1.html
http://www.computerworld.com/
retail networks to cease carrying HDDVDs on their shelves was in fact the final death knell of
the format.6
Finally, and not inconsequentially, was the ability for many of the above actors each to offer a
compelling product to the end consumer, and win his/ her exclusive adoption across multiple
platforms. Specifically, for a format to gain eventual adoption, it had to: Have its dedicated disc
player adopted by the end customer (i.e. a Panasonic Blu-ray player), have its content be
preferred by that customer (EA’s Medal of Honor on Blu-ray), and have its content stocked by
the specific retail channel used by that customer (EA’s Medal of Honor stocked at Best Buy).
This adoption chain, and the consumers influence cannot be understated; as if a binary equation,
only one link in the chain needed to be broken, for the net sum for the disc format to be ‘zero’.
6
http://www.engadget.com/2005/09/19/blu-ray-vs-hd-dvd-state-of-the-s-union-s-division/
Assessment of Strategy: Mitigating Integration Risk in the Adoption Chain
Analysis of the costs and benefits to partners in the adoption chain yields lukewarm results as to
why Blu-ray triumphed over HDDVD (please see Appendix B). In fact, one could argue just as
convincingly that HDDVD should have triumphed when we look across the adoption chain. We
know that Blu-ray is a more expensive format in terms of manufacturing expertise and cost for
both the disks and the hardware such as Blu-ray players. At launch in 2006, average retail prices
for the Blu-ray players were twice the retail prices for HDDVD: $1000 for a Blu-ray player, vs
$500 for a HDDVD player or $800 for a more fully featured version7. However one sliced it, the
Blu-ray technology and format was more expensive.
So what explains Blu-ray’s triumph? We believe the truth can be found in how Sony looked at
the cost – benefit to partner analysis and then tailored its B2B and B2C engagement strategies in
manner that targeted the most important and interdependent players in the adoption chain: the
movie studios and the end consumer.
Movie Studios & other content providers: These studios exist in an industry that has seen profits
decline. The Blu-ray spoke right to the heart of at least one major problem these studios faced:
revenue loss from piracy. The added security features of the Blu-ray, despite the higher
aforementioned costs, make the format a winner over HDDVD in the eyes of the studios. A
report from LEK to the Motion Picture Association of America states that the US movie industry
7
Hagiu, Andrei. “The Last DVD Format War,” Harvard Business School Case Study 9-710-443, March 31, 2010.
lost approximately $6.1 Billion in 2005 to piracy, a number that holds particular significance
given that total industry revenues from DVD sales in 2005 was $16.1 Billion8.
End Consumers: Through 2007, sales of hardware and Blu-ray discs lagged expectations.
Analysts believed that reluctance to commit to one format while the format war continued kept
many consumers and their dollars on the sidelines. In fact, in 2006 some analysts estimated that
the format war over the next seven years would cost the movie studios $16 Billion in lost
revenue. Sony continued to work vigorously with movie studios to secure rights to both new as
well as popular catalogue (past) movie titles for the Blu-ray format. To further spur adoption
and assuage consumer reluctance, Sony used advertising and marketing to create consumer pull.
As part of the Blu-ray launch, Sony planned to set up kiosks in 40 Sony Style stores and
demonstrations in 100 other retail stores across the US to demonstrate and explain the benefits of
the Blu-ray format9. As a result of these and other factors, in 2008 Blu-ray sales outstripped
HDDVD sales 2-to-1. Time Warner (Warner Bros), the largest of the studios in terms of
revenue, was very last studio to choose sides in the format war: it chose Blu-ray. Very soon
after this decision, retailers such as Best Buy, Netflix and Walmart also sided with Blu-ray.
The details of the negotiations between the movie studios and Sony and Toshiba are not public.
However, sources report that Toshiba offered incentives of up to $150 Million to Dreamworks to
adopt HDDVD10. What is clear is that securing the allegiances of the movie studios was central
“The Cost of Movie Piracy,” LEK Consulting, June 16, 2008. http://www.perfspot.com/docs/doc.asp?id=1098,
accessed October 2010.
8
9
Tarr, Greg. “Sony: New Titles Key to Blu-ray Disc Plans,” Twice by Reed Business Information, June 19, 2006
Barnes, Brooks. “Warner Backs Blu-ray, Tilting DVD Battle,” New York Times, January 5, 2008.
http://www.nytimes.com/2008/01/05/technology/05disc.html, accessed October 2010.
10
to winning this format war. Sony understood this and aligned its adoption chain strategy
accordingly to score big wins with the most important partners.
Appendix A – Blu-ray/ HDDVD Ecosystem map
Appendix B
Partner
Disc Design &
Manufacture,
Hardware &
Software
Manufacturers
Cost of adopting
Blu-ray vs
HDDVD
Benefit of
adopting Bluray vs HDDVD
Winner


2x capacity
of HDDVD
HDDVD

Better
copyright
security
2x capacity
of HDDVD
?
Blu-ray
Draw
3/4
More titles on
blu ray
Blu-ray
4/2

Movie Studios &
other content
providers

Only costs
150K to retrofit
a DVD mfg
line to make
HDDVD
Mfg process is
more
complicated,
therefore more
expensive
Hardware is
more expensive

Consumer
Electronics & Other
Retailers
End Consumer
?
Can’t pirate
movies as
easily
Position in
Adoption Chain
/ Order of
Importance to
winning format
war
1/3
2/1