DVD War of 2005–8: Blu-Ray versus HD DVD
TEACHING NOTE
■ SYNOPSIS ■
Toshiba’s February 19, 2008 announcement that it was stopping production of its HD-DVD
marked the end of the standards war between Sony and Toshiba for leadership in the next
generation of high-capacity DVDs. This account of the two-year struggle between Toshiba and
Sony offers insight into the dynamics of standards war, and allows us to consider the factors that
precipitate a “tipping point” in a market where network externalities are very significant. By
addressing the question of “What could Toshiba have done differently in order to have won
against Sony’s Blu-ray,” students can explore the complex interaction of market leadership in a
situation of technological rivalry
■ TEACHING OBJECTIVES ■
While the issue of network externalities and winner take all markets appears in the Video Games
case, this brief case focuses explicitly on a situation where rivalry between two alternative
technological standards is the sole strategic issue. This case is designed as a vehicle for applying
the analysis of network externalities and standards wars contained in Contemporary Strategy
Analysis. It directs particular emphasis to the role of alliances in building bandwagon effects and
the critical importance of managing expectations.
■ POSITION IN THE COURSE ■
This case is ideal for introducing the analysis of industry and competition—in particular, for
applying Porter’s Five Forces of Competition framework. A subsequent class can then be
devoted to a case that involves more complex industry structure or competitive dynamics, (e.g.
“Ford and the World Automobile Industry in 2009” (R. M. Grant, Cases to Accompany
Contemporary Strategy Analysis, 7th edn., Blackwell, 2010), “Offshore Drilling” (Harvard
Business School Case No. 9-799-111, 1999) or “Bitter Competition: The Holland Sweetener Co.
vs. NutraSweet [A]” (Harvard Business School Case No. 9-794-079, 1994).
■ ASSIGNMENT QUESTIONS ■
1. Was it inevitable that only one DVD technology could survive?
2. Was the outcome of the war predictable from the beginning? When did Blu-ray’s victory
become inevitable?
3. What could Toshiba have done differently and could it have won?
4. To what extent was Sony a winner? Did its ultimate victory justify its unwillingness to
reach a compromise with Toshiba during the first half of 2005?
, ■ READING ■
R. M. Grant, Contemporary Strategy Analysis (8th edn.), Wiley, 2013, Chapter 9, especially pp.
359-262 on “Competing for Standards”.
For a fuller treatment of this topic, see C. Shapiro and H. Varian, “The Art of Standards Wars”
California Management Review, Winter 1999.
■ CASE DISCUSSION AND ANALYSIS ■
Was it inevitable that only one DVD technology could survive?
The key issue here is the extent of network externalities in this market. There are two key sources
of network externality here
1. User linkages—user linkages are limited for this product. Network effects between users
probably limited to sharing DVDs.
2. Availability of complementary products and services. The critical network effects
concern complementary products. The complementary products and services are: the
hardware products that include DVD drives (DVD players, PCs, video game consoles)
and the content producers—movie studios and video game publishers. For both these sets
of firms, the presence of dual standards presents a major problem. For manufacturers, it
requires designing and manufacturing products that incorporate both technologies. For
the games publishers and movie studios, it means distributing output in dual formats.
In fact, the complications extend even further—to the extent that movies and video games
need to be produced in order to optimize the potential of the media, dual formats may
create even more complex issues. For example the case quotes Bill Gates on the
challenges of Blu-ray for PC makers (p. 205). At the most elementary level, the different
storage capacity of the two formats creates choices for the studios regarding the content
they put on a single disk.
Moreover, the problems extend down the value chain: for retailers it means additional
costs of stocking and display and increased risks of being left with surplus inventory.
The only ways in which the two rival formats might coexist would be:
• If DVD disk drives could be made compatible with both formats—which according
to the case is not possible.
• If the market for DVDs partitions into separate segments—e.g. the PC makers, video
game console makers, and games publishers might adopt HD-DVD, while DVD
players and the movie studios might adopt Blu-ray. However, as hardware devices
become increasingly multifunctional, that seems unlikely. .
Was the outcome of the war predictable from the beginning? When did Blu-ray’s
victory become inevitable?
,It is clear from the case that Sony’s position strengthened in several increments in the course of
the war. The key events were the defections from one camp to another. The critical event
precipitating “tipping point” seems to have been Warner Brothers' decision on January 4 2008 to
drop HD-DVD. From that point, Blu-ray’s momentum became unstoppable.
But what prompted Warner Brothers to stop supporting both formats? The most likely
explanation is that Warner Brothers was guided by what was happening in the market. By the
end of 2007, Blu-ray players were decisively outselling HD-DVD players.
{So, could this outcome have been predicted from the start? So, could this outcome have been
predicted from the start? Certainly there is no indication of this from the press reviews throughout
2006. Sony was a more powerful player in home entertainment than Toshiba. Its key advantage
was its ability to dictate standards to its own movie subsidiary Sony Pictures and to influence
video games through its Playstation consoles. However, the fact that HD-DVD was first to market
with a smoother product launch gave a significant initial advantage to Toshiba.
What could Toshiba have done differently and could it have won?
Leadership in this battle seems to have slipped away from Toshiba without there being any
obvious slip-ups on its part. Certainly Toshiba appears to have made great efforts in enlisting the
support of the movie studios.
One area where Toshiba might have fought a more effective battle was in video games. Given
that Sony was using its Playstation 3 as its main launch pad for Blu-ray, Toshiba needed to
counter Sony’s leadership in this market. Would this have been feasible? Yes, Sony was a late
mover in this market. Toshiba made clear efforts with Microsoft, but gained limited cooperation.
The other player was Nintendo whose Wii proved to be the surprise winner in the market. Wii
was not released with a DVD player—one area for inquiry would be the potential for a Wii model
incorporating an HD-DVD. One possibility would have been for Toshiba to have enlisted
Microsoft and Nintendo in an anti-Sony alliance.
To what extent was Sony a winner? Did its ultimate victory justify its unwillingness to reach
a compromise with Toshiba during the first half of 2005?
An issue that arises in any standards war is: “Was it worth it?” The evidence of the case
suggests that both players were probably losers. For Toshiba the billion dollar charge
against earnings almost certainly understates the costs; for Sony the costs were probably
even higher—probably exceeding the benefits of profits from sales of its Blu-ray disk
players and associated licensing revenues. A key problem seems to be the short likely life
cycle of the technology and the expansion of online provision of media content.
Hence, an agreement over a common standard early on would probably have been a
superior strategy for Sony as well as Toshiba.
, ■ KEY TAKE-AWAYS FROM THE CASE DISCUSSION ■
The case illustrated several of the themes outlined in the “Competing for Standards” section of
Chapter 9 in Contemporary Strategy Analysis. In particular:
1. The role of product complementarities in network effects. In this, as in many other
markets for hardware-software systems, the critical source of network externalities arises
from hardware-software complementarities. Where hardware and software are co-
specialized (i.e. not interchangeable) and where customers seek a wide range of
software, then network externalities can be powerful. The higher the
development/adaptation costs of the software, the stronger are these effects.
2. Importance of managing expectations. The dynamics of positive feedback (early
leadership attracts further support) operate long before the products embodying the new
technologies are launched. The critical battle is over managing expectations.
3. Building the bandwagon. The key to expectations formation is in size and cohesiveness
of the alliances built by the rival technologies—this is especially the case where the
source of network externalities is product complementarities.
4. Standards wars destroy/redistribute value. Building alliances requires sharing the
benefits of the technology with the alliance partners. Gaining market share leadership
requires offering low prices to customers. Hence, standards wars deplete the value that is
available to the owner of the winning standard.
5. As knowledge of the dynamics of standards wars diffuses, so standards wars are
becoming shorter. As firms become aware of the role of positive feedback and “tipping
points” so the laggards in a standards war are quicker to recognize when the war is lost—
hence exit is much quicker than was the case in some of the classic battles of yesteryear
(e.g. Betamax vs. VHS).
TEACHING NOTE
■ SYNOPSIS ■
Toshiba’s February 19, 2008 announcement that it was stopping production of its HD-DVD
marked the end of the standards war between Sony and Toshiba for leadership in the next
generation of high-capacity DVDs. This account of the two-year struggle between Toshiba and
Sony offers insight into the dynamics of standards war, and allows us to consider the factors that
precipitate a “tipping point” in a market where network externalities are very significant. By
addressing the question of “What could Toshiba have done differently in order to have won
against Sony’s Blu-ray,” students can explore the complex interaction of market leadership in a
situation of technological rivalry
■ TEACHING OBJECTIVES ■
While the issue of network externalities and winner take all markets appears in the Video Games
case, this brief case focuses explicitly on a situation where rivalry between two alternative
technological standards is the sole strategic issue. This case is designed as a vehicle for applying
the analysis of network externalities and standards wars contained in Contemporary Strategy
Analysis. It directs particular emphasis to the role of alliances in building bandwagon effects and
the critical importance of managing expectations.
■ POSITION IN THE COURSE ■
This case is ideal for introducing the analysis of industry and competition—in particular, for
applying Porter’s Five Forces of Competition framework. A subsequent class can then be
devoted to a case that involves more complex industry structure or competitive dynamics, (e.g.
“Ford and the World Automobile Industry in 2009” (R. M. Grant, Cases to Accompany
Contemporary Strategy Analysis, 7th edn., Blackwell, 2010), “Offshore Drilling” (Harvard
Business School Case No. 9-799-111, 1999) or “Bitter Competition: The Holland Sweetener Co.
vs. NutraSweet [A]” (Harvard Business School Case No. 9-794-079, 1994).
■ ASSIGNMENT QUESTIONS ■
1. Was it inevitable that only one DVD technology could survive?
2. Was the outcome of the war predictable from the beginning? When did Blu-ray’s victory
become inevitable?
3. What could Toshiba have done differently and could it have won?
4. To what extent was Sony a winner? Did its ultimate victory justify its unwillingness to
reach a compromise with Toshiba during the first half of 2005?
, ■ READING ■
R. M. Grant, Contemporary Strategy Analysis (8th edn.), Wiley, 2013, Chapter 9, especially pp.
359-262 on “Competing for Standards”.
For a fuller treatment of this topic, see C. Shapiro and H. Varian, “The Art of Standards Wars”
California Management Review, Winter 1999.
■ CASE DISCUSSION AND ANALYSIS ■
Was it inevitable that only one DVD technology could survive?
The key issue here is the extent of network externalities in this market. There are two key sources
of network externality here
1. User linkages—user linkages are limited for this product. Network effects between users
probably limited to sharing DVDs.
2. Availability of complementary products and services. The critical network effects
concern complementary products. The complementary products and services are: the
hardware products that include DVD drives (DVD players, PCs, video game consoles)
and the content producers—movie studios and video game publishers. For both these sets
of firms, the presence of dual standards presents a major problem. For manufacturers, it
requires designing and manufacturing products that incorporate both technologies. For
the games publishers and movie studios, it means distributing output in dual formats.
In fact, the complications extend even further—to the extent that movies and video games
need to be produced in order to optimize the potential of the media, dual formats may
create even more complex issues. For example the case quotes Bill Gates on the
challenges of Blu-ray for PC makers (p. 205). At the most elementary level, the different
storage capacity of the two formats creates choices for the studios regarding the content
they put on a single disk.
Moreover, the problems extend down the value chain: for retailers it means additional
costs of stocking and display and increased risks of being left with surplus inventory.
The only ways in which the two rival formats might coexist would be:
• If DVD disk drives could be made compatible with both formats—which according
to the case is not possible.
• If the market for DVDs partitions into separate segments—e.g. the PC makers, video
game console makers, and games publishers might adopt HD-DVD, while DVD
players and the movie studios might adopt Blu-ray. However, as hardware devices
become increasingly multifunctional, that seems unlikely. .
Was the outcome of the war predictable from the beginning? When did Blu-ray’s
victory become inevitable?
,It is clear from the case that Sony’s position strengthened in several increments in the course of
the war. The key events were the defections from one camp to another. The critical event
precipitating “tipping point” seems to have been Warner Brothers' decision on January 4 2008 to
drop HD-DVD. From that point, Blu-ray’s momentum became unstoppable.
But what prompted Warner Brothers to stop supporting both formats? The most likely
explanation is that Warner Brothers was guided by what was happening in the market. By the
end of 2007, Blu-ray players were decisively outselling HD-DVD players.
{So, could this outcome have been predicted from the start? So, could this outcome have been
predicted from the start? Certainly there is no indication of this from the press reviews throughout
2006. Sony was a more powerful player in home entertainment than Toshiba. Its key advantage
was its ability to dictate standards to its own movie subsidiary Sony Pictures and to influence
video games through its Playstation consoles. However, the fact that HD-DVD was first to market
with a smoother product launch gave a significant initial advantage to Toshiba.
What could Toshiba have done differently and could it have won?
Leadership in this battle seems to have slipped away from Toshiba without there being any
obvious slip-ups on its part. Certainly Toshiba appears to have made great efforts in enlisting the
support of the movie studios.
One area where Toshiba might have fought a more effective battle was in video games. Given
that Sony was using its Playstation 3 as its main launch pad for Blu-ray, Toshiba needed to
counter Sony’s leadership in this market. Would this have been feasible? Yes, Sony was a late
mover in this market. Toshiba made clear efforts with Microsoft, but gained limited cooperation.
The other player was Nintendo whose Wii proved to be the surprise winner in the market. Wii
was not released with a DVD player—one area for inquiry would be the potential for a Wii model
incorporating an HD-DVD. One possibility would have been for Toshiba to have enlisted
Microsoft and Nintendo in an anti-Sony alliance.
To what extent was Sony a winner? Did its ultimate victory justify its unwillingness to reach
a compromise with Toshiba during the first half of 2005?
An issue that arises in any standards war is: “Was it worth it?” The evidence of the case
suggests that both players were probably losers. For Toshiba the billion dollar charge
against earnings almost certainly understates the costs; for Sony the costs were probably
even higher—probably exceeding the benefits of profits from sales of its Blu-ray disk
players and associated licensing revenues. A key problem seems to be the short likely life
cycle of the technology and the expansion of online provision of media content.
Hence, an agreement over a common standard early on would probably have been a
superior strategy for Sony as well as Toshiba.
, ■ KEY TAKE-AWAYS FROM THE CASE DISCUSSION ■
The case illustrated several of the themes outlined in the “Competing for Standards” section of
Chapter 9 in Contemporary Strategy Analysis. In particular:
1. The role of product complementarities in network effects. In this, as in many other
markets for hardware-software systems, the critical source of network externalities arises
from hardware-software complementarities. Where hardware and software are co-
specialized (i.e. not interchangeable) and where customers seek a wide range of
software, then network externalities can be powerful. The higher the
development/adaptation costs of the software, the stronger are these effects.
2. Importance of managing expectations. The dynamics of positive feedback (early
leadership attracts further support) operate long before the products embodying the new
technologies are launched. The critical battle is over managing expectations.
3. Building the bandwagon. The key to expectations formation is in size and cohesiveness
of the alliances built by the rival technologies—this is especially the case where the
source of network externalities is product complementarities.
4. Standards wars destroy/redistribute value. Building alliances requires sharing the
benefits of the technology with the alliance partners. Gaining market share leadership
requires offering low prices to customers. Hence, standards wars deplete the value that is
available to the owner of the winning standard.
5. As knowledge of the dynamics of standards wars diffuses, so standards wars are
becoming shorter. As firms become aware of the role of positive feedback and “tipping
points” so the laggards in a standards war are quicker to recognize when the war is lost—
hence exit is much quicker than was the case in some of the classic battles of yesteryear
(e.g. Betamax vs. VHS).
