One Last Thing | Setting the stage for another flop?
By Jonathan Last
Those who ignore history are doomed to repeat it. One of life's more satisfying ironies, however, is that the same fate often befalls those who fixate on history. Consider the coming train wreck of Sony's PlayStation 3.
At this year's annual Electronic Entertainment Expo in Los Angeles, Sony announced that its next-generation video-game console will begin retailing in November for $599 (or $499 for a stripped-down version). The news rippled through the gaming industry, the consensus being that Sony had doomed its new system with such a high price tag. Traditionally, home video-game consoles have sold for $199 to $299.
This news was of broader interest than you might think. According to the New York Times, video-game sales in the United States topped $10.5 billion last year. Since Sony released its first PlayStation in September 1995, the company has dominated that market. According to the marketing-information firm NPD Group, Sony's PlayStation 2, which has sold more than 101 million units, owns 55 percent of the current market share in video games.
Over the years, Sony's video-game unit has become increasingly important to the corporation and helped the company through tough times. In the down year of 2002, for instance, PlayStation generated more than half of Sony's profit.
So why would Sony price itself out of such an important market?
The answer is: History. It looks like suicide to offer a $600 video game - unless you are Sony.
The reason for the elevated price is that PlayStation 3 includes Sony's high-definition "Blu-ray" DVD player. As a separate item, these players are not yet available to consumers, but when they arrive in stores this year, they will be priced from upward of $1,000 a pop. Sony owns the Blu-ray disc-reading technology and is girding itself for war against a competing high-definition DVD format, Toshiba's HD-DVD, which arrived on the market in April.
HD-DVD is a less robust medium, but it is both first and cheaper. An HD-DVD player can be had for less than half of what Blu-ray players will cost. With such a disadvantage, Sony is leveraging Blu-ray by tying it to the company's next video-game system. Sony knows a little something about format jousts.
As Edward Jay Epstein details in his book The Big Picture, the company we know as Sony was born in 1945, when Akiro Morita launched Tokyo Telecommunications Engineering Co. He sold the type of household gadgets needed in a war-ravaged country: rice cookers and heating pads. Eventually Morita became interested in recording devices. His first major success came when he found a way to use cheap paper tape to record sound. Building his company on recordable tape, Morita internalized the idea of "format über alles."
But he didn't have an opportunity to pursue a new format for many years - not until 1975, when Sony introduced a videorecording device called Betamax.
Like Edsel or New Coke, the word Betamax is now synonymous in business-school classrooms around the country with "corporate failure." It was the first home videorecording system, and it was technologically superior to its competitor, VHS, which did not arrive on the consumer scene until two years later.
But Betamax was also more expensive than VHS. And while Sony tried to keep the fruits of the format to itself, VHS was farmed out to other electronics manufacturers. As John Nathan notes in his book Sony, by 1980, "Betamax was being driven from the home video market."
Over the years, Sony met with other format failures: the mini-disc in 1991 and the memory stick in 1998. Neither was as costly as the Betamax disaster, but both were born of the same mania for proprietary formats.
Sony internalized these losses, but viewed them as the results of tactical, not strategic, defects. So the company looked for ways to bolster new formats. As the DVD revolution was dawning in the late 1980s, Sony spent $3.4 billion to buy the movie studio Columbia-TriStar Pictures. Sony believed its hardware simply needed software to go with it.
Sony wisely avoided the fight for a proprietary DVD format, instead partnering with Toshiba and Philips (the DVD already had one competitor, DivX). But always mindful of the past, Sony looked to establish Blu-ray as the next-generation format, putting it on a collision course with HD-DVD. To gird itself for this war, the company bought another movie studio, MGM, in 2004 for $5 billion and then decided to put Blu-ray drives into the PlayStation 3.
It's a strange way of thinking. Obsessed with owning proprietary formats, Sony keeps picking fights. It keeps losing. And yet it keeps coming back for more, convinced that all it needs to do is push a bigger stack of chips to the center of the table. If Blu-ray fails, it will be the biggest home-electronics failure since Betamax. If it drags PlayStation 3 down with it, it will be one of the biggest corporate blunders of our time.
The people who run Sony aren't stupid; quite the opposite. But every outlook carries its own internal logic, which can lead smart people in unsmart directions.
History teaches some lessons about that, too.
