The Format Wars: Sony Proves that It’s the Player, Not the Game, That Wins


In 2006, when Sony released the much-anticipated Playstation 3, people literally climbed over one another to acquire one. Then the console fell flat. High prices, bugs, a disappointing selection of games, and the Nintendo Wii’s runaway success placed the PS3 at a miserable third place in the console wars.

But Sony had a not-so-secret weapon. Its name was Blu-Ray. If you remember, for a short time there was a format war between Blu-Ray and HD-DVD. Blu-Ray won the war in short order. And many analysts believe this was due to the PS3 along with heavy marketing from Sony. Sure, most PS3 consumers wanted games, not multimedia devices. And because of high prices, PS3 sales slackened for more than a year. People wondered whether Sony had committed market suicide with the player.

Two years and several strategic tweaks later, Sony may be coming out on top. Several key partnerships have ensured that Blu-Ray discs are the format of the future. Though the PS3 has arguably been a console failure (they’ve gone from first place to third place in a single generation), it provided the vehicle through which Sony was able to swing the necessary deals to secure Blu-Ray’s place in history. That’s not all. Due to clever brand repositioning and a Hollywood-savvy CEO, 2008 looks like its best PS3 year since the product’s release. A resurgence of sorts.

Currently, Sony’s Blu-Ray market share in units is 46%. With the PS3, that number is closer to 98%.

According to TG Daily:

Nearly nine million high-def discs were sold during the year, raking in revenues of $260 million. Blu-ray discs accounted for 67% (about $170 million) of all HD movie sales (40% in 2006), despite the fact that these movies were more expensive than HD DVD titles. According to the industry organization, the Playstation 3 may have been the decisive factor to provide Blu-ray with the necessary edge to win over the majority of high-def movie sales.

As one of the primary creators of the format, consider the licensing fees Sony gets from Blu-Ray, the profit potential looks sound.

Six major publishers currently control almost 85% of the home video market – Warner holds 18.8%, followed by Fox (15.3%), Sony (13.5%), Paramount (13.4%), Disney (13.1%) and Universal (10.7%).

Would Sony have been able to land Blu-Ray dominance (a morale windfall after its Betamax fiasco) without the PS3? That’s the missing link. Betamax perished because movie and recording studios went for VHS. Blu-Ray succeeded for industry execs preferred it. Both have superior technology.

Unlike Betamax, however, the PS3 exploited a dual niche and good reputation. Consider this: Buyers expected the PS3 to live up to the standards of its predecessor, the PS2. It didn’t. But Sony already had the legitimacy it needed to successfully sell Blu-Ray technology to movie executives. Compare these two possible pitches:

Sony exec: Buy Blu-Ray. Here, let me demonstrate our superior technology on our $800 Blu-Ray player. It’s more expensive, we know, but check out the quality.

Movie exec: We didn’t go for Betamax. Why should we go for this?

Sony exec: Buy Blu-Ray. We acknowledge that the PS3 didn’t perform as well as the PS2, but it’s still in the running. Look how many people have their hands on Blu-Ray players through the PS3. We have a solid existing market to exploit, and at $399, people are going to keep buying. Check out the quality.

Movie exec:
Sony exec has a point. PS3 consumers already have their hands on Blu-Ray players. People don’t get a Wii to watch movies. Sony has distribution in the bag.

The PS2’s wild success gained Sony unquestioned legitimacy in the gaming world. The PS3 came out to high expectations—and disappointment. But there, nestled inside the noncommittal product, was Blu-Ray. Sony’s initial strategy to win the console wars didn’t work out, but its console provided the vessel that sold Blu-Ray to the right people.

It helps that Blu-Ray has just about every major name in technology on its membership list. The groundwork was intact. The PS3 provided the vehicle, the final touch, through which Sony gained dominance.

I look forward to another good show when DVDs go obsolete.

  • Nice post.

    My brother just got a PS3 and he uses the Blu-Ray more than he actually plays the video games.

    I’m just thankful Blu-Ray won the format war.

  • Ryan

    The critical question is how much money Sony makes on the sale of Blu-Ray discs. As that format supplants standard DVD, and billions of Blu-Ray discs get sold, will Sony profit from each one?

  • Ryan

    I think it would be a really interesting business analysis to see whether, at the end of the day, Sony stood to make more money by winning the HD format wars or winning this generation of console wars. Perhaps Sony was willing to take a short term loss for a long term gain? Again, it all comes down to the numbers and I’d really like to know what they stand to make from the sale of each Blu-Ray disc.

  • Brad

    Don’t forget how much Sony had to bribe the movie houses to get them to switch. $400-500mm to Warner, $120mm to fox. That is a lot of cash and lost profits due to the payouts. Also, Sony has lost $3 BILLION on the PS3. Is $4 billion worth it to win the format war???

  • Drea

    How much they’re making off Blu-Ray licensing deals is indeed The Question. I couldn’t find it anywhere…if someone knows, please tell me. The official licensing page, of course, is also veiled in mystery:

    As far as recouping $4 billion goes–I would argue that a) if they make enough off Blu-Ray licensing deals (would probably take global distribution to get that kind of revenue) and b) they recoup the profits through another sector, then it was worth it. Even if the format wars are eventually won by downloads (which I think they will be, but not before Blu-Ray gets a good chunk of money back), I think the prestige and history associated with the deal have a kind of soft value that will continue to get Sony ahead in future home entertainment deals.

    Then there’s the matter of backdoor deals and ethics. This article is based on the assumption that business deals are done in the traditional way, through strategic moves and convincing tactics. Cheating is an entirely different article. The truth as I saw it in the media reflected the usual corporate competition. If all those reports didn’t reflect reality, then…sigh. We’re being deceived left and right.