Competitive Analysis II: How Toshiba and HD-DVD Could Come Back

Rob Enderle

In the first part of this series, I lamented the lack of competitive analysis organizations in technology companies and suggested that, had Toshiba properly gamed out what Sony was likely to do and applied that to its execution strategy, it likely would be on the winning side rather than the losing side right now.


Toshiba had almost all of the critical advantages, but Sony was in a position where it couldn't allow a loss. By pushing Sony against the wall too early and not ensuring the PS3 failed to ramp, Toshiba is now almost out of the race. But, this market is still young and massively underpenetrated, the consumer is still not that interested in HD Optical from anyone, and Sony has burned through a near legendary amount of resources to get this win and continues to struggle in a number of markets, particularly the gaming segment, which has been generating massive amounts of red ink for the company since the launch of the PS3.


Until the buyer actually buys products at a high rate, this market could yet change. My view is that it is still most likely to move to downloads next, probably connected to a cable or DSL offering, rather than a game system or standalone set-top box (thanks to the related subsidies). Though, Apple in a few days will likely do a reasonably good job in providing an alternative to that scenario and remains one of the few companies that could materially change this outcome.


Toshiba's Remaining Assets and Liabilities


To assess what Toshiba can do, we should inventory its remaining assets. It has more standalone HD-DVD players focused just on movies in the market, its players are connected while many of the Blu-Ray players are not, it has one of the most powerful companies in the world (Microsoft) as a partner, and its player still appears to have a manufacturing cost advantage.


Looking at the liabilities, it is now way behind in content, it has nothing like the PS3 driving sales into seven digits, and the key independent influencers think its platform is now dead. Of the three problems, the last will likely prove the most problematic because, once folks conclude something is dead, it is really hard to convince them otherwise.


Toshiba's Choices


1. The most attractive and apparently least risky path is to sue for peace. This is where the losing side goes to the winning side and says that for some predetermined consideration it will walk away and give up the fight. Sony and its partners might still be willing to pay a large sum of money and/or give Toshiba significant concessions to simply walk away, and while this pool would have been vastly richer had Toshiba done this last quarter, it should still be worth considering against the very real risk that what needs to be done to eliminate Blu-Ray is outside of the reasonable capability of the HD-DVD supporters. This option has always been unique to the HD-DVD side as, once Sony put the Blu-Ray drive into the PS3, the cost of abandoning it would have simply been too great.


2. Assess what it would take to move Time Warner back into the Toshiba HD-DVD camp and execute against this plan. All of the studios, thanks largely to the writers' strike, are looking at what will likely be a massively bad year (here is the cost updated every second for this thing) when it comes to both revenue and profit (it should easily reach over a billion dollars by mid year). Every one of them is likely trying to find out how to mitigate this. There is likely an amazingly affordable price that Time Warner might consider to change sides before it drops HD-DVD production in a few months. Sony likely already paid it a lot to make this move, but if Sony paid the subsidiary Warner Brothers, there is a chance the parent Time Warner could override. Microsoft could play a very big roll here as the two entities have historically been rather close.


3. Go after Disney instead. One of the mysteries in this segment is why Disney jumped from the HD-DVD camp to the Blu-Ray camp, and the back story behind that move might identify a negotiating vector that could open up a major opportunity for HD-DVD. I suspect the move was the result of a unique relationship between key players. Were that relationship exposed or the key Disney player incented to either change companies or retire, coupled with a financial offer to Disney, that company, for the same financial reasons as Time Warner, might be motivated to move. But, before this is attempted, Toshiba would need to know just where to crack Disney wide open and that information is not readily available to me right now.


4. Do an end run and move to blended download and/or dual-mode devices. The market is moving to downloads, but it will take some time to get there. Offering a player that could both play HD-DVDs and gain access to the content already being licensed to Microsoft (which includes most of the Blu-Ray camp) could provide a compelling consumer mix of the present and the future. Were the company to subsidize a combination Blu-Ray, HD-DVD player, given that the existing content is split, it could put the consumer in the position to make the choice. With the players in wide distribution, the content owners could move to the best (read cheapest) format and Toshiba could financially ensure that HD-DVD is that choice with Microsoft's backing for longer than Sony could likely financially afford to hold out.


5. An interesting alternative or addition would be to work with Microsoft to create the same thing, but as a significantly improved and price-reduced HD-DVD enhancement to the Xbox 360, which has a market penetration of over four times the Playstation 3. Alone, I don't think this would be strong enough to change the outcome, but coupled with any one of all but their first plan this could ensure an eventual HD-DVD victory.


Wrapping Up


These are back of the envelope thoughts and a formal analysis would be vastly deeper and provide a much more granular picture of potential options and include what Sony's response to each might be. I don't want anyone to think that taking back this market would be as simple as a one-step plan because Sony clearly wouldn't be standing still through any of this. In fact, were I doing this as a formal assessment, I'd probably recommend seeing if the existing anti-trust action in Europe couldn't be accelerated, or another action in the U.S. initiated, to the point where Sony was afraid to react in any major way first.


In the end, what a good competitive analysis group does is provide executives with thought-through choices and related probabilities, competitive responses, and costs (both real and economic) so they can make better informed decisions.


It amazes me that more companies in the tech segment simply don't know how to do this anymore, even though losses like Toshiba's seem to point to the incredible need for this kind of work.


If you would like to learn more about competitive intelligence, look into the Society of Competitive Intelligence Professionals, SCIP.

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