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Video Warfare: How Toshiba Took The High Ground


The Corporation: Strategies

VIDEO WARFARE: HOW TOSHIBA TOOK THE HIGH GROUND

Koji Hase, a senior manager at Toshiba Corp., spent Good Friday of 1992 with Warren N. Lieberfarb, head of Warner Home Video Inc., brainstorming about how to cram full-length movies onto CD-size disks. Then, the two headed to Hollywood power restaurant Morton's for dinner. The soft-spoken Hase decided this brash, animated New Yorker reminded him of the Tasmanian Devil, Warner's voracious, whirling Looney Toons character. A few bottles of red wine later, they decided they both looked like the Tasmanian Devil. So when it came time in November to christen the project, Lieberfarb suggested "Taz," and the name stuck.

Now, the name is looking apt. Toshiba and Time Warner Inc.'s double-sided, digital videodisk (DVD) has spun its way into the hearts of Hollywood movie moguls, while a rival system from Sony Corp. and Philips Electronics could get left in the dust. Toshiba's standard wowed Hollywood with 5 gigabytes of capacity per side, room for 135 minutes of high-quality video plus a host of interactive goodies such as viewers' choice of endings. The Beverly Hills unveiling was an awesome display of corporate clout. Movie powerhouses such as Warner Bros., MCA, and MGM/UA shared the podium with manufacturing giants Matsushita, Thomson, and Pioneer. The rival team isn't admitting defeat. But it's clear that Toshiba/Time Warner have won an early, important battle.

KEY ALLIES. How things turned out this way is one of the oddest tales to emerge from the struggle between Hollywood and Silicon Valley to dominate the dawning Multimedia Age. With an eye toward the Infobahn, the entertainment industry wants a say in the standards that control the delivery of digital pictures into the home. Since Toshiba is ascendant in Hollywood, Sony and Philips have set their sights on computer makers, pitching their format as a high-density replacement for CD-ROMs. That may drive an even deeper wedge between the two industries and spark an all-out standards war that would mire the new market in confusion.

Such a conflagration, if it comes at all, is probably months away. In the meantime, Toshiba/Time Warner's Hollywood victory holds crucial lessons for how big multimedia deals get done. Rather than trying to dominate the new videodisk format with its own, patented technology, Toshiba, which owns a large stake in Time Warner entertainment, skillfully mediated among fractious competitors and stitched together an alliance that will be difficult for anyone to unseat.

The stakes are huge. DVD could blossom into a $30 billion market by the early 21st century, predict some members of the Toshiba camp, rivaling the VCR industry today. For starters, there are the disk players, which Toshiba and its allies want to launch by mid-1996 for about $500. Then, there's revenue from billions of disks Hollywood hopes to sell to consumers at about $20 a pop.

Better still, the DVD system could grow in many directions. Cable companies could store DVD movies in "video jukeboxes," delivering films over cable into subscribers' homes. Like Philips/Sony, Toshiba will also try to position its DVDs as next-generation CD-ROM drives in PCs and even merge them with next-generation game machines.

Toshiba moved the DVD project into high gear in June, 1993, deploying 100 engineers to work under semiconductor veteran Taizo Nishimuro, Hase, and Hisashi Yamada. Building on technology developed with Matsushita Electric Industrial Co., the team found a way to record billions of bits of music, video, and text onto superslim disks just 0.6 millimeters thick. The thinner layers allow lasers to read smaller pits representing digital zeros and ones, boosting capacity far above that of conventional music disks and CD-ROMs. Two slim disks are then glued back-to-back to double storage space.

Technology in hand, Toshiba and Time Warner tried to round up allies among hardware makers. Toshiba showed an early prototype to Philips in January, 1994. But the tall, stately Nishimuro says Philips' response was "fuzzy." No wonder. Philips and Sony had pioneered the audio CD revolution 14 years earlier and together had extended it into CD-ROMs. They had watched CD systems expand to an installed base of nearly 100 million, with 3 billion disks in circulation. The future of higher-density disks, they figured, belonged to them.

MCA MUTINY. Matsushita was also entranced by the potency of the Sony/Philips alliance. Despite its work with Toshiba on the double-sided disk, the Osaka-based giant hedged its bets, helping Sony with its approach. Sony and Philips had even hatched plans in April to announce a world standard with Matsushita.

Chances are the announcement would have gone ahead. But Matsushita's U.S. movie arm, MCA Inc., refused to get on board with Sony. Publicly, MCA said it would follow its Japanese parent. Behind the scenes, though, Matsushita's own technical-liaison people at MCA enlisted Warner's Lieberfarb to visit Matsushita headquarters and fend off a joint announcement with Sony.

The plea from MCA was a huge coup for Toshiba/Time Warner. But Matsushita, the powerful maker of Panasonic and Quasar brands, continued to sit on the fence. Lieberfarb and his team--Christopher J. Cookson, Lewis S. Ostrover, Marsha K. King, and Joseph Vayda--realized they would need maximum support in Hollywood to stop Sony and Philips. He quietly organized an ad hoc committee of seven studios, chaired by Walt Disney Co.'s Robert E. Lambert and Richard B. Cohen, president of MGM/UA Home Entertainment.

"WE'VE GOT IT." The committee was a brilliant stroke that ultimately turned the battle in Toshiba's favor. In August, Sony toured Hollywood with a prototype that met with a tepid response. A month later, the ad hoc studio committee released a wish list that played straight into Toshiba's hands. They wanted 135 minutes of playing time, high image and audio quality, and room for at least three languages, plus a parental "lockout" feature to skip over violent or risque scenes. As Goldman, Sachs & Co. electronics analyst Eric Gan in Tokyo points out, a two-hour action movie, such as In the Line of Fire, eats up over 31/2 gigabytes, largely filling Sony's disk and leaving precious little room for interactive applications. But Toshiba's 10-gigabyte prototype had room to spare. "I thought: `This is it. We've got it,"' recalls Toshiba's Hase.

Philips and Sony continue to stress their technology's compatibility with current CD-ROMs. The new disk players can't just be a replacement for VCRs, insists Philips Consumer Electronics Program Manager Jacques Heemskerk, but the machines must also satisfy computer makers. Sony also questions the intense focus on Hollywood. Complains Managing Director Nobu-

yuki Idei: "I don't understand why the studios should be committed long before there is even a product."

In the end, Sony and Philips barged ahead with an official unveiling on Dec. 16, but they went to the podium without allies. Sony felt Toshiba's double-sided format would be too expensive for manufacturers. But just three days after the unveiling, Matsushita's DVD director, Sakon Nagasaki, visited Warner Music's Pennsylvania disk-stamping unit, WEA Manufacturing, which had been test-producing double-sided disks for six months. Nagasaki came away convinced that Sony was wrong.

Two weeks after Nagasaki's trip, Matsushita cast its lot with Toshiba/Time Warner, followed quickly by Thomson, with its powerful RCA brand. RCA's consumer-marketing clout in the U.S., backing the VHS VCR standard, hastened the decline of Sony's Beta players 18 years ago. "We plan to spend as much if not more on DVD as we did on DSS," the company's wildly popular Digital Satellite System, says Joseph P. Clayton, executive vice-president of Thomson Consumer Electronics in Indianapolis.

FENCE-SITTERS. Even with Matsushita and RCA behind them, Toshiba/Time Warner can't declare victory. In Hollywood, several studios continue to bide their time. Fox Inc. remains uncommitted, as does Disney. But both could use the extra capacity from Toshiba's system. Disney's cash-cow animation eats up gobs of digital real estate.

Silicon Valley, meanwhile, isn't taking sides. But it's hard to see why computer makers would choose Sony and Philips. The two have shown that they can raise double-disk capacity to 7.4 gigabytes using a dual-layer technology created by 3M. Even so, that's much less than Toshiba's two-sided system. And 3M's dual-layer approach requires an extra manufacturing step, which means higher costs for disk-stampers.

For Toshiba and Time Warner, bringing Sony and Philips into the fold will require some of the trickiest negotiations either has ever faced. Already, to reel in Hitachi, Matsushita, and Pioneer, the pair had to make many compromises, incorporating bits of rivals' patented technology, which means sharing license revenues. They've wooed disk-stamping companies with similar promises of license flexibility. What's more, at $500 per unit, the DVD players won't earn Toshiba much profit. So there is little room for Toshiba to make concessions to Sony, such as incorporating some of Sony's technology in the new standard.

There may still be time to forge a compromise. "We're only 500 meters into the marathon," says Sony's Idei. But over at Toshiba, Nishimuro's office boasts a trophy: a colorful, five-inch statue of the Tasmanian Devil that Lieberfarb sent him. Toshiba and Time Warner may not devour their rivals, but they've certainly taken a healthy bite.

Lessons from the trenches

WHAT TOSHIBA AND TIME WARNER DID RIGHT

-- Pushed the technology envelope to 10 billion bytes of storage

-- Courted Hollywood aggressively through ad hoc advisory group

-- Placed films and games over computer applications

-- Wooed other electronics companies with "open" licensing approach

WHAT SONY AND PHILIPS DID WRONG

-- Slow to develop high-capacity digital videodisk prototype

-- Sacrificed capacity for compatibility with existing disks

-- Presented Hollywood with finished specs, instead of seeking advice

-- Boasted of future recording capability, raising Hollywood copyright fearsBy Larry Holyoke in Tokyo and Larry Armstrong in Los Angeles


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