[Ecommerce] John Kay in the Financial Times: Only one winner in the battle of Blu-ray

[Thiru Balasubramaniam]

<SNIP>

That railway standard is common property. Proprietary control over a
market standard is most likely to be achieved if the owner allows ready
access to the standard by other companies. JVC pursued open licensing
while Sony=92s policy was more restrictive, and that was a major element
in JVC=92s success. MS-DOS was available to every computer manufacturer,
while Apple attempted to retain exclusivity. Sony and Apple gambled for
high stakes and lost =96 their strategies would have been very profitable
if they had succeeded, but the factors that made these strategies
potentially rewarding reduced their chances of success. Microsoft=92s
expansive profits from MS-DOS and now Windows are derived from low
royalties on large volumes.

In video games, hardware and software are controlled by the same
company: the distributor of the console is also publisher of games. This
market structure demands very different pricing policies, supporting the
strategy King Gillette discovered a century ago. Give away the razor and
scalp them with the blade: set a low price for the box and gain profits
from captive consumers of your game. Entry for new products and
manufacturers is easier here than in a competitive compatibility
standards market. So the battle of the games consoles has continued for
years, with different companies =96 first Atari, then Nintendo, now Sony
and Microsoft =96 vying for market leadership.



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John Kay: Only one winner in the battle of Blu-ray
By John Kay
Published: March 27 2006 20:32 | Last updated: March 27 2006 20:32

John KayYou probably have not heard of Blu-ray yet, but you will.

Toshiba will next month launch a high-definition video disc player in
the US. This is the first shot in a new standards war. One alliance, led
by Toshiba, fights under the banner HD-DVD. The Blu-ray consortium is
led by Sony. Standards battles have been a feature of the consumer
electronics industry. The war of

video formats, in which JVC=92s VHS system triumphed over Sony=92s Betamax,
is a staple case in MBA courses. A decade later, Microsoft routed Apple
in the battle of personal computer operating systems. The triumph of
MS-DOS, forerunner to Windows, gave the Redwood company a dominance that
continues today. The rewards of victory can be great.

Video cassette recorders and operating systems for personal computers
need compatibility standards because software must match hardware. If
there is competition between many producers in both hardware and
software, convergence on a single standard is almost inevitable because
most companies in both segments will want to produce for the most
popular standard. The market leader therefore gains still more market
share, and dominance becomes reinforcing and ultimately insurmountable.
Even a superior product cannot overcome the incumbent=92s advantage.

Most compatibility standards are the result of regulation or custom, and
no private business owns them. Governments determined the format of
television broadcasting, and sets and programmes were made to this
common standard. Different standards were chosen in Europe and the US:
the French even developed their own.

Local monopoly is inevitable and globalisation of both hardware and
software markets creates pressure for a single worldwide standard, as
happened with video cassettes and computer operating systems. But
developments in the modern global economy replay the experience of
Victorian times. Most railway lines around the world are 4ft 8=BDin apart
because that was the choice of George Stephenson.

That railway standard is common property. Proprietary control over a
market standard is most likely to be achieved if the owner allows ready
access to the standard by other companies. JVC pursued open licensing
while Sony=92s policy was more restrictive, and that was a major element
in JVC=92s success. MS-DOS was available to every computer manufacturer,
while Apple attempted to retain exclusivity. Sony and Apple gambled for
high stakes and lost =96 their strategies would have been very profitable
if they had succeeded, but the factors that made these strategies
potentially rewarding reduced their chances of success. Microsoft=92s
expansive profits from MS-DOS and now Windows are derived from low
royalties on large volumes.

In video games, hardware and software are controlled by the same
company: the distributor of the console is also publisher of games. This
market structure demands very different pricing policies, supporting the
strategy King Gillette discovered a century ago. Give away the razor and
scalp them with the blade: set a low price for the box and gain profits
from captive consumers of your game. Entry for new products and
manufacturers is easier here than in a competitive compatibility
standards market. So the battle of the games consoles has continued for
years, with different companies =96 first Atari, then Nintendo, now Sony
and Microsoft =96 vying for market leadership.

The market for gateway products, such as portals and search engines, is
similarly characterised by powerful, but transitory, market dominance.
Few companies can expect to have the best product decade after decade.
This is why Google is no Microsoft or JVC.

The battles to provide internet access or control the obsessions of
computer game players are the Thirty Years Wars of the business world,
with advantage switching frequently among shifting alliances. But
markets with compatibility standards see a dramatic fight to the finish.

Compatibility is the key to the new war between Sony and Toshiba. So who
will win the battle to put high-definition movies into our living rooms?
I will come to that question in next week=92s column.