Chapter 8 Strategic alliances and networks
Use of alliances in implementing technology strategy
As we have seen, alliances often are pursued as ways to explore new applications, new technologies or both. By their very nature, they confront uncertainty and know- ledge asymmetry between the partners. Consequently, there are many calls for full explicit agreements with plans to be signed in advance of any collaboration, espe- cially by accountants and lawyers. Yet this can prevent and hinder collaboration because of the lack of familiarity between the partners. What is often required is a more informal approach to enable both parties to learn from each other. Moreover, the collaboration and learning often evolves over time as the parties begin to under- stand one another better. The beneﬁts can be great indeed, but the costs often are not fully visible. There are signiﬁcant hidden costs, such as management time and energy.Pause for thought
Many analysts argue that strategic alliances are like marriages. But does this mean many of them will end in tears? Is it possible to have a happy ending??Case studyChristopher Simms and Paul Trott
This case study explores the development of high- definition video and the format war between Sony’s
Blu-ray and Toshiba’s HD DVD. A format war describes competition between mutually incompati- ble proprietary formats that compete for the same market, typically for data storage devices and record- ing formats for electronic media. A useful historical example of one of the first format wars was between railway width gauges in the United Kingdom during the Industrial Revolution of the early 1800s. Isambard
Kingdom Brunel developed a 2.1 m width gauge for his Great Western Railway because it offered greater stability and capacity at high speed. Whilst George
Stephenson developed a 1.44 m width gauge for the first mainline railway, the Liverpool to Manchester
Railway; the de facto standard for the colliery rail- ways where Stephenson had worked. Needless to say, the narrower 1.44 m gauge won simply because more of this track had been laid, but trains today could be travelling much faster, if the wider gauge had been adopted.
The story of the VCR, Betamax, DVD,
HD DVD and Blu-ray
Blu-ray Disc (popularly known simply as Blu-ray) is an optical disc storage medium designed to supersede the standard DVD format. Its main uses are for stor- ing high-definition video, PlayStation 3 video games and other data. Blu-ray Disc was developed by the
Blu-ray Disc Association, a group representing mak- ers of consumer electronics
, computer hardware and motion pictures. The discs have the same physical dimensions as standard DVDs and CDs. The name Blu-ray Disc
derives from the ‘blue laser’ used to read the disc. Whilst a standard DVD uses a 650 nanome- ter (nm) red laser, Blu-ray Disc uses a shorter wave- length 405 nm laser, and allows for over five times more data storage on single-layer and over 10 times
And the winner is Sony’s Blu-ray – the high-definition DVD format war
on double-layer Blu-ray Disc than a standard DVD.
During the high-definition optical disc format war,
Blu-ray Disc competed with the HD DVD format.
Toshiba, the main company that supported HD DVD, conceded defeat in February 2008, and the format war came to an end. In late 2009, Toshiba released its own Blu-ray Disc player. The two formats have been battling for the growing high-definition share of the £12.3 billion a year global home DVD market.
High-definition DVDs offer improved visuals and sound, but also make it harder for content to be ille- gally copied and pirated. It is a sweet victory for the
Sony-backed Blu-ray format. Sony’s technically superior Betamax video format lost out to JVC- backed VHS when those formats went head to head in the 1980s.
The story of film and broadcast recording technol- ogy for home use dates back to the mid-twentieth century. When television first took off in the 1950s, the only means of preserving video footage was through kinescope, a process in which a special motion picture camera photographed a television monitor. Kinescope film took hours to develop and made for poor quality and was useful only for the broadcasters themselves. The electronics industry saw opportunities to develop recording technologies and a race developed to create a standard format for doing this. This race continues today.
Overview of the development of the VCR industry
Invented in 1956, the VCR had a lifespan of around
50 years and revolutionised the film industry, changed television-watching habits, triggered the first ‘format wars’ and raised new copyright ques- tions, establishing jurisprudence on fair use.
The big electronic companies of the 1950s raced to develop a technology for home recording and playback during the 1950s, seeing a significant opportunity and market gap, and therefore they started working on recorders that used magnetic tape. The first player launched was developed by the
Ampex Corporation: however, the world’s first mag- netic tape video recorder, the VRX-1000 (which was launched in April 1956), had a price tag of $50,000 and expensive rotating heads that had to be changed every few hundred hours. This, therefore, made it an unviable consumer item, although it was popular with television networks.
Many companies abandoned their research and followed Ampex’s lead. RCA pooled patents with
Ampex and licensed in the Ampex technology. The new goal for the firms in the industry was to develop a video machine for home use. It had to be solid, low- cost and easy to operate. Sony released a first home model in 1964, followed by Ampex and RCA in 1965.
Whilst these machines, and those that followed over the next 10–15 years, were much less expensive than the VRX-1000, they remained beyond the means of the average consumer, and were bought primarily by wealthy customers, businesses and schools. But there was still strong competition to develop a con- sumer format.
The competition between the companies attempting to develop a consumer format led to the release of three different
, mutually incompatible
VCR formats: Sony’s Betamax in 1975, JVC’s VHS in 1976 and the Philips V2000 in 1978. Two of these would come head-to-head in the 1980s in what became known as the First Format War. Before the technology battle could begin, however, the con- sumer electronics industry had to find an answer to a more pressing problem: content. Where would it come from? What would people watch on their
VCRs? At this stage, the industry regarded the
VCR’s television recording feature as a bonus option of little utility to the average home user: why, they asked, would anyone want to record a TV show and watch it later? They thought movie videos would provide an answer to the content problem, but the movie industry itself was convinced this idea was not to its advantage.
: Oliver/Leedham/Alamy Images
Chapter 8 Strategic alliances and networks
Copyright issues for the VCR
Home video sent the movie industry into a spin.
Television had already stolen a big part of its market, and it saw the VCR as a massive new threat.
Copyright, the film industry argued, was at stake. Did not the mere recording of a television show constitute an infringement of the copyright owner’s rights over reproduction? The studios took the issue to court. In
1976, the year after Sony’s release of the Betamax
VCR, Universal City Studios and the Walt Disney
Company sued Sony, seeking to have the VCR impounded as a tool of piracy.
New communications technology – then as now – has always challenged previous assumptions and jurisprudence in the area of copyright. The first court decision in 1979 went against the studios, ruling that use of the VCR for non-commercial recording was legal. The studios appealed and the decision was overturned in 1981. Sony then took the case to the
US Supreme Court, who finally ruled that home recording of television programmes for later viewing constituted ‘fair use’. An important factor in the
Court’s reasoning was that ‘time-shifting’ – i.e. recording a programme to watch at another time – did not represent any substantial harm to the copy- right holder, nor did it diminish the market for the product.
By then, the VCR had become a popular con- sumer product and, contrary to their fears, the film studios found themselves to be major beneficiaries of the technology as the sale and rental of film videos began generating huge new revenue streams. In
1986 alone, home video revenues added more than
$100 million of pure profit to Disney’s bottom line.
The television stations, on the other hand, having found that the ‘useless’ recording option was a big hit with viewers
, faced a different problem. They had to find new ways to keep their advertisers happy now that viewers could fast-forward through the commer- cial breaks.
Setting the standard: VHS v. Betamax
Meanwhile, the format war between VHS and
Betamax was under way. When Sony released
Betamax, it was confident of the superiority of its technology and assumed that the other companies would abandon their formats and accept Betamax as the industry-wide technical standard. It was wrong.
On its home turf in Japan, JVC refused to comply and went to market with its VHS format. In the European market, Philips did not play along either, but technical problems were to take Philips out of the fight almost before it began.
From where Sony stood, the only clear advantage of the VHS format was its longer recording time. So,
Sony doubled the Betamax recording time and JVC followed suit. This continued until recording times were no longer an issue for potential customers, and marketing overtook superior technology as the key to the battle.
Betamax was, arguably, a superior technology
(although debate on this continues today, and many argue that the difference in quality was relevant only really to those using the machines commercially);
Beta SP was still used by professional videographers until relatively recently. But what Betamax really needed was market share. Morita (Sony’s CEO) blames Betamax’s eventual defeat on insufficient licensing. Despite the fact that it was the better prod- uct, Betamax never achieved a large enough pres- ence to create consumer preference. VHS had gravity and won the battle.
The two companies were on a par for several years, until JVC’s VHS format pulled ahead. This was due, in part, to JVC’s broader licensing policy.
Counting on increased royalties to make money on its VHS machines, JVC licensed the technology to big consumer electronics companies like Zenith and
RCA (a company with significant presence in the
United States at the time). As a result, VHS machines became more abundant on the market and prices fell, increasing their consumer appeal.
At about the same time, in the early 1980s, video rental shops started springing up on every street cor- ner. Early on, the video shop owners recognised that they would have to make VCRs available for cheap rental to attract a larger client base. The high-quality
Betamax machines were more expensive, harder to repair, and the first models were compatible only with certain television sets. So, VHS became the obvious choice for the rental shops. Another factor that influ- enced the outcome is the adult entertainment indus- try (porn). The size of this industry is enormous and the porn studios’ decision to use VHS may also have influenced the outcome. This combined effect of greater availability of machines and increased availa- bility of content on VHS eventually squeezed out
, of course, did not stand still. By 2003, DVD sales had overtaken those of the
VCR, signalling the dying days of magnetic tape. Video rental shops, sensitive to market trends, switched to
DVD, accelerating the demise of the VCR, eventually leading to a sharp demise in sales of video recorders
(VHS). The DVD had advantages in terms of quality, although it lacked the same flexibility and ease of recording that were the case for the VHS format.
Today, few VCRs are sold (and it is very difficult to find players, with most retailers having stopped selling such machines), and the format is close to being obsolete.
An ongoing issue that rumbles on in the background of the format wars is the issue of copyright. It continues to be a key influence in firm’s strategic decision making towards the new formats of streaming and download- able media, as well as the HD disk formats.
The development of DVD
The development of the Laserdisc by Philips in 1969 yielded many of the technologies Sony carried over and utilised when it partnered with Philips to jointly cre- ate the CD in 1979. In the early 1990s, these two com- panies then worked closely together again to develop a new high-density disc called the MultiMedia Compact
Disc (MMCD was the original name), but their format was eventually more or less abandoned in favour of
Toshiba’s competing Super Density Disc (SD), which had the vast majority of backers at the time, such as
Hitachi, Matsushita (Panasonic), Mitsubishi, Pioneer,
Thomson and Time Warner. The two factions cut a deal, brokered by IBM president Lou Gerstner, on a new format: DVD. Toshiba wound up on top after the dust settled in 1995–6, and Sony and Philips, who were not cut in on the standard (and royalties) nearly as much as they would have liked, immediately started work on a next generation system. The Professional
Disc for DATA (aka PDD or ProDATA), which was based on an optical disc system Sony had already been developing alongside the existing project, even- tually would become the Blu-ray disc. Toshiba, not to be outdone by Philips and Sony, also started work on a new generation system: the Advanced Optical Disc, which eventually evolved into the HD DVD.
Blu-ray DVD v. HD DVD
After 35 years of optical audio/video disc develop- ment
, history seems to have repeated itself with the launch of the two competing formats of HD
DVD and Blu-ray DVD, with both factions attempt- ing to beat one another in order to ‘reap the rewards’. The Blu-ray and HD DVD formats were both launched in the early twentieth century, with each format having been developed by competing electronics companies. Sony, alongside Royal
Philips Electronics, developed the Blu-ray format, whilst HD DVD was developed by Toshiba, along- side Hitachi.
In 2005, what could be described as ‘ongoing peace talks’ between the Blu-ray and HD DVD camps, finally dissolved after many attempts to develop a compromise of the next-generation format.
This meant that the two companies would have to compete head to head to become the standard for the next generation of video recording and reproduc- tion for the living room.
The two formats are incompatible with one another, despite using lasers of the same type. HD
DVD discs also have a different surface layer (the clear plastic layer on the surface of the data, which is the bit you get fingerprints and scratches on) from
Blu-ray discs. HD DVD uses a 0.6 mm-thick surface layer, the same as DVD, while Blu-ray has a much smaller 0.1 mm layer to help enable the laser to focus. Herein lie the issues associated with the higher cost of Blu-ray discs. This thinner surface layer is what makes the discs more costly: because
Blu-ray discs do not share the same surface layer thickness of DVDs, costly production facilities must be modified or replaced in order to produce the discs. A special hard coating must also be applied to
Blu-ray discs, so their surface is sufficiently resilient enough to protect the data a mere 0.1 mm beneath – this also drives the cost up. Blu-ray, therefore, unlike
HD DVD, requires a hard coating on its discs because data is 0.5 mm closer to the surface. The polymer coating it uses, called Durabis, was devel- oped by TDK and is supposedly extremely resilient and fingerprint resistant. The added benefit of keep- ing the data layer closer to the surface, however, is more room for extra layers. This increased cost, which would more than likely lead to increased prices to the consumer, was an issue that would threaten the potential success of the Blu-ray, although the format does hold more data (as shown in Table 8.5).
Chapter 8 Strategic alliances and networks
Film studio support
Not only did each format have to compete to estab- lish itself as superior in the eyes of the consumer
, there was also a separate battle to be won with the film studios in order to secure eventual success.
Table 8.6 shows the different studios and their initial support of each format.
It is also worth noting that, in the years prior to the launch of these formats, and immediately afterwards,
Sony acquired a number of film studios. Sony was also rumoured to be paying some studios large sums to take on and stick with its format.
A much more difficult factor to unravel is the list of networks (formal and informal) that each group of firms developed. In some cases, it was clear, with firms list- ing associate members of each board. Once again,
Blu-ray had a longer list of members and interested parties. It seemed Sony had learnt from its mistakes with VCR and it was not going to make the same mis- take again (see Table 8.7).
Whilst the mainstream film studios play a key role in determining the relative success of each format, perhaps as important as the big media conglomer- ates may be the adult entertainment industry. Most industry analysts agree that US pornographers’ deci- sion to adopt the cheap convenient VHS – rather than rival Betamax – when the two systems were intro- duced in the 1970s, killed off Betamax, and sales of pornographic films drove the adoption of video recorders. It may have been Sony’s failure to license
Betamax that led to its demise, but the adult enter- tainment industry probably also contributed to its demise. Dario Betti, an analyst at London-based digi- tal media consultancy Ovum, says: ‘Like it or not,
DVD performance details
ROM single layer
ROM dual layer
RW single layer
RW dual layer
Studios supporting HD DVD and Blu-ray
Studios (film and game) listed as supporting members
20th Century Fox
Buena Vista Home Entertainment
Buena Vista Home Entertainment
New Line Cinema
The Walt Disney Company
Sony Pictures Entertainment
The Walt Disney Company
Vivendi Universal Games
pornography drives each new, convenient visual technology.’ Few may be willing to admit it, but sex sells, and there is certainly a case that more conveni- ent nudity (and the pornographers’ preferred choice between HD DVD and Blu-ray) will play some role in determining which of the two formats is, ultimately, successful.
The Sony PlayStation
The first Blu-ray player launched by Sony (the primary developer of the Blu-ray format) was actually the
PlayStation 3 (PS3), which featured the ability to play
Blu-ray disks. This gave Sony something of an upper hand for some time, because its PlayStation 3 games console has a built-in Blu-ray player. Sony had, therefore, sold more than 10 million Blu-ray units, whilst only about 1 million HD-DVD players have been sold, mostly in Japan.
The PlayStation 3 originally was launched at a price of around £500, the first ‘pure’ Blu-ray player was launched later at a price of around £800.
Obviously, in comparison to the PlayStation, this player lacked a number of features, particularly the ability to play games. Interestingly, one of the earliest machines to play HD DVD was also a games console, the Xbox 360, which was Microsoft’s primary com- petitor against the PlayStation (and priced around
£200 cheaper). Both of these consoles were notably more expensive than Nintendo’s Wii, which was attracting much attention around this time. Despite the high technological performance of both the
PlayStation and Xbox
, Nintendo was, at that time, able to gain a majority share in the market (and this is also despite the PlayStation’s ability to play Blu-ray disks).
Discussion: the winner and the future
Sony’s decision to incorporate Blu-ray playback into the PS3 is thought to have been a decisive factor in the format emerging victorious. Ultimately, the Blu- ray format won the war to become the next genera- tion of HD player. Another factor that has been linked
Interlinkages and networks between firms
Companies listed as members of the board or managing members
Apple Computer Corp.
Hewlett Packard Company
Sanyo Electric Co.
LG Electronics Inc.
Mitsubishi Electric Corporation
Panasonic (Matsushita Electric)
Royal Philips Electronics
Samsung Electronics Co., Ltd
20th Century Fox
Walt Disney Pictures and Television
Chapter 8 Strategic alliances and networks
to this is the ‘Wal-Mart effect’ – after an announce- ment from the US retailer that it would sell only Blu- ray films and players. This retailer has massive power in the US market. With Sony’s victory, however, comes another battle: film downloads. Music down- loading destroyed the CD industry; the same may happen in DVD. Why would people go out to the shops to buy discs when they can buy high-definition films straight away online? What does this sugges- tion say for the future of Blu-ray?
Interestingly, despite Apple giving its backing to the Blu-ray format, it has yet to produce a single computer with a Blu-ray drive. Instead, Apple seems to be concentrating on films delivered across the internet, through iTunes and the new
Apple TV, rather than on physical discs. So, although Blu-ray has won this battle, it may not have won the war. As home internet speeds become faster and consumers get used to video on-demand services
, the film market could undergo a similar change to the music sector, with films downloaded rather than physically bought. Enter a new format war of online video . . .
When Google released the high-quality WebM video format royalty-free to the world, digital video publishers were faced with a conundrum: support the guaranteed royalty-free but slightly lower-qual- ity WebM standard, or the sharper but potentially more expensive H.264 industry standard? The industry divided amongst the WebM camp, the
H.264 supporters and the true neutrals of the browser world:
WebM support only: Mozilla Firefox;
H.264 support only: Microsoft internet Explorer and Apple Safari;
● both: Google Chrome and Opera.
In 2010, the MPEG LA technology licensing body announced that the H.264 standard would join WebM on the royalty-free side of the fence until the end of time or until the standard becomes obsolete, which- ever comes first. This makes Google’s $133 million buyout of On 2 Technologies seem like a waste of money – that is where the technology for WebM came from, and now there is really no need to pro- vide a royalty-free alternative to the prevailing stand- ard. But few believe that H.264 would be free today, if
Google had not made that investment.
H.264 is not entirely
free, even now. Free use extends only to services that are free to end users, such as Google’s YouTube. Apple will still have to pay licence fees for the videos it sells through iTunes. But, part of that payment goes back into Apple’s own pockets – the company is a long-time backer of and patent contributor to the H.264 standard. Other major beneficiaries of the H.264 licence fee include Microsoft,
Cisco Systems and Dolby Laboratories. Keeping the standard relevant and revenue-producing is important to these firms, whilst Google is not part of the consor- tium and so has little incentive to support H.264.
1 What does this case tell us about whether or not it is the best technology and/or being first in the market that determines the winner of these product format battles?
2 Illustrate some other business sectors where different formats coexist and some where a single format is preferred.
3 Use the CIM (Figure 1.9) to illustrate the innovation process in this case.
4 Why was the PlayStation the first Blu-ray player and, subsequently, when Blu-ray players were launched, why did the PlayStation remain cheaper? Consider possible reasons for this.
5 What additional factors helped Blu-ray win the battle? What role did licensing and networks play in the relative success of each format?
6 What related industries contributed to the format war and how did they influence its outcome?
7 With the increasing popularity and use of downloading films, what influence will the DVD format winner play in this related battle?
8 What are the implications for innovation strategy, R&D expenditure and marketing for firms engaged in or likely to be engaged in a format war?
9 List the key factors that seem to determine the eventual winner in industry format wars. Divide these into primary and secondary factors.
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