The Death of the Console, a book proposal – part 3 of 4

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This is the THIRD part of the first chapter of a book proposal I sent out earlier this year. No publisher offered an advance against it, mainly because they felt it was too niche.

I liked it, and I wanted to publish it before it got too out of date. So here is. If you like it, please comment, retweet or share it on Facebook (or forward it to any publisher friends that you have)

In February, 1976, Sony launched a product that would revolutionise home entertainment. It cost $1,295, it could record television shows to be watched later and it terrified the moguls who headed the major entertainment conglomerates. The Betamax video recorder was seen as so threatening that Universal sued Sony over the legality of the video recorder to prevent the consumer adoption of a technology that might reduce the value of libraries of films and television programmes. After eight years, the case was finally decided in favour of Sony in 1984 but it was a pyrrhic victory for Akio Morita, the engineer who founded and dominated the company. By the time the case was settled, rival Matsushita had launched and established the inferior VHS as the dominant video cassette format in the market.[19] Reflecting on his defeat, Morita concluded “if I owned a movie studio, Betamax would not have come out second-best.”[20]

This lesson dominated Sony’s long-term thinking over new technologies. The company rapidly built up a strong position in the ownership of content. It bought CBS Records for $2 billion in 1986[21], Columbia Tristar Pictures for $3.4 billion in 1989[22], Psygnosis Entertainment in 1993 for $48 million[23] and, through a consortium in which it owned 20%, MGM for $4.8 billion in 2005[24]. The battle lines were being drawn to control the ultimate prize: the home entertainment hub at the heart of every living room.

The PlayStation was the opening salvo, a high-quality console with jaw-dropping graphics that would go head to with the consoles from Nintendo and Sega but at the low price of $299. The PlayStation 2 built on the success of its predecessor and shipped with a DVD drive. Kaz Hirai, head of Sony Computer Entertainment America, said at its launch that the PS2 “is not the future of video game entertainment, it is the future of entertainment period.”[25]

But it was in the PlayStation 3 that Sony was to reveal the staggeringly long-term strategy that it was following. In a re-run of the Betamax versus VHS battle, Sony’s next generation DVD player, known as Blu-Ray, was going to head-to-head with the HD DVD format championed by Toshiba. Sony’s corporate acquisitions meant that Columbia Tristar (now called Sony Pictures) and MGM backed the new format and Sony was able to persuade Walt Disney and 20th Century Fox to support Blu-Ray as well. Toshiba initially had Paramount Pictures, Universal Pictures and Warner Bros on its side.

For Sony, the PlayStation 3 was its trump card. It installed a Blu-Ray in every console. Within eighteen months of the launch of the PS3, there were over ten million Blu-Ray players in homes around the world. In contrast, Toshiba’s HD DVD format had only shipped one million players. In February 2008, Toshiba announced that it would stop production of HD DVD players leaving the way clear for Blu-Ray to become the industry-standard high-definition DVD player.[26]

The strategy has not been without its challenges for Sony. Blu-Ray players are expensive and as a result, the PlayStation 3 is the most expensive console of its generation with a launch price of $499 for the basic model. The high price has hindered take-up of the PlayStation 3, leaving it in third position behind the Nintendo Wii and Microsoft’s Xbox 360. However for Sony, it may have been worth it to lay to rest the spectre of the Betamax defeat. As Sir Howard Stringer, current CEO of Sony, said “Had I lost that war, the headline would have been, not that HD-DVD won, but that [Blu-ray] was Betamax 2. That would have been on my tombstone.”[27]

For Microsoft, the Xbox occupies a similar role, but for an even more grandiose strategy. Microsoft built its dominance through the ubiquity of its operating systems on PCs. Initially with DOS, and subsequently with Windows, the company established itself as the platform for users and developers. Now it is vying to control access to information from the living room. Three pieces of hardware have long been perceived as potential winners in this battle: the PC, the video game console and the satellite/cable set-top box. Microsoft already dominates the PC market. In 1997, it invested $1 billion in a 7.3% stake in Comcast, the US cable company, in an attempt to build a “Windows-based gateway to the television.[28] And the Xbox is designed to cover the third potential route to the market, to make sure that whichever of the three pieces of hardware win the battle, Microsoft has a place at the table.

However, its strategies appear to be faltering. The company sold its stake in Comcast in January 2009 (albeit at a profit of between $1 billion and $2.4 billion)[29]. The success of the Wii has taken the wind out of the Xbox’s sails and increasingly the growth in the games industry is coming either from the Wii or from online games such as RuneScape and social games on Facebook and MySpace.

The irony is that Microsoft and Sony may have invested vast sums to win a battle which, in the end, didn’t even matter. The real contest now is not even hardware related. The future of games is moving away from hardware and towards the browser.

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[19] The Big Picture, Edward Jay Epstein (Random House, 2006) p53

[20] Hit and Run: How John Peters and Peter Guber Took Sony for a Ride in Hollywood (Simon and Schuster, 1996), p184 – !!!Cross-referenced from The Big Picture, not checked yet!!!

[21] The Big Picture, Edward Jay Epstein (Random House, 2006) p53

[22] The Big Picture, Edward Jay Epstein (Random House, 2006) p54

[23] PlayStation – a History, Eurogamer, November 20, 2006 (http://www.eurogamer.net/articles/a_playstationhistory_1)

[24] Brussels gives nod for Sony to absorb MGM, Financial Times, March 31 2005 (http://www.ft.com/cms/s/0/3aee481e-a207-11d9-8483-00000e2511c8.html)

[25] The Ultimate History of Video Games, Steven L. Kent (Three Rivers Press, 2001) p580

[26] How the PS3 led Blu-ray’s triumph, BBC Online, February 19, 2008 (http://news.bbc.co.uk/1/hi/business/7252506.stm)

[27] Sir Howard Stringer, All Things Digital D6 conference, May 28 2008 (http://d6.allthingsd.com/20080528/stringer/ and http://www.gamesindustry.biz/articles/ps3-s-profitability-curve-mildly-catastrophic-says-stringer)

[28] According to Bernstein Research analyst Craig Moffett, “Microsoft Sells Entire Comcast Stake”, Barrons, January 20 2009 (http://blogs.barrons.com/techtraderdaily/2009/01/20/microsoft-sells-entire-comcast-stake/)

[29] Microsoft Discloses Sale of Interest in Comcast, Wall Street Journal, January 20 2009 (http://online.wsj.com/article/SB123250986459301395.html)

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