Sony edges ahead of Facebook in virtual reality race

After years of underperformance, Sony finally experienced much-needed relief, showing the world its innovation prowess once again. According to a New York Times article, senior executives at Sony were all taken by surprise as its virtual reality headset was selling as fast as the company could make it. Merely four months after launch, close to a million units were sold. Meanwhile, Facebook-backed Oculus Rift had barely shipped more than 240,000 units, and HTC Vive another rival, sold 420,000 units. How did Sony, almost synonymous to Japan’s lost decade, manage to beat Facebook hands down in virtual reality?

In the early 1970s, video cassette recorders (VCRs) began to make inroads into American households, and quickly surpassed colour televisions as the hottest selling consumer electronic product. One format, the Betamax, launched by Sony in 1975 quickly emerged as the first reliable, high-quality video cassette.

Still basking in the glory from its earlier smash hit, the portable transistor radio, Sony had established itself as a pioneering innovator. The company promised consumers a video format that delivered superior colour, crisp pictures, and stable images.

The Betamax quickly achieved a commanding lead in the marketplace. Even the Japanese government favoured the Sony format, trying to force other manufacturers to settle on one single standard, so that consumers, regardless of what machines they bought, could access the same library of videos.

A year later, a minor player named JVC lined up with Matsushita and developed the VHS as an alternative format. Being a latecomer, JVC-Matsushita focused on overseas markets, following an expansive strategy that aimed at forming as large a group as possible.

JVC-Matsushita courted RCA relentlessly in the US. When RCA executives requested a video cassette that “could record a football game,” JVC and Matsushita immediately went to work, corralling a team of 70 engineers to the project. In less than two months, VHS doubled its playing time from two to four hours.

By the time RCA contracted 50,000 VHS cassettes in 1977, it became all too clear to other US manufacturers that they too must follow suit to stay relevant. General Electric, Zenith, Magnavox, and Sylvania successively adopted the VHS format.

Meanwhile, Matsushita, also the parent firm behind the Panasonic brand, exploited its manufacturing prowess to new heights. The company committed a production capacity for VHS players exceeding that of the combined volume of all other Japanese producers, let alone Sony itself.

It was in this context that JVC could aggressively pursue the private label businesses, supplying the complete machines for distribution by Hitachi and Sharp under their own brands, an arrangement that Sony had adamantly refused. Chairman Akio Morita of Sony scoffed in 1976 that his company “is not an original equipment manufacturer (OEM)”.

It wasn’t that Sony didn’t innovate. It did. Between 1977 and 1983, Sony was the first company to offer wireless remote control, half-speed and one third speed machines, high fidelity (hi-fi) sound, and one unit movie cameras. For a reputation for superior quality, Sony was peerless.

But technological advantage could only go so far. JVC-Matsushita attacked where Sony was weakest: low price and mass distribution when the format war raged on. As soon as VHS became a more open and widely adopted format, a larger economy of scale was achieved, which in turn allowed VHS to beat Betamax on price further still.

That lower cost ironically had attracted a sector that helped spur adoption at a rate the industry had never seen: the pornographic videos. The unexpected bonanza cemented VHS as the format of choice for video rental, propelling JVC-Matsushita to an indisputable victory. By 1980, VHS accounted for 70 to 90 per cent of the revenues of cassette dealers in the United States. The end was in sight for Sony’s Betamax.

Like a video cassette recorder, a virtual reality (VR) headset by itself is worthless. Only when users employ it in conjunction with a complementary product – video games or movies – can there be any value found.

At the time of this writing, no single player, or coalition has been strong enough to impose a worldwide standard in VR. Studios dedicated to VR content resemble a cottage industry, each designed to conform to the myriads of interface specifications tied to different manufacturers. Now as if in a twist of historical events, the PlayStation is redeeming Sony from its earlier missteps.

Priced at US$500, the headgear, the two move wands, and the special camera can plug in as an add-on directly into a PlayStation console. Meanwhile, rival Oculus is selling its Rift headset for US$599, or about US$1,400 combined with a high-end computer. HTC’s Vive went higher still, priced at US$800 for the headset and required another US$800 computer to support it.

The lower price point of Sony was of course derived from the existing user base. There were more than 40 million PlayStation 4 units sold last year. For these consumers, many of them advanced video gamers, a relatively small investment would enable the experience of full-fledged VR. So why not?

The existing base also drives independent game developers. Like a movie studio, a game developer always seeks to design products for a format that has the widest reach. The desire to become a blockbuster thus represents a chicken and egg problem. Without a large audience, game companies hesitate to bet on any VR experience. It’s always safer to make money based on the traditional game format.

Fortunately for PlayStation, video game publisher Capcom, had released a version of Resident Evil 7 Biohazard, a popular horror series, in January playable on Sony’s VR headgear. That might be just the beginning. Sony’s PS4 is on top of the world right now with an enormous list of must-play games and a sharp sales advantage over its rivals like X-box and Nintendo.

From video cassettes to virtual reality headsets, Sony’s rise, fall, and resurgence illustrates technological inventiveness can never translate into competitive advantage. Even an initial first-mover position is not sufficient. To win a format war, content is, and always will be, king.

Howard Yu is professor of strategy and innovation at IMD Business School with campuses in Switzerland and Singapore