The Globe and Mail: How did Sony win the HD war?

[cap213]

I was browsing the paper the other day and stumbled upon this article:

http://www.reportonbusiness.com/serv...umnsBlogs/home

How did Sony win the HD war?
RICHARD SIKLOS
Globe and Mail Update
February 29, 2008 at 6:00 AM EST

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 Corp. [SNE-N] chief was fresh off his company's triumph in the high-stakes, high-definition video player wars. On Feb. 19, Sir Howard 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 that it would stop producing its less expensive, Microsoft-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 to go exclusively with Blu-ray. The victory was not only crucial to proving Sir Howard'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 videotape format that has haunted the halls at Sony for two decades.

“I was a pain in the ass on this,” Sir Howard 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.”

Indeed, the pathos behind 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 and held up as the ultimate clash of cultures. Brian Roberts, now the head of U.S. cable company Comcast, recently recounted to Sir Howard his first visit to Sony as part of a U.S. cable industry group. Then Sony chief Akio Morita grew enraged when asked whether he was unhappy with buying Columbia, which had resulted in a $3.2-billion (U.S.) writedown in 1994. “You Americans don't understand.” Mr. Morita shot back. “We clearly had the best product with Betamax – but Hollywood picked VHS.” In an e-mail, Mr. Roberts recounted the meeting 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 a decade or so to 2005, when Sir Howard was the surprise choice to lead troubled Sony 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, to offer a budget alternative to pricey new Blu-ray players. The only problem was that 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. Sir Howard 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 Sir Howard's Hollywood mogul pals as possible to commit and stay exclusively to Blu-ray. And, he said with a laugh: “Nobody does anybody a favour 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 duelling 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.

What was clear going into the last quarter of the year was that consumer confusion over which format to buy was holding back sales of next-generation DVD players at a time when the DVD market over all 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 (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 Talladega 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 executives would see them.

Never mind the Hollywood ending, Sir Howard can only imagine how much bigger the headlines would have been had Sony come out on the losing side again. And he acknowledges that he still has a marketing challenge ahead convincing consumers that they need an 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 version of HD video on demand that bypasses video players entirely. Asked if he might offer trade-ins for the one million people who have bought soon-to-be-obsolete HD DVD gadgets, Sir Howard grimaces. “Steady,” he jokes: “If I have any more success, I'll be bankrupt.”

Richard Siklos is editor-at-large at Fortune Magazine in Los Angeles