Sony Banks The Company On Blu-ray

I have a bet with my friend on which next-generation high definition video format will win. In five years, I think that Toshiba’s HD-DVD will win over Sony’s Blu-ray. Despite the technological superiority of Blu-ray over HD-DVD, I don’t think it’s what the people want or need (I think holographic technology will be better suited for our storage needs, but that’s about five years down the road).

Sony has invested almost everything it has in Blu-ray, although you would think that the company should bank its future more on the Playstation 3. The video game industry shifted from the once dominant Nintendo to Sony when Sony released its landmark Playstation console. Selling over a hundred million units over its lifetime, the PS helped guide the industry into mainstream society. The Playstation 2 currently has a 60% share in the video game hardware market while Microsoft and Nintendo both lag behind.

Microsoft released its Xbox 360 platform last year and is on track to sell four to five million units by June. Nintendo has yet to release its next generation console or set a firm release date, while Sony has just announced that it would delay its PS3 until November from its previous summer date. In the video game industry, timing is everything. One of the reasons people think that the PS2 won the console war was because it had such an overwhelming head start over the Xbox and Gamecube. But the portability of the original PS games to the PS2 didn’t hurt either.

Sony knows that timing is crucial, and that giving Microsoft too much of a head start might be devastating. But instead of rushing its console to store shelves, Sony decided that further developing the PS3 would be better for its long-term value. The main reason is that the development of its Blu-ray drive has taken longer than expected. The real heart of the PS3 is the inclusion of the next generation optical drive.

The digital encryption has delayed both the Blu-ray and HD-DVD formats. Movie studios are terrified of piracy (not rightfully so, I might add) and the specifications of the AACS (Advanced Access Content System) DRM standards have been tweaked and modified numerous times so that only recently the final hardware units have been cleared to sell. Toshiba HD-DVD players and Warner Brothers HD-DVD launch titles have both been delayed from their original March 28 release to April 18.

Sony has had a rough decade, losing hardware dominance from increased competition in televisions, music players, etc. Its once landmark Walkman players revolutionized music with stylish personal cassette and CD players, but lost the digital music market to Apple’s iPod. Sony’s original DVD format lost to Toshiba’s eventual DVD standard and has been researching Blu-ray ever since. With 100 million DVD players sold in the United States, Sony lost an opportunity at all of the royalties paid for the technology. The one thing that keeps DVD players above the $30 mark is that about $20 is earmarked for royalty payments.

With so much competition in the electronics market, Sony is banking on both the video game and DVD markets. If Blu-ray won the HD video format war, then Sony would get royalties for years. Developing hardware is always costly, and getting the R&D costs back is almost never a possibility. It is rumored that Microsoft loses $200-$300 on every Xbox 360 sold. Sony’s PS3 is supposedly more advanced, and might have the company losing more money on every console sold than the Xbox 360.

But Sony is in a tight spot. It has brand reputation, but its products are no longer the most popular. It might win the console war despite the head start that Microsoft has. There are over a hundred million PS2 consoles in the world and considering that that many original PS consoles were sold, it’s a good bet that that many PS3 will be sold as well. The PS3 will be enormously popular, but Sony wants the PS3 to be a living room media hub. Microsoft tried that route with the 360, but that has stalled. Nintendo decided against that with its “Revolution” console, citing costs to both the company and the consumer. Sony has taken a no-holds barred approach and the company’s entire future rests on the success of the Blu-ray drive.

Microsoft was smart in choosing to release either a HD-DVD or Blu-ray drive as a separate add-on rather than wait to make it standard in the 360. Sony will use Blu-ray as its optical drive, but if Blu-ray doesn’t win the format war then the company will have lost the war and lots of money.

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