Dialog: After HD DVD, whither Toshiba?

A multinational, multi-talented, highly diversified technology producer doesn't simply wither away just because it loses one battle -- even a loss as big as HD DVD. But depending on how it chooses to stick around, will Toshiba find itself redeemed? Or liable?

When a minor professional sports league finds it can't compete with the majors, it disbands and goes away. When a television network can't profit from its productions, it ceases operations and follows in the long wake pioneered by the DuMont Network. When a presidential candidate loses, he often fades into the backwoods of history...and fast.

But a format is someone's intellectual property, and as such, it's an investment. Too much is tied up in it, so even when that IP is forced out of the market, you can't just turn it off. It has to wind down. Retailers have to find a way to flush their inventory. Manufacturers have to retool. Components makers have to rethink their strategies. And all the while, the IP licenses they purchase...live on, and even accrue fees.

It's at a time like this when all eyes turn to Toshiba, the champion of HD DVD and, at least in the beginning, the obvious Biggest Loser in the format war with Blu-ray. Earlier this week, I asked technology analyst Carmi Levy to help figure out whether there's any kind of redemption scenario for Toshiba.

SCOTT FULTON, BetaNews: A lot of people forget, when they talk about formats, that formats consist first and foremost of intellectual property. There is a lot of money invested in the intellectual property of HD DVD. Now, I don't know about you, but let's say I find this great new smartphone, and I make a two-year commitment to go with the carrier that can provide me with the smartphone and all the software that's behind it. And three months later, that carrier goes belly-up. I don't know whether I really do have legal recourse, but by [golly], I'm going to check to see whether I do, and I want to see whether I could get my money back on the remaining parts of it.

Now, there are a whole lot of manufacturers here, of not just the consoles but the disc manufacturing factories, the testing organizations. One of these testing laboratories for HD DVD came online this week, of all the bad timing. These people invested tens of millions of dollars in equipment...and there's a lot of money tied up in this. The first thing these guys have got to be thinking is, how do we get it back?

AR Communications Senior Vice President Carmi Levy

CARMI LEVY, Senior Vice President, AR Communications: Right. I'm sure there will be lawsuits associated with the termination of HD DVD as a marketing brand. There's no question, if you had staked your company's future on this platform and you now find yourself potentially without a future, obviously one of the people you'd be talking to would be a lawyer.

And who wins in this? Lawyers, because they get to charge by the hours; whoever wins or loses, it's irrelevant to them. But at the same time, it underscores how this is as much a lesson in business planning as it is in technology planning. Never hitch your cart to one horse, because if that horse fails to finish the race, what do you do then? What is your contingency, to continue to sustain your business model if your original assumptions turn out to have been wrong, and if the market on which you had based those business decisions ceases to develop, or even ceases to exist?

So certainly there are a bunch of HD DVD-related third-party vendors today that are hoping that years ago, when they made the decision to back Toshiba, they had the foresight to have a Plan B ready to execute if Toshiba decided to pull the plug. And if they didn't, then I hate to sound harsh, but they really have no one to blame but themselves. Every company needs a diversification strategy. We follow similar strategies in our personal investments, in how we choose to lead our lives. The same thing needs to apply when a format or a standard comes along. Even Microsoft has recognized that its Windows and Office brands -- standards in their own right -- will not drive the company's growth forever. So as a result, they're actively investing in other platforms in other areas to allow the company to generate revenue, where previously it did not generate revenue.

Even Blu-ray today has a window of opportunity of maybe five years, before the Internet begins to eclipse it. It is by no means a permanent format, and it is by no means an absolute victory because Sony has to already be invested in follow-on technologies, follow-on platforms, and follow-on standards so that it can continue to maintain its revenue streams long after Blu-ray is consigned to the dust heap.

SCOTT FULTON: We started this discussion where you said, obviously, Toshiba's the loser here. But what if there's a silver lining behind this, and my thinking goes like this: First of all, they don't have to invest a lot in the HD DVD Promotional Group any more; they can turn their attention to a partnership with SanDisk on a new type of flash memory technology, a new fabrication facility, and other things that they're good at.

But the other thing is this: Sony is probably going to be the last company in the world to produce a player that is capable of playing an HD DVD disc. But what if Toshiba, having lost -- in all graciousness -- goes ahead and makes a hybrid. Think of it this way: There's this abundance of systems-on-a-chip that are already out there that already are capable of playing both formats. So why not -- in deference to all those people who are having to kick out their first-generation profile Blu-ray players anyway, and the other group who's thinking they shouldn't have invested $100 on that cut-rate HD DVD from Wal-Mart -- present them with a hybrid that [also] plays all the HD DVD discs there will ever be (they'll stop cutting them in April)? Why wouldn't that be a gracious move that ends up benefitting Toshiba in the long run?

CARMI LEVY: If they can produce such a machine at a price point that allows them to compete with second-generation Blu-ray-only players...in such a way that allows them to go to market with similarly priced machines that adds differential value that the market perceives as value-added, then absolutely. Because if this is what sets Toshiba's machines apart and establishes Toshiba as an engineering leader -- "same price, I get both" -- then absolutely. The question is, can they produce essentially what is two machines in one with the economies of scale that would be required to bring it to market without a significant price pouncing?

For example, if you can buy a Blu-ray player for $400 today, if [Toshiba] could introduce [a hybrid] into the $400 range, then absolutely, it would be a no-brainer.

SCOTT FULTON: I don't see why they couldn't. Let's face it, a lot of the systems-on-a-chip are actually capable of playing both formats; they just don't. And then there's the slight physical differentiation that you'd have to implement in order to make the blue laser track the same way, but it runs at the same frequency for both formats. You'd probably have to invest maybe $50 per unit in retooling expenses, my guess. And if you've done that...You've lost anyway. So why increase your prices? Market this hybrid at $400. Why not $300. Capture what's left of the market and run with it.

CARMI LEVY: Absolutely. And I think the market's looking to Toshiba to see how fast they can switch their production strategy so that they can cash in on the market move toward Blu-ray. Obviously they don't want to take too crushing blows; they've already taken one. They've lost the war, but now here's an opportunity for them to capitalize on that, and to at least start generating revenue, whereas previously they didn't really have any.

Next: To the loser go the spoils?