The Wall St. Journal's Faulty Conclusion From The VHS-Betamax War (SNE)

| About: Sony Corporation (SNE)
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By Carl Howe

Lee Gomes in the Wall Street Journal yesterday (sub. req.) applied the lessons of the VHS-Beta videotape wars in the 1980s to the coming high definition DVD battle between Sony's Blu-ray and Toshiba's HD-DVD formats. He recalls that VHS won the war because it boasted features consumers cared about (namely longer playing time) and the technology was available from several manufacturers, while Sony's focus on better picture quality left consumers cold. The result: VHS achieved 98% consumer market share for videotape recorders by 1988. It's a frequently cited business lesson proving "good enough" standardized products win in consumer markets over better proprietary technology. Everyone knows this, right?

Ummm, not so fast. What happens when we think about this story using profit dollars as our metric instead of market share? After all, that's the type of measurable strategy that CEOs expect from marketing execs nowadays. How did the story work out in bottom line dollars?

The facts: VHS won the market share battle for consumers, but the victors were forced to fight a grueling commodity battle amongst themselves, not against Sony. And, as in most commodity battles, the players focused on price and features to win. The result? The most successful companies that "won" the battle with VHS -- JVC, Matsushita, and others -- won the right to make devices that had to compete against hundreds of similar products, had no pricing power in the market and achieved profit margins between two and five percent. At their peak in the year 2000, VHS VCR companies sold 55 million devices in a year, yielding somewhere around $330 million in profit for the three major manufactures making VCRs in that year. That's about $100 million each. And that in VHS's peak production year.

But what happened with Beta? Yes, Sony eventually withdrew Beta VCRs from the consumer market. But Sony retargeted Beta videotape recording to a market that valued video quality more than tape length. The result: Sony dominated the professional and broadcast market from the 1980s well into the 1990s with its Betacam, Betacam SP, and Betacam Digital series of products. And Sony had immense pricing power and profitability in those markets. In just one year, Sony logged nearly a billion dollars in profit from its professional video technologies for the broadcast industry. That's about 10 times more profit than each manufacturer of VHS VCRs made during their peak.

The Wall Street Journal is citing the victory of VHS over Beta to guide our understanding of next-generation DVDs. Others have used it to predict that Apple's domination of digital music with the iPod can't last under an onslaught from Windows Media Player-based devices. But the loser in the VHS-Beta war made more money than the victors because of a better marketing strategy. And maybe that's the real lesson we should be learning.