Blu-Ray, Sony Paid Warner Bros. $400 Million?
February 2008
Howard Stringer made history in 2005 for being the first non-Japanese executive to take the helm at Sony Corp. But he may be better remembered as the one who won the high-definition war, erasing the stain on the electronics firm's image ever since it lost the videotape war two decades earlier.
Although celebrated yesterday, the victory was sealed last month when Sony swayed Warner Bros. to back Sony's Blu-ray technology and quit producing movies using Toshiba Corp.'s rival HD DVD format.
What remains a mystery is just how big a push Warner needed to pick sides. Analysts say Sony only prevailed following a heated bidding war against Toshiba, with the reward reaching as much as $400-million (U.S.). Neither side has confirmed the size of any bids or payments.
It was supposed to be the technology equivalent of First World War trench warfare: A prolonged battle to the death between Toshiba and Sony for global domination in high-definition DVDs.
In the end, the denouement was more like Germany's swift 1940 end run of the Maginot line.
Less than two years after its first HD DVD player hit the market, Toshiba president Atsutoshi Nishida raised the white flag, declaring yesterday that it would stop making and selling the devices altogether within a month.
Toshiba's unconditional surrender leaves the spoils to Sony, maker of the rival Blu-ray disc player - a technologically superior format that had the backing of virtually all the major movie studies and retailers.
"We simply had no chance to win," Mr. Nishida acknowledged bluntly.
The final straw, he said, was Warner's decision last month to exclusively release movies in Blu-ray. The decision by Warner, with about 20 per cent of the movie market, put a critical mass of the industry in the Blu-ray camp.
With billions of dollars in global sales at stake, experts had predicted the Toshiba-Sony battle would go on for years - not unlike the 1980s battle of videotape formats between VHS (Matsushita) and Betamax (Sony). That war lasted a decade, leaving Sony battered and humiliated.
So how did this epic battle come to such an abrupt end?
The answer lies in part with the bruising Sony experienced with Betamax, which, like Blu-ray, was also the better product on paper.
For more that 20 years, Sony has been "haunted by Betamax" and was fiercely determined not to let history repeat itself, explained Xavier Drèze, a marketing professor at the University of Pennsylvania's Wharton business school.
"Sony was much smarter," Prof. Drèze said. "They understood this time they couldn't do it alone. They understood that they needed strategic partnerships with industry players."
The war was over when Sony managed to line up a critical mass of partners - in Hollywood, Silicon Valley and on Main Street.
The tipping point was Warner Bros. But Sony Pictures, Walt Disney Co. and News Corp.'s Twentieth Century Fox Film Corp. had already done the same - signing exclusive sealed deals with presumably rich royalty arrangements.
"This was heavy hitters in a back room talking about what the royalty structure was going to be and how much money they were willing to put on the table to be exclusive with one camp or the other. That was the determining factor here," concluded Van Baker, an analyst with market research firm Gartner Inc.
Until last month, Warner had been backing both technologies.
Last Friday, Wal-Mart Stores Inc. announced it would sell only Blu-ray DVDs. Officials said "customer feedback" prompted its decision.
Netflix Inc., Best Buy Co. Inc., Blockbuster Inc. and Target Corp. had earlier done the same.
"Everyone was tired of the format war, the retailers were tired of it, the consumer electronics vendors were tired of it and they just wanted this thing to get settled," Mr. Baker said.
"Consumers and the industry learned the hard way with Beta and VHS that a prolonged format war was disastrous. There was a lot of motivation to get one or the other to win and the only thing that protracted it was the amount of money flying around."