If Microsoft does not honestly believe in HD DVD’s ability to triumph over Blu-ray, why does it continue to support the format exclusively? In my assessment, a large part of the reason is that where Sony stands to gain or lose in a big way in the context of the console war, Microsoft has a vested interest. If Blu-ray succeeds, and as a consequence propels the adoption of Playstation 3, it will no doubt harm the competitiveness of Microsoft’s console. Consumers may be confused now as to why they should shell out $500 for a game console with an unproven high-definition DVD format, but if Blu-ray became the industry standard, the perceived value of the Playstation 3 would be greatly enhanced.
The sensible strategy for Microsoft, then, is to deny or delay this possible outcome for as long as possible, even if it means supporting a format with a higher likelihood of failure than its rival. It’s thus apparent that Microsoft’s outward enthusiasm for HD DVD is no more than a guise for a war of attrition with Sony to delay the fulfillment of the Playstation 3’s value proposition as an all-in-one game machine and high-definition DVD player. If Microsoft can prolong the format war for long enough, it can develop a strong enough portfolio and capture sufficient market share that by the time Blu-ray emerges the victor, the beneficial effect it would produce for Playstation 3 sales would be too little, too late to make much of a difference for Sony.
In light of these observations, it’s clear who gained the most from the Paramount announcement. Not Sony, because it lost a valuable business partner to a rival company. Not necessarily Toshiba either, because HD DVD still has a steep hill to climb before it can actually defeat Blu-ray (and if it loses nonetheless, the $150 million spent brokering the deal would simply be additional sunk cost). The greatest benefactor from Paramount’s decision was Microsoft, because the action delayed—perhaps significantly—the emergence of a clear victor in the high-definition format war. So long as HD DVD and Blu-ray are locked in a stalemate, the Playstation 3’s value proposition remains suppressed; and this has a directly advantageous effect on the competitiveness of the Xbox 360.
If Microsoft can continue to play Sony and Toshiba off one another, by the time a definite format winner emerges, the videogame and home video industries may have dropped the physical disc altogether in favor of digital distribution. Indeed, both Microsoft and Sony executives have predicted the inevitable demise of the disc after the Blu-ray/HD DVD generation.[1] Will Sony be able to reap the rewards of its big gamble in time? It’s too soon to say, but for the moment, it seems that Paramount has thwarted any efforts on Sony’s part to finish the fight quickly.
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