The Hollywood Economist

Hollywood’s Tokyo Godfathers

How Japan enabled the re-invention of Hollywood.

Sony PlayStation 3

Sony’s decision last week to delay the launch of its third-generation game console PlayStation 3 until November 2006 sent shock waves through the entire entertainment economy. The reason is that PlayStation 3 is far more than a child’s toy. It is a state-of-the-art home server that can play the next-generation high-definition DVDs, wirelessly connect to the Internet, and simultaneously support up to nine different operating systems for consumer electronics that, for better or worse, will further accelerate Hollywood’s move from theaters to home entertainment.

This crucial shift, one that has changed the nature of the movie business, has proceeded not from marketing decisions made in Hollywood or New York but from Hollywood’s other axis: Tokyo. First, Sony enabled an entire new home market by creating a VCR in the 1970s. The first video recorder had been invented in the 1950s by an American company, Ampex, but it weighed a half-ton, cost $50,000, needed a two-man crew to operate it, and was designed for studio use. After Sony ingeniously re-engineered it into an affordable device called the Betamax that was small enough to fit on top of a television set and easy enough to be operated by the proverbial child, the Hollywood studios sued to block Sony from marketing it. Starting in 1977, in Universal v. Sony, Sony tenaciously fought the studios in court and, in 1984, finally won in the Supreme Court. If the studios had prevailed, there may have been no home market for movies, but they had the good fortune of losing. This result led to the opening up of a huge video-rental market and turned out to be their (unforeseen) salvation. (It was a bittersweet victory for Sony—it won the court battle against the American studios but lost the format war to its archrival Panasonic.)

In the 1990s, Toshiba, Sony, and other Japanese electronic giants made another decision that changed Hollywood even more radically: substituting a digital platform for the video cassette. Again the Japanese companies had to overcome the resistance of Hollywood studios, who initially were concerned that the new technology, the DVD, could jeopardize the video-rental market that had become their cash cow. By now, however, the two leading proponents of the DVD, Toshiba (which had pioneered the optical disc) and Sony (which had a patent, along with its partner Phillips, on digital sound), had acquired powerful positions in Hollywood. Toshiba was a part owner of Time Warner Entertainment, and Sony owned the Columbia Tristar studio. So, Toshiba’s Koji Hase persuaded his strategic partners at Time Warner home entertainment that the DVD, with its superior quality, was needed to counter competition from newly introduced digital satellite broadcasting and, after assuring them that an entire movie could be made to fit on a CD-sized disc, got their backing and access to the huge Warner Bros. film library.

Meanwhile, Sony also committed the Columbia TriStar library to the DVD. After Sony and Toshiba (as well as other Japanese manufacturers) agreed in Hawaii in August 1995 on a single format on which they would all share the patents, the DVD launch proved enormously successful. It quickly transformed movies into retail products that could be sold by Wal-Mart and other mass merchandisers, largely replacing the rental market with an even more lucrative sell-through business. By 2005, the revenue from DVDs for the major studios was three times that of the revenue from movie theaters. Because the DVD allowed for random access, studios could package entire seasons of TV hits into boxed sets, opening up a rich new market for original TV products, such as The Sopranos, Sex and the City, and 24.

The next Tokyo initiative in the war for the couch potato will be raising home movies to a high-definition standard. High-definition, which contains five times the color picture elements of conventional DVDs or television, was pioneered in Japan in the late 1970s and allows home audiences to watch a movie-quality picture on a much larger display. Toshiba and Sony, the same Japanese companies that brought Hollywood the DVD, have now decided to replace it with a high-definition disc, which Toshiba calls “HD-DVD” and Sony calls “Blu-Ray.” Both companies have machines that use a blue laser to read the densely packed data, can connect to the Internet, and produce the same quality high-definition picture.

The chief differences between them are price and storage capacity. Toshiba’s HD-DVD is less expensive to manufacture and holds just enough data, 15 gigabytes, for a high-definition movie (Toshiba assumes other features can be accessed over the Internet). Sony’s Blu-Ray is more expensive to make but can hold much more data. Its disc can be divided into as many as eight wafer-thin layers, each of which can hold up to 25 gigabytes. In addition, some of the layers can be used to record additional material downloaded from the Internet. The Blu-Ray format, with its enormous storage capacity, is backed by all the Hollywood movie studios.

One reason for the studios’ support is that the Blu-Ray technology provides two separate “viewing planes” for a DVD: one for the high-definition movie, the second for scene-specific features such as commentaries, music videos, and games. This opens the door to creating parallel universes, which the viewer can navigate among with a click of the remote control. Disney, for example, plans to put scene-specific educational lessons on children’s movies, while Sony plans scene-specific games. The Internet would provide further interactive material, including prequels, sequels, altered endings, and additional action sequences, which can be downloaded on the rewritable layers of their disc.

When PlayStation 3 arrives this November, with its Blu-Ray technology and super-realistic games, it will further blur the line between movies and games. The hand of Tokyo may not always be visible in the dazzling glitter of Hollywood, but it has enabled the industry to re-invent itself.