Investor's Business Daily, April 13th, 2007
Will history repeat itself?
Arrogance and lack of foresight are the reasons usually given for Sony's SNE drubbing in the epic battle between its Betamax video player and VHS rivals in the early 1980s.
Some experts believe the Japanese electronics giant might be repeating the error with its bid to make its Blu-ray video disc player into a dominant consumer product.
Blu-ray, one of two technologies competing for dominance in the high-definition video player market, is facing off against Toshiba's HD DVD player. As with Betamax vs. VHS, both sides are backed by big guns in consumer electronics and entertainment.
Are Sony's honchos again clinging to a one-sided strategy that led to defeat in the Betamax wars?
Michael Raynor, author of "The Strategy Paradox: Why Committing to Success Leads to Failure (And What to Do About It)" has another view. A thesis of his book is that Sony failed with Betamax 25 years ago not because of bad decisions, but due to bold ambitions.
Sony spied a huge opportunity, honed a cutting-edge product and executed flawlessly -- except that it had bad luck, according to Raynor, a Distinguished Fellow with Deloitte Research.
"Sony had everything right, insofar as you can get everything right," said Raynor. "The best strategies are the boldest. But they also entertain the greatest chance of failure."
With Blu-ray, Sony is betting boldly once again. If it wins, the Blu-ray will join other Sony smash hits, like the Walkman and PlayStation. Or it could join the gallery of Sony flops, like the MiniDisc music player and Memory Stick.
The outcome of this slugfest will provide top managers with strategy lessons for years to come. If Raynor's right, the new video wars also may show that the past isn't always a flawless guide to the future when it comes to business.
As in the Betamax/VHS battle, the key players in the Blu-ray/HD DVD battle will likely face what Raynor calls the strategy paradox, which he boils down to two premises. The first is that commitments, once made, cannot easily be changed. The second premise is that making the right ones is a matter of luck because the future is uncertain. Unexpected events, no matter how sharp the business plan, can shift the paradigm.
Raynor says big-win strategies require risky bets that align perfectly with future events. Hitting a home run requires swinging for the fence. But if the batter is expecting a fastball and is thrown a curve, he's likely to whiff.
Sony was swinging for a grand slam in 1975 when it introduced Betamax, as a video recorder for time-shifting TV or recording programs for later viewing (the movie rental business had yet to develop).
But 13 years after its debut, Sony pulled Betamax off the market in 1989, conceding defeat to Matsushita Electric Industrial's MC VHS recorder and the legions of makers licensed to make it.
Matsushita can't claim credit for genuine foresight in its victory, Raynor says. It won not because it made better choices but because it made, purely by chance, what turned out to be the right choices.
Consumer electronics firms had been planning for the introduction of video players for several years. Early attempts flopped -- including a joint venture between Sony and Matsushita for a video player called U-Matic. Matsushita couldn't do a good job copying Sony's original video player design, Raynor said. To help out Matsushita, Sony agreed to water down its technology, resulting in an inferior product the public didn't want.
For this and other reasons, Sony chose to move forward on its own with Betamax.
Matsushita then began showcasing its VHS model and offering to license the technology to all, Sony included. It sought consensus on creating an industry standard that would avoid format wars. The VHS was inferior to Betamax in many respects. But it was simpler and less costly to build.
Sony stuck to its creed of technical excellence and the motto of founder Akio Morita who said: "Always lead, never follow." It wanted the best audio and video quality and believed, correctly, that going its own way would bring the Betamax to market before VHS.
Something similar happened in the early days of Blu-ray/HD DVD development, stirring a sense of deja vu with some analysts.
A consortium of firms had focused their efforts on developing the HD DVD format.
But Sony took another route. It began pushing a superior DVD design that was more advanced than HD DVD. But it also was more complex and costly to build. Sony bet that the higher capacity of Blu-ray discs would win the day. A split occurred between the companies involved, ushering in the current DVD format wars.
"The parallels between Betamax and Blu-ray are huge," said Rob Enderle, principal of research firm Enderle Group.
Sony started swinging from the outset. It built the Blu-ray player in its new PlayStation 3 video game player. That meant people could play video games and likewise watch films recorded in the Blu-ray format. Volume sales of PS3 would provide an added boost to the success of stand-alone Blu-ray players.
But, as the strategy paradox assumes, Sony couldn't have predicted the ensuing success of the competing Wii game system from rival Nintendo NTDOY. Nintendo had always lagged behind the Sony in the video game console market, but not this time.
The Wii system is outselling PS3 more than two to one. "Nintendo is chewing them up," said Enderle.
The result is that Sony didn't get the expected bump from PS3 that would benefit its stand-alone Blu-ray player.
Unexpected events -- like the success of Wii -- could also resemble the stroke of bad luck that hit Betamax.
The unexpected blow that hit Betamax came two years after its debut. In 1977 Fox licensed 50 B-list films for distribution, thus launching the movie rental business. Until then, no one was certain how or when the movie rental business would unfold. Hollywood was opposed to tape video recorders and was backing the development of a laser disc player by Royal Philips Electronics PHG, in part because the disc could not be copied.
The unexpected move by Fox laid the groundwork for Betamax's demise. As fate would have it, Sony had recently redesigned the Betamax with some popular features.
But the new Betamax II -- still pitched as a system to time-shift TV -- was not backward compatible with the first edition. When Fox made its movies available, it offered them in the earlier Betamax I and VHS format -- as the Betamax II didn't yet have significant market share.
The Betamax II proved to be far more popular with consumers, but it was a technical stumble that spelled the beginning of the end.
Will following the same strategy spell success or failure for Blu-ray?
Time will tell. But Raynor makes the point 20hat you can't always assume that history will repeat itself. The batter that struck out two decades ago could hit tomorrow's home run.
Copyright 2007 Investor's Business Daily, Inc.
