Case Study: Blu-ray versus HD-DVD and Streaming: Standards Battles in Video

In 2003, Sony officially launched its Blu-ray disc, an optical disc data-storage format that could
offer highdefinition video, with hopes of replacing the DVD format. Sony’s technology had the
backing of a consortium that included Philips, Panasonic, Pioneer, Sharp, Samsung, Hitachi,
and others. Toshiba, on the other hand, was not eager to let Sony dominate the market with its
Blu-ray technology; Sony and Philips had controlled the original standard for compact discs
(CDs), and every producer of CDs, CD players, and CD recorders had been required to pay
licensing fees to Sony and Philips–an extremely lucrative arrangement for the partners. Toshiba
thus formed a consortium, the DVD Forum, which developed a competing, high-definition
DVD standard, HD-DVD, making it the “official” successor to the DVD format. Both new
formats were intended to deliver a theater like experience at home, with brilliantly clear video
and surround-sound audio, on high-end LCD and plasma televisions. The formats, however,
would be incompatible. Consumers, retailers, and movie producers all groaned at the prospect
of a format war similar to the battle that had taken place between Sony’s Betamax and JVC’s
VHS video standard three decades earlier. That war had left many bloodied—consumers who
bought Betamax players, for example, found that very few movies were ultimately made
available in the format, and retailers got stuck with unwanted inventory in Betamax players and
movies. The threat of another format war caused many retailers and consumers to delay their
purchases of the next-generation players while they waited to see if the market would pick a
winner. Fearing a lengthy, costly battle, consumer electronics producers began working on
players that would be compatible with both standards, even though that would significantly
increase their cost. Initially, the HD-DVD standard had a head start. Blu-ray players were
considered to be too expensive and buggy, and there were few movie titles available in the
standard. Toshiba, on the other hand, already had the cooperation of several major Hollywood
studios for its format, including Time Warner’s Warner Brothers, Viacom’s Paramount Pictures
and Dreamworks Animation, and NBC Universal’s Universal Pictures. Sony had only its own
Sony Pictures Entertainment, Disney, News Corporation’s 20th Century Fox, and Lions Gate
Entertainment. Both companies also used videogame consoles to promote their standards. Sony
incorporated the Blu-ray format into its PlayStation 3, dramatically raising the cost of the
devices. Though it sold the consoles at a very low price relative to cost, the consoles were still
significantly more expensive than traditional videogame consoles, causing PlayStation 3 to sell
only about half as many total units as PlayStation 2 had sold (85.23 million versus 157.68
million, respectively). Sony was willing, however, to concede some ground in the PlayStation
battle to win the Blu-ray war. Toshiba’s HD-DVD was offered as an optional, add-on drive for
Microsoft’s Xbox 360. However, on the eve of the Consumer Electronics Show in Las Vegas in
early January 2008, Warner Brothers announced that it would no longer support the HD-DVD
standard. This set off a chain reaction among content providers and retailers. By late February,
New Line Cinema, Universal Studios, and Paramount announced that they would be releasing
movies on the Blu-ray format, and Best Buy, Wal-Mart, Circuit City, Future Shop, Blockbuster,
and Netflix all announced that they would exclusively stock Blu-ray DVDs. The blow was
unexpected—and devastating—for Toshiba. On February 19, 2008, Toshiba’s CEO, Atsutoshi
Nishida, conceded defeat by publicly announcing that Toshiba would no longer produce HD-
DVD players, recorders, or components. By late 2009, Toshiba had released its own Blu-ray
disc player. Sony’s Blu-ray victory, however, was not the landslide that it expected. On
September 12, 2008, a consortium of tech heavyweights (including Intel and Hewlett-Packard)
announced that they would collaborate with Hollywood to create standards that would make
downloading movies fast and easy. If consumers were able to download high-quality movies off
the Internet, it would become increasingly difficult to persuade them to spend $300 or more on
a Blu-ray player. Carmi Levi, senior vice president at consulting firm AR Communications,
predicted that “Blu-ray is probably going to be the last physical [product] where you walk into a
store, get a movie in a box, and bring it home.” By 2012, about one-third of U.S. households
had a device that could play a Blu-ray movie (including PlayStation 3); at the same point in the
DVD format’s life, over half of U.S. households had a device. for playing DVDs. Video
streaming revenues had reached $5.7 billion in the United States by 2014 and were expected to
reach $14 billion by 2018. Physical DVD and Blu-ray sales, on the other hand, were expected to
drop from $12.2 billion in 2013 to $8.7 billion by 2018. Though the availability of Bluray
format streamed content was increasing, many people preferred to stream content in standard
(versus high definition) format because it was faster, reducing the buffering time necessary for
watching content. In fact, one study found that nearly onequarter of U.S. households did not
have adequate bandwidth to stream high-definition content, and another study found that even
in households that could stream high-definition content, many viewers still chose standard
definition viewing. On May 1, 2014, Sony issued a warning to investors that it expected to take
a hit on earnings because Blu-ray sales were contracting faster than it had expected.

Questions:

1. What were Blu-Ray’s advantages in the competition with HD-DVD? Could Toshiba have
done anything differently to ensure the HDDVD standard’s success?

2. Why do you think Warner Brothers’ announcement set off a chain reaction?

3. Could Sony have anticipated that streaming would dampen the revenues of Blu-Ray.
 Case Study: The Globalization of Starbucks

Thirty years ago, Starbucks was a single store in Seattle’s Pike Place Market selling premium-
roasted coffee. Today, it is a global roaster and retailer of coffee with more than 24,000 stores,
40% of which are in some 70 countries worldwide. Starbucks set out on its current course in the
1980s, when the company’s director of marketing, Howard Schultz, returned from a trip to Italy
enchanted with the Italian coffeehouse experience. Schultz, who later became CEO, persuaded
the company’s owners to experiment with the coffeehouse format, and the Starbucks experience
was born. The strategy was to sell the company’s own, premium-roasted coffee and freshly
brewed, espresso-style coffee beverages, along with a variety of pastries, coffee accessories,
teas, and other products, in a tastefully designed coffeehouse setting. From the outset, the
company focused on selling “a third-place experience” (in other words, spending significant
time at a place that is neither work nor home), rather than just the coffee. The formula led to
spectacular success in the United States, where, within a decade, Starbucks went from obscurity
to one of the bestknown brands in the country. Thanks to Starbucks, coffee stores became
places for relaxation, chatting with friends, reading the newspaper, holding business meetings,
or (more recently) browsing the Web. In 1995, with 700 stores across the United States,
Starbucks began exploring foreign opportunities. The first target market was Japan. The
company established a joint venture with a local retailer, Sazaby Inc. Each company held a 50%
stake in the venture, Starbucks Coffee of Japan. Starbucks initially invested $10 million in this
venture, its first foreign direct investment. The Starbucks format was then licensed to the
venture, which was charged with growing Starbucks’ presence in Japan. To make sure the
Japanese operations replicated the “Starbucks experience” in North America, Starbucks
transferred some employees to oversee the Japanese operation. The licensing agreement
required all Japanese store managers and employees to attend training classes similar to those
given to U.S. employees. The agreement also required that stores adhere to the design
parameters established in the United States. In 2001, the company introduced a stock option
plan for all Japanese employees, making it the first company in Japan to do so. Sceptics doubted
that Starbucks would be able to replicate its North American success overseas but, by 2014,
Starbucks’ had 1,034 stores and a profitable business in Japan. After Japan, the company
embarked on an aggressive foreign investment program. In 1998, it purchased Seattle Coffee, a
British coffee chain with 60 retail stores, for $84 million. An American couple, originally from
Seattle, had started Seattle Coffee with the intention of establishing a Starbucks-like chain in
Britain. By 2014, there were 530 stores in the United Kingdom. In the late1990s, Starbucks
opened stores in Taiwan, China, Singapore, Thailand, New Zealand, South Korea, and
Malaysia. In Asia, Starbucks’ frequent strategy was to license its format to a local operator in
return for initial licensing fees and royalties on store revenues. As in Japan, Starbucks insisted
on an intensive employee-training program and strict specifications regarding the format and
layout of the store. By 2002, Starbucks was pursuing an aggressive expansion in mainland
Europe, primarily through joint ventures with local companies. Its largest footprints are in
Switzerland, France, and Germany. To succeed in some countries, Starbucks has found that it
has to adjust its basic formula to accommodate local differences. France, for example, has a
well-established café culture. The French find Starbucks’ lattes too bland, and the espresso too
burnt, so Starbucks has had to change the recipe for its drinks to match French tastes. Since
French consumers like to sit and chat while they drink their coffee, Starbucks has had to add
more seating per store than is common elsewhere. As it has grown its global footprint,
Starbucks has also embraced ethical sourcing policies and environmental responsibility. Now
one of the world’s largest buyers of coffee, in 2000 Starbuck’s started to purchase Fair Trade
Certified coffee. The goal was to empower small-scale farmers organized in cooperatives to
invest in their farms and communities, to protect the environment, and to develop the business
skills necessary to compete in the global marketplace. In short, Starbucks was trying to use its
influence to not only change the way people consumed coffee around the world, but also to
change the way coffee was produced in a manner that benefited the farmers and the
environment. According to Starbucks, by 2017, some 95.3% of the company’s coffee was
“ethically sourced.

Questions:

1. Where did the original idea for the Starbucks format come from? What lesson for
international business can be drawn from this?
2. What drove Starbucks to start expanding internationally? How is the company creating
value for its shareholders by pursuing an international expansion strategy?

3. Why do you think Starbucks decided to enter the Japanese market via a joint venture with
a Japanese company? What lesson can you draw from this?

4. Is Starbucks a force for globalization? Explain your answer.

5. When it comes to purchasing coffee beans, Starbucks adheres to a fair-trade program.

What do you think is the difference between fair trade and free trade? How might a fairtrade
policy benefit Starbucks?