How Lack of Competitive Analysis, Nintendo Caused Blu-Ray's Victory

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As we exited 2007, there was no definitive leader in the fight for the next high-definition optical standard. The HD-DVD camp had sold a lot of players, but they were offset by PlayStation 3 sales, which ramped strongly through the quarter. Blu-Ray maintained its slight lead in media sales, but total sales were still a fraction of potential.


Past Coverage on HD Optical


A while back, I did a series using Blu-Ray as an example of a bad decision. A lot of folks reading this thought I was recommending HD-DVD or even saying it would win.What I was trying to point out was that the cost of the battle was too high for Sony and the company should not have entered it. The concluding piece in the set argued that the market had grown tired of the battle and if it didn't end soon, that market would move to something else. I recommended that the two sides sit down to prevent this.


At CES, the buzz was on set-top boxes and either streamed or downloaded content, suggesting that Sony's hard win was a Pyrrhic victory, at best. I have both HD-DVD and Blu-Ray players, and the last player I purchased (and wrote about) was the Addonics Zebra HD-DVD/Blu-Ray dual-mode drive, but I still use my Oppo up-converting DVD player more than any other HD product I have. I've also consistently recommended that player over either format (so much so that Oppo has quoted me doing it).


Time Warner Weighs In


Time Warner weighed in in favor of Blu-Ray Friday with what may be the definitive advantage, once it makes the shift and depending on the HD-DVD response, to eliminate one of the two standards.


In looking back at the sequence of events, the HD-DVD camp made several mistakes. One of them was failing to realize how much Nintendo would have to do with this outcome. This goes to strategic thinking. While the technology industry generally lacks it, other industries make use of a competitive analysis function. The HD-DVD camp could have used such analysis to prevent this outcome.


Let's start with what competitive analysis is, and then move to what it likely would have suggested for the HD-DVD camp.


Competitive Analysis


Competitive analysis, used heavily in industries such as automobiles and pharmaceuticals, is typically executed by a small group of well-educated strategic thinkers who game out future events to anticipate problems and define strategies that can then be immediately used if those problems result, to avoid those problems, or to take advantage of competitors' weaknesses. They even profile executives from competing firms, assess manufacturing capabilities, anticipate competitive entries, define future competing products and what it would take to beat them, and forecast regulatory changes.


Most technology companies are run tactically. While they have long-term plans, executives spend most of their time dealing with short-term decisions; they often are blindsided by events that may have been a long time coming but, because they weren't obvious, come as an avoidable surprise -- like the ones we are discussing here.


Much like the corporate version of government intelligence-gathering organizations, the competitive analysis group's mission is to spotlight the strategic and ensure the company's long-term survival and success.


The move by Time Warner was signaled months ago, but seemed to come as a complete surprise to Toshiba and the HD-DVD consortium. So what happened?


What Was Missed


Sony had put itself in a position where it couldn't lose. I don't mean the odds were in its favor; I mean the cost of losing would be catastrophic for the company. For Toshiba, while a loss would be painful, it could easily survive. In a heads-up fight, Sony would be willing to go farther than Toshiba, so Toshiba needed to make sure Sony never felt cornered until it was too late for Sony to react.


When Toshiba got Paramount and Dreamworks to go exclusively HD-DVD, it cornered Sony and put a spotlight on Time Warner. It gave Sony time to ensure Time Warner would not move to the HD-DVD camp. Now people are speculating that Paramount will switch back to Blu-Ray, and few seem to believe it when it says it won't.


A critical element, the PS3 game system, initially should have assured an early victory for Sony. Instead, the Blu-Ray technology made the PS3 too expensive for the market, moving Sony from first to a distant third in that segment. Even so, Sony was selling PS3s at a much higher rate than the combined sales of HD-DVD and Blu-Ray standalone players.


Toshiba needed to cripple PS3 sales, and the weapons were the Xbox 360, which had an HD-DVD option selling in comparatively low volumes, and the Nintendo Wii, which had dominated the market since launch.


There was no apparent focus on moving more Xbox 360 HD-DVD accessories, and Nintendo was manufacturing-constrained, shifting sales over mostly to the PS3, which was seen as newer than the Xbox 360. Toshiba had a significant price advantage on its HD-DVD player, but it allowed prices to creep up during the buying period. This market is incredibly price-sensitive; once prices crept over the critical break point of $200, they slowed sharply because people had set their value point at the earlier prices.


So as the year ended, Blu-Ray had maintained its lead and Time Warner realized it had to pick one. Based on disk sales, it clearly was leaning toward Blu-Ray. Sony would have been more than willing to provide substantial financial incentives to make this move.


What Toshiba Should Have Done


Three tactical moves likely could have ensured this decision went the other way. Time Warner had been a huge advocate for HD-DVD at the start and even while supporting both standards, seemed to favor HD-DVD, with its more on-disk options and dual-mode disks (with regular DVDs on one side), which is why Toshiba likely believed it wouldn't go Blu.


Toshiba should have embraced these dual-mode drives (this was generally the case, but without visible support for this format the related benefits were not widely known). Sony would not have been threatened by this, as its format was supported as well, and likely would not have moved more aggressively against these dual-mode drives. Because they were network-connected, these drives actually would have been able to provide better updates for the Blu-Ray side.


Second, Toshiba should have worked with Nintendo to ensure it could fulfill Wii demand, holding down PS3 sales. To offset upsetting Microsoft, it should have offered additional incentives and advertising connected to the Xbox 360 HD-DVD drive to ensure higher attach rates and better ramp that product while enhancing the value of the Xbox 360.


Third, Toshiba should have ensured that prices for its HD-DVD players went down, not up, as the holiday season progressed, and managed prices to clear inventories by year end. I'd add that since the current free media rebate programs surrounding both Blu-Ray and HD-DVD don't get counted by most industry monitors, the HD-DVD program should have been changed to a rebate program where you are refunded what you paid for any five HD-DVDs. Folks often forget to turn in the rebate forms, and the sales would have allowed HD-DVD numbers to spike, mitigating or reversing the Blu-Ray advantage at year end.


Unless Sony saw this coming -- which is possible, suggesting this would need to be gamed out at least one more move -- these tactical moves should have been incentive for Time Warner to go with HD-DVD and not Blu-Ray.


Wrapping Up


Competitive battles are like chess games, with moves and countermoves. Successful masters think many moves ahead. The inability to strategically think through the moves needed to ensure victory put Toshiba and its supporters at a major disadvantage. Sony took advantage of it, and the result favored the company with more to lose (which is often the case in many kinds of battles). By persuading several small studios to go exclusively with HD-DVD, Toshiba put Sony in fear of failure, but didn't assure that failure. Sony stepped up and now has a decisive lead. There's a good lesson here for anyone who wants to learn it and win in his or her chosen market.


By the way, Toshiba isn't dead yet, and while it will be incredibly hard to come back from this, it isn't impossible (some have already started talking about how). We'll chat later about what it might be able to do to turn this around.