Thursday, February 21, 2008

How the Blu-ray war was won - Sony outspent, outsold Toshiba

Sony's victory in the high-definition format war is a badly needed win for the Japanese electronics giant, after a series of humiliating failures that have left control of the music market with Apple. The question that Sony has yet to answer, however, is whether the price paid to see off Toshiba - at least $3 billion (£1.54 billion) - was worth it.

Blu-ray is more expensive to manufacture than Toshiba's HD-DVD player. Toshiba players are on sale for as little as £149.99 this year, £120 less than the cheapest Blu-ray. Although some of that discounting reflected a last throw of the dice from Toshiba, for the moment consumers have been saddled with a more expensive format and Sony's losses to make up.

The only way for Sony to distribute Blu-ray in large quantities was to build the technology into the PlayStation 3 and sell the games console at a discount. Sony's console division ran up a $1.97 billion deficit in the year to March 31 last year, which it followed with a $991 million loss in the first three quarters of the current year. Yet the true costs of Blu-ray are probably much greater: early research and development expenses have not been included.

Analysts believe, however, that Sony will recoup its $3billion-plus investment eventually. Richard Hooper, an analyst with Screen Digest, said: "It is hard to estimate precisely what royalties Sony will generate, but we believe that they will be able to recoup far more than $3 billion over the lifetime of Blu-ray. It's worth it".

Without PlayStation 3, Sony would would have been in deep trouble. In Europe, for example, Sony has sold up to an estimated three million consoles. Toshiba is similarly coy with its figures, but has admitted that it has sold "over 200,000".

David Walstra, a Sony Blu-ray specialist, said: "Blu-ray films have been outselling HD-DVD by roughly two to one in the United States, but by three or even four to one in Europe". It was becoming increasingly clear to Hollywood that Blu-ray's customer base - with 9.5million PlayStation 3s expected to be sold in the year to March 31 - was going to be far greater than HD-DVD could manage. Warner Brothers took the first step, abandoning Toshiba in January.

Incorporating Blu-ray into the games console, however, was not the only reason that Sony succeded. It was also able to keep enough Hollywood studios on board, with Walt Disney, Twentieth Century Fox and Warner Brothers all backing the format.

Blu-ray's superior capacity - it will be able store 50GB when it introduces "dual-layer" technology, compared with Toshiba's 30GB - was also important. Anthony Peet, general manager of Disney's DVD business in Britain, said that the storage meant "we can include more bonus features and ship less discs".

Both Sony and its consumers still have to pay a price. For the company, it comes from building the expensive technology into a games console, which Sony executives concede is being sold at a loss. Nintendo has seized market share with its cheaper Wii, while Microsoft's XBox360 is also performing competitively. Where Sony dominated the second generation console markets, outselling Microsoft's Xbox by five to one, its present share globally is estimated at 20.8 per cent.

For customers, unlike those of Toshiba's HD-DVD, which was fully developed, Sony left some features out as it raced to get the product to market; in particular, the ability to incorporate internet downloads into the discs.

“Only the PlayStation 3 is future- proofed; it is not clear what will happen to other players which do not have ethernet [fast internet] connections,” Mr Hooper said.

That means that people who have bought a standalone Blu-ray player may have to buy new equipment if they want to take advantage of new features, making them, like HD-DVD owners, casualties of the high-definition format war.


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