FORBES: How Sony and Blu-ray won over HD DVD

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A new FORBES magazine article tells a bit about what went on behind the scenes in the HD format war’s final months.

It is an exciting read that also shows how important Blu-ray is for Sony. In the end, you could say that the only company that simply could NOT afford to loose won it in the end.

Indeed, until last summer Sony’s turnaround was ticking along, but Stringer’s “Sony United” concept was still little more than a slogan. Suddenly Sony faced a crucial test: Its Blu-ray technology was in jeopardy. To contain the mass of bits needed to display movies in high definition, Sony and partners (including Philips, Samsung and lg Electronics) came up with Blu-ray–the discs are read by blue lasers–while Toshiba pushed a cheaper format called HD-DVD. A standards war was brewing–another Betamax-versus-VHS battle.
Retailers such as Best Buy (nyse: BBY – news – people ) and Wal-Mart (nyse: WMT – news – people ) didn’t care what the standard was; they just wanted consumers to feel confident enough about which format would prevail so that they would buy new videodisc players to go with their high-definition televisions. But with Blu-ray and HD-DVD players selling neck and neck, the two rivals were in a standoff, and many consumers were delaying their purchases. Toshiba and Sony each wanted the big Hollywood movie studios to pick sides.
Paramount announced last August that it was choosing the Toshiba technology over Blu-ray. Reports flew that Toshiba paid Paramount and its DreamWorks unit $150 million to clinch the deal, which Paramount parent Viacom (nyse: VIA – news – people ) doesn’t deny.

Toshiba began selling HD-DVD players for $99, hoping to outsell Blu-ray players and lock in its advantage. The news triggered “sheer and utter panic” at Sony, says its U.S. chief financial officer, Robert S. Wiesenthal. Except in Tokyo. In Japan Blu-ray accounted for 90% of videodisc players sold, so to Sony executives there it seemed that Blu-ray had already won the format war. But Sony’s U.S. executives knew that the huge U.S. market was now up for grabs.

In Tokyo the night the Paramount news broke, Stringer set up a global conference call to brainstorm ideas for stopping Toshiba. He called on every division to play a part, seizing on the crisis to force the company to work together. A company changes its entrenched habits only when it is under stress. So says Gerstner, in Chapter Seven.

One suggestion was quickly implemented. Sony had wanted gamers to use PlayStation as a videodisc player more often. So if they found a Hollywood movie in the box when they bought the machine, they’d likely test-drive the film, not just play the car-racing games. “Howard rang me up and told me, ‘I really need you to pack half a million units of Spider-Man with PlayStation 3,'” says Michael Lynton, chief executive of Sony Pictures Entertainment.

This was a startling change from when Lynton joined in 2004: “The picture company didn’t talk to the music company, and we didn’t talk to the electronics company.” Divisions could haggle for a month before agreeing on, say, how much the Sony studio would pay for Sony TVs or cell phones used on movie sets. Not anymore.

For the studios and retailers, Sony’s big argument was that even though Blu-ray and HD-DVD were neck and neck in player sales, Blu-ray was really ahead by 1.8 million. That’s if you count the videogame fans who own PlayStation 3 players, because they play Blu-ray discs. So Sony executives went to work persuading Hollywood studios that Blu-ray wasn’t the next Betamax. It fell to Wiesenthal, Stringer’s U.S. finance man, to lobby one studio, Lionsgate, to make sure it didn’t agree to payments from Toshiba (which doesn’t own a studio). “The relationship between Sony and Lionsgate was going to continue a lot longer than the relationship between Toshiba and Lionsgate,” he argued, making cell phone calls from a boat while on vacation off Long Island, N.Y. “Toshiba was not going to cofinance one of their movies.”

Peter Dille, a marketing official at Sony’s U.S. games unit, suggested wooing rival Hollywood studios–Lynton’s competitors–by including snippets of their movies in PlayStation 3 ads. The free advertising would get the industry’s attention. Message to Hollywood: “This does more than play games,” Dille says.

With Toshiba cutting its price, Sony needed to sell more players. Its headstrong gaming division agreed to cut PlayStation 3’s price by $100, then began selling an even cheaper version with half the memory, even though it would crimp the division’s profits. Sony executives from Los Angeles, San Diego, New York and Tokyo converged on Best Buy headquarters in Minneapolis to spend a half-day in meetings. Sony offered to help pay for Best Buy ads in Sunday newspapers nationwide, to pay for Blu-ray store displays and to offer discounted Blu-ray packages–a Bravia TV sold with a Blu-ray player and five free discs, for instance. Sony execs also made pilgrimages to Wal-Mart, Target (nyse: TGT – news – people ), Circuit City (nyse: CC – news – people ) and other chains.

Despite rumors to the contrary, Sony executives say they did not pay movie studios to side with Blu-ray in the format war. But Sony did spend more than $60 million advertising PlayStation 3 from November to January in the U.S., according to tns Media Intelligence, bringing free attention to Hollywood movies and retailers alike.

The swing vote turned out to be home entertainment giant Warner Brothers. After scrutinizing holiday sales of players, Warner announced on Jan. 4 that it would adopt the Blu-ray standard. On Feb. 15 Wal-Mart agreed to sell Blu-ray machines exclusively. Four days later Toshiba said it was ending its HD-DVD business. In the first half of the year, the number of Blue-ray machines in use more than doubled, to 6 million. Stringer’s plea for unity had paid off. Says Andrew House, Sony’s marketing chief: “We have laid the ghost of Betamax to rest.”

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Through out my years, Sony has been a passion of mine.

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