Platt Perspective on Business and Technology

Building a startup for what you want it to become 9: adding in disruptively innovative products and product portfolios 4

Posted in startups by Timothy Platt on November 10, 2015

This is my ninth installment to a series on building a business that can become an effective and even a leading participant in its industry and its business sector, and for its targeted marketplaces (see Startups and Early Stage Businesses and its continuation Page 2, postings 186 and loosely following for Parts 1-8.)

I began Part 7 of this series by posing a list of issues to discuss, beginning there. And I proceeded to address the first of those four points in that installment, and the second of them in Part 8:

1. More general principles that enter into the diffusion of innovation into a marketplace, at least as they arise and present themselves in a new business context.
2. And more through coverage of two key disruptive technology transitions: the transition from tape format storage to disk format, and from disk format to cloud storage based streaming media.

My goal for this posting is to continue from there with the third entry to that initial list:

3. And following through on those working examples, at least briefly discuss some of the issues of format and hardware that would be used in presenting and accessing content, and of content ownership and licensing control over it, as content owner’s become key stakeholders in determining which data formats and the hardware technologies that they play on, succeed or fail.

I begin addressing that by returning to consider tape recordings, and a detail that I have already at least selectively addressed but that merits at least briefly repeating. When tape recording-based home entertainment equipment was first produced, there were multiple tape formatting options to choose from, and two of them rapidly rose to the competitive top: VHS and Betamax. And cutting ahead of my narrative here, for the moment, VHS won out in the videotape format war that ensued as manufacturers who had pegged their fortunes on one or the other of these two options, fought for market domination in this arena by promoting their chosen champion.

There are a number of admittedly equally valid approaches that could be taken in addressing this complex of issues, but at least as a starting point for that, I would focus on alignments and conflicts of interest between stakeholders who participated in this war. And certainly for purposes of this type of discussion, that at least potentially includes a wide range of significant stakeholder participants. On the production and manufacturing side that includes hardware manufacturers, and content providers, where both of these more general labels include a diversity of distinct groups. And I begin here with the manufacturing side to this story.

Manufacturers, in this context, obviously include tape player manufacturers, with Sony (which backed the Betamax format) and RCA (which backed the VHS format), the two largest players in this marketplace contest. But the overall group of manufacturers involved here also includes formal supply chain partner and other parts manufacturers, that these final product manufacturers turned to for purchase of components that would not be cost-effective for them to manufacture entirely in-house, on their own. And considering manufacturers as a whole here, but from a very different and distinct direction, consider the businesses that would actually produce the recording cassettes that would be played in these recording and playback devices: manufacturers of the magnetized tape itself that constitutes the recording material there and the largely plastic format-specific packaging that this tape fits into, and that it is spooled through as segments of it are being played from or recorded onto.

• The manufacturers, and particularly the larger-commitment manufacturers of those tape players themselves, all produced devices that of necessity could only support one content format, as the tape cassettes of these format alternatives were of different size and shape and they required at least somewhat different read/write heads for accessing and using the recording medium tape in them. Competing formats required incompatible hardware to support them.
• This restricting specialization, with all of the risks it imposed of potentially backing what might turn out to be a losing format, was accepted at least in part due to the costs that would have been involved for any single manufacturer if they had chosen to in effect compete against themselves by building separate lines of products for two sides of a market where only one side would win, and where that one format would come to dominate this industry sector as a whole. This risk consideration was at the very least exacerbated by patent ownership restrictions, that would limit participation in the manufacture of devices for the individual formats involved here, to patent owners and to approved paying licensees.
• Cassette manufacturers, at least in principle had more of an option for producing two or even more types of cassette at once, each with its own separate format-specific assembly line, as the set-up cost commitments would be smaller than those required to assemble entire tape players. But patent ownership and licensing restrictions applied to them too, and perhaps more importantly they operated on narrower per-item profit margins too. So their threshold for acceptable risk was lower too.

On the manufacturing side, fundamental constraints forced participants to chose and pursue one tape format and one of them only, and its marketable realization. And this forced them to actively promote that one format as the best available, in hope that the marketplace would make their choice the one accepted standard in this emerging business space.

Content providers, at least for purposes of this discussion primarily included the recording studios and other large businesses that produced movies and related material that would be professionally recorded on those tapes for sale. And their goal was to offer their proprietarily owned, copyrighted product on what would turn out to be the winning format too. They also had to choose a single format to present their material through – with that driven by the demands of exclusive rights contracts. Studios would sign exclusive rights agreements with specific tape cassette companies, and not just for single movie releases but for large multi-release blocks of business. And that tied them to single tape formats too.

So hardware manufacturers and content producers all had to make their own decisions as to which of these tape formats to back and to put all of their investment effort into, and with all of the risk that entailed. And the question was which side would win. The outcome of this, was of course that VHS became the standard and Betamax an historical side note. How?

This could have gone either way, at least as far as the technical quality of these formats, and of the early equipment that played them is concerned. At the risk of oversimplifying a more complex story, this at least potentially “flip of a coin” decision was made by pioneer and early adaptors in home entertainment tape-based systems as they made acceptance decisions for this type of innovation. That means the early adaptor finished product tape manufacturers who provided early content that could be played on these machines, and early adaptor consumers who bought them, and partly on the basis of this new technology itself, and at least as much on the basis of the relative quantities and popularity of the movies offered in these competing formats. VHS tape format products took off in sales faster and more strongly, so content providers became skewed in offering their new movie releases more in VHS than in Betamax. And this disparity grew, and with more new content available for VHS players, and more of those players sold to play it. And depending on whether you prefer VHS or Betamax, this trend quickly developed into what you could call either a virtuous cycle or a vicious cycle, as VHS players came to completely dominate the market, and Betamax died off from lack of new releases in that format.

And with this noted, I end this thread of discussion with a point of irony. The first Betamax public release came out in Japan on May 10, 1975. The first VHS public release also came out in Japan, in October, 1976: a full 17 months later, and the first release of this technology format in the United States had to wait until August of 1977 when RCA had purchased rights to this format from the Victor Company of Japan, Ltd. (JVC). So Betamax lost out in the videotape format war even though it started out with what should have been a solid 27 months and more of first mover advantage. There is a lot more that could be added to that part of this story.

I am going to continue this discussion in a next series installment where I will address the fourth and last topics point of my Part 7 list of issues to discuss here:

4. And looking further ahead, I added that I am leading up in all of this discussion, to consideration of product portfolios and of how product portfolios can help balance risk and benefit as a core due diligence requirement – where for purposes of this series that means focusing entirely on how a portfolio approach would and would not work in the initial startup and early business stages of a new enterprise, and I add here, for a business that has just transitioned out of those first initial-step development stages and into profitability.

I will simply note in anticipation of that discussion, that all of this posting revolved around the processes and the consequences of the businesses involved, placing all potential benefit and risk in one format, and effectively into a single overall product type. I will turn to consider diversity and its virtues in my next installment to this series. And in keeping with the historical examples that I have been focusing on up to here, I will at least in part, look into the transition from DVD to Blu-ray formats, and from them to streaming media as a part of that discussion. Meanwhile, you can find this and related material at my Startups and Early Stage Businesses directory and at its Page 2 continuation.

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