I am, sadly, the proud owner of a HD-DVD player that is predicted to become a heavy paperweight soon, in spite of the fact that current Blu-Ray players (other than the PS3) are short on features and long on price. With content squarely on the side of Blu-Ray, unless the HD-DVD consortium can force some Blu-Ray conversions (seems unlikely), I think we know where the chips will fall.
(Source: Wikipedia)
Here's what I think went wrong.
1. Microsoft didn't build the XBox 360 with an included HD-DVD player: D'oh! In order to release early and keep costs down, MSFT chose not to include HD-DVD with the XBox 360. This got them to market first, but hobbled HD-DVD relative to Blu-Ray (and was possibly a bad long-term strategic move). HD-DVD could have had a significant installed base early if the 360 had included HD-DVD capability. Perhaps MSFT and the HD-DVD consortium underestimated how much clout Sony would have once Apple (and Disney) joined the Blu-Ray consortium. In fairness, being first to market was important - in the console business, there are strong network externalities, (i.e. success breeds success) and a strong installed base really helps to win. On the other hand, Microsoft could have released a later update that included an HD-DVD player. This decision would not have been a slam dunk because it may have annoyed early adopters. However, as long as any console could play any Xbox 360 game, I don't think this would have been a showstopper.
2. In the meantime, the PlayStation 3 was quietly building up a large installed base in the living room: Yes, the 360 is outselling the PS3 today (although not in Japan), but the PS3 comes bundled with a Blu-Ray player, whereas you have to buy the HD-DVD player (standalone or as an attachment for the 360). So, there's now a fair number of Blu-Ray players primed for use.
3. Prediction: Apple is about to release a Blu-Ray equipped (range of) device(s): This is a no-brainer. Apple has to join the High-Def battle soon, and they're on the Blu-Ray board. This might even happen today. The studios likely got wind of this early, and they know not to bet against Apple's streak in the digital media market. This could well have been the tipping point for WB and Universal's recent decisions to support Blu-Ray.
What does this mean for the Console Wars?
That's anyone's guess, really - there are a number of variables - but here are my predictions.
People will continue to buy consoles for the games they offer, but with Blu-Ray gaining popularity, the market will tip towards the PS3. Today, the 360 has better content, period. But Sony has a lot riding on the PS3 and a decent in-house studio. With PS3 sales already on the rise after the price cut, Sony should spend more money to convince studios to create exclusive games for the PS3 (and/or release games early for the PS3 if they support other consoles too). Given the right incentives, studios will begin to build more PS3-exclusive games. Since most next-gen console owners also own HDTVs, the Blu-Ray factor will be on everyone's mind. All other things being equal, a 2-in-1 device is better than a single-use device - and game and movie studios know this. Sony does have at least two things working against it though. The rumblings in the industry is that it's more difficult to develop and debug games on the PS3 than the Xbox - but with time I'd expect the tools to get better, and this to become less of an issue. There's also the fact that the 360 is a better console. So I'd doubt that Microsoft would lose to Sony, but their victory over them won't be quite as emphatic as it might have been. There will be another round.
Microsoft now has three choices (well, four if you include "do nothing", which is still a viable option now, but may not be for too long if Sony plays its cards right):
1. Drop the price of the 360 to the point that the 360 plus a standalone Blu-Ray player is cheaper than a PS3. This will cut deeply into their margins, and might be met by a corresponding (and therefore less deep) price cut by Sony. To win the price battle, Sony needs to be priced at a JND (just noticeable difference) vs the Xbox + Blu-Ray player combo. That's not hard to do, give the price of Blu-Ray players. The bottom line is if this becomes a price war, Sony is almost a shoo-in to win.
2. Drop out of the format wars and adopt Blu-Ray. Bundle a Blu-Ray player with new consoles. Ouch. That would involve admitting they made a big mistake, but could still be their best move, especially if they offer current HD-DVD attachment owners a nice rebate on the new Blu-Ray attachment (early adopters understand the risks, but you don't want to annoy them too much - witness the iPhone price drop fiasco). If they do this, though, they'd owe Sony royalties on every console they sell. Regardless of who wins the console wars, Sony would win big if this happened. Microsoft is unlikely to want to hand Sony that kind of advantage because it could hurt them in the future.
3. Bundle the HD-DVD player with every new Xbox. I think it's already too late for this to work now, although it just may give HD-DVD a stay on execution and some time to try to win more content. Sony's console sales are already on the rise, and the clock is ticking. If Microsoft wants to adopt this strategy, the time to do so is yesterday. This will also likely annoy people who have spent money on buying the HD-DVD player as a standalone attachment, but I think it's still viable.
Could Microsoft have seen this coming? Could they have done something about it?
Yes and yes. The writing was on the wall for a while. None of what's happened recently should have been hard to predict, given Sony's incentives (they were betting the farm on PS3 + Blu-Ray) and Apple/Disney's choices (made quite a while ago). With many consumers staying out of the market while the HD wars rage, Sony's technique of building an installed base of Blu-Ray players in the living room needed to be countered quickly. After all, once you have an HD player, the cost to try the new format is just the cost of a high-def disk. This effectively means zero lock-in, which in turn encourages trial. If Microsoft had bundled their HD-DVD attachment with the Xbox 360 in Q3 of last year, the holiday season sales might just have changed the outcome. It's a fair bet that it would have prevented the camp-switching by WB and (effectively) Universal that now looks to be the death-knell for HD-DVD and, in consequence, a significant strategic win for Sony in the console wars.
On the other hand, it could very well be that Microsoft saw this coming, weighed the pros and cons and decided that the success of HD-DVD wasn't important enough for them to invest further in the console, and chose to take a wait-and-watch approach to Blu-Ray. This is the do-nothing approach, which in my opinion is not the best tactic given the strategic landscape.Final words: After the Sony rootkit fiasco, I really really hoped Sony wouldn't win. A company that cares that little about its consumers really shouldn't be controlling the next generation of media. But this blog is about strategy, not wishful thinking. :-)
Update: Today (1/29/08), Woolworth's in the UK announced that they will stop selling HD-DVDs in store, and will only sell Blu-Ray players in the future, and cited the Playstation 3 as the main reason for the success of Blu-Ray over HD-DVD.
Update: Today (2/11/08), Neflix and BestBuy threw logs on the fire by announcing that they, too, will only be stocking Blu-Ray.
Update: (2/19/08) It may be happening already. The rumor mill says Toshiba has decided to stop manufacturing HD-DVD hardware, and the PS3 outsold the Xbox 360 in January even though the game library for the 360 is significantly better. [Source: Kotaku]
Update: (3/10/08): Microsoft just dropped the price of the Xbox 360 in Europe. Almost certainly a result of the price pressure being put on them due to Sony's victory in the High-Def war.
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