Sony's Blu-ray: Betamax Lesson Learned

Sony Corporation (SNE) appears to have learned its lesson from the Betamax/VHS format war. As some already know, Sony was the primary backer of the Betamax format introduced in 1975 that competed with--and eventually--lost market share to VHS. The VHS format was introduced in 1976 by JVC and it proceeded to wear down Sony to the point where Sony began producing a VHS player in 1988, effectively ending that format battle. There is a similar battle for high definition [HD] movie disc technological supremacy today between Sony’s Blu-ray and Toshiba’s (TOSBF.PK) HD DVD formats. This format battle has been going on for almost two years but it is all but determined that Sony’s Blu-ray will win this one.

Wal-Mart (WMT) announced Friday that it will exclusively carry Blu-ray discs, as they join a chorus of retailers who have made their final decision, including Netflix (NFLX) and Blockbuster (BBI) rentals. Even more telling, all of the major movie studios have made the switch to Blu-ray. HD DVD is losing both content and retail allies in quick succession.

The game console market could also make a difference in the format war. Sony’s PlayStation3, which includes a Blu-ray player, has begun to see sales increase dramatically after a recent price cut. Conversely, Microsoft’s (MSFT) Xbox 360--equipped with an HD DVD--fights for those same consumers and has experienced a slip in sales recently. There is realistically no way for the HD DVD format to compete with the exclusive network that Sony has built around Blu-ray. Surely, this defeat will hurt the bottom line at Toshiba, an unpleasant feeling that Sony remembers well from the 1980’s.

Sony did not want to make a huge investment in developing a new technology just to lose again, and it appears this time it will have the last laugh. This victory will surely give the stock a shot in the arm. Speaking strictly from a numbers perspective, we have a positive outlook on Sony as it is selling slightly below its rational expected range that we calculate as $46-$80. This range is based on looking at what valuations the market has been willing to buy Sony for in the past. So, with the future of HD movies at its fingertips and having many other successful and diversified electronics business lines, Sony’s stock should command a higher valuation in the months ahead.

Disclosure: None

Comments

[CrossProfit]

It will be interesting to see what Paramount (Viacom), Universal (GE) and MSFT do. If one of the three capitulate, then it is over for sure. This could not have come at worse time for MSFT regarding x-box marketing.

This could explain the hit that MSFT shares are taking, more so than the YHOO offer. We were scratching our heads as to the market's reaction to the YHOO offer where most analysts considered the $31 per share price to be fair and far more reasonable than $40 PS that was previously offered.

Now we all know what privileged few knew beforehand.

CrossProfit

[Tom B]

The cost was that they temporarily lost a bit of momentum in the Game console wars. On the plus side, XBox doesn't have another Halo3 in the pipeline, so PS3 should catch up/

[Tom B]

"We were scratching our heads as to the market's reaction to the YHOO offer"

In that case 2+2 will equal WAY less than 4.

[TA]

'Microsoft’s (MSFT) Xbox 360--equipped with an HD DVD--fights for those same consumers and has experienced a slip in sales recently.'

The XBOX 360 does not come with a HD-DVD. In fact few bother to purchase the addon.