Screaming and Shouting

A lesson from the 1970s may be instructive when thinking about which cryptocurrency will win.

It is always disconcerting for me to hear that my kids are being taught about things that happened while I was actually alive – all under the guise of ‘history’. Finding out that my eldest son had been learning about the Cold War and the election of Ronald Reagan was the discovery that shocked me most.  I was at university when that happened.

It was even more disconcerting to be taught about events that happened during my youthful past while I was recently a Masters student in economic history at the LSE.  But when you study business history, a classic case from a theoretical viewpoint is that of the 1980s triumph of VHS over Betamax in the videotape market. This was a story buried in the ancient past for most of my fellow students, but I could distinctly remember a time before these inventions, and I could also remember friends’ parents debating which format to go for. As the eldest in the class I was the only person who could correctly identify which tape was which when the professor showed us slides of them.  Old? Me?

My vaguely recalled folk memory of why VHS triumphed was that – although Betamax was in some ill-defined way ‘better’ – VHS tapes had longer playing times and that’s what ultimately counted. The truth (which, I found, is now a matter of intense academic study) is much more complex and is also instructive for anyone considering today’s world of competing technology standards. So why did VHS win?

A common idea in the discussion of business strategy is the idea of ‘first mover advantage’ whereby the creator of a technology can become dominant by exploiting its control over patents and technology standards and by taking advantage of organisational learning as the technology develops. Sony’s creation of the first consumer-oriented home videotaping format – Betamax – in the mid 1970s would seem to fit into this pattern. Instead, however, the rival format of VHS (developed by its smaller rival JVC) became dominant in Betamax’s place until, by the late 1980s, Sony ceased production of machines in this format.

Video tape recorders had existed for some time before the 1970s. Large, bulky and extremely expensive units had been created (in particular by US producer Ampex) for use by professional broadcasters. Sony, the giant Matsushita, JVC and others had cooperated in the early 1970s to produce a cassette-based product (the ‘VCR’) for consumers called U-Matic but this had proved unsuccessful for home use (although we did have one at school: it was massive and, by all accounts, massively expensive).

Afterwards, Sony decided to develop a better successor on its own (called Betamax) based in large part on improvements to the U-Matic blueprint. So did JVC, but JVC’s design (called VHS) although also based on U-Matic, was incompatible with Betamax since it was housed in a larger cassette. A handful of other companies around the world had also been developing propriety standards but, with the exception of Philips in Europe, all these efforts were abandoned in the face of the clearly superior Japanese technology.

Attempts were made by Sony in 1974 to persuade JVC and Matsushita to adopt Betamax but these efforts failed, mainly because the small Betamax tape could only record one hour of material – an amount considered insufficient by these two firms. This consideration also resulted in American TV giant RCA refusing to sign up to Sony’s standard although it did abandon its own home video tape programme. Despite this, after work to increase its tape length to two hours, Sony went ahead and launched its machines in 1975. Throughout 1976 it continued to try to assemble an alliance to support VHS but, with the exception of Sanyo and Toshiba, the rest decided to wait until the launch of JVC’s VHS. At this, competition started in earnest.

Without first mover advantage and as the smaller underdog in the battle, JVC’s strategy was to assemble as wide an alliance of partners as possible, quickly. Sony was hampered in its attempts to do so partly by its attitude to negotiation (it had felt slowed down by its partners in the development of U-Matic and was now unwilling to compromise its design) and by its stance of not building machines for other firms to re-label (so called OEM manufacture). JVC was more flexible – going as far as to allow its partners a say in the final VHS specification. As a result, it gained the support of Matsushita (JVC’s parent) – a move that was to prove decisive since, in time, Matsushita, “[established] production capacity for the VHS that exceeded the combined capacities of all other Japanese VCR producers”. [1]

Matsushita also proved vital to the success of VHS when, in 1977, they managed to tie in RCA in the USA by responding to RCA’s demands that machines could tape an entire American football match by increasing the tape’s capacity to four hours (an engineering task they accomplished in only two months). The VHS alliance also proved successful at signing up distribution. The cooperation of the manufacturers of colour televisions was critical to this effort since video recorders were demonstrated and stocked in the same outlets as sold TVs. The VHS family had a lead in this regard both in Japan (with 60% of colour TV sales) and in Europe, and also had an slight edge in the USA (49% for VHS vs. 41% for Betamax) where RCA’s presence in the VHS camp was vital to attract other US players.

Once these alliances were in place, the manufacturing might of Matsushita came into its own. It had invested in scale manufacturing capacity and its expertise in mass production, as well as the VHS alliance’s emphasis on a simple-to-manufacture design, meant that high volume was possible from the start and so unit costs were soon dropping fast. By 1977, Zenith (Sony’s US TV-manufacturer partner) “demanded a renegotiation of its OEM agreement with Sony, to whom it was paying $100 more for Beta machines than RCA paid Matsushita for VHS machines”. [2]

In terms of outright product quality the two families of machine were, in time, broadly similar with regards tape timings, picture quality and machine features – despite later folklore that Betamax was superior, “technical experts…have concluded that this was, in fact, not the case”. [3] So much for my memory of Betamax being ‘better’.

It is possible that Betamax could still have survived as a format and even gone on to be dominant had the market not developed in one further way. Originally envisioned as a machine to allow home taping (for watching TV programmes at a later time – so-called ‘time shifting) or as a technology for home filmmaking (in competition with Super-8) the market was thought to be niche. In fact, the market became mainstream, especially in European markets like the UK where, by 1983 almost 30% of homes had a VCR. As more people owned machines, a third use (to watch pre-recorded videos at home) became more important.

It was now, in the mid-1980s, that network effects became vital: customers would buy machines if they thought there would be software to play on them. The VHS side was effective at making sure software was available: RCA’s alliance with the Magnetic Video Corporation of America (aided by Matsushita’s provision of low-cost bulk copying machines) ensured that VHS tapes were much more plentiful than their Betamax rivals. This prompted more sales of VHS machines and the positive feedback loop continued. Sales of VHS exploded at Betamax’s expense (my first ever machine, bought using my second ever pay packet was a VHS) and, in time, in the late 1980s, Sony gave up production of Betamax.

The triumph of VHS was thus – primarily – a function of artful strategy in alliance building. Whether it was alliances in manufacturing (in which the presence of the behemoth Matsushita was critical), in distribution or in leveraging the gradual, grinding power of network effects for complementary products (film software), the VHS side did these things better than Sony/Betamax. It is here, rather than outright product quality that the key to the victory can be found.

Apart from the nostalgia of thinking again about the technology of my young adulthood, why do I bring up this story? In part, because we can still see similar patterns in today’s world of consumer electronics (games console wars, IOS vs. Android, even the charging technology for electric cars). But the interesting comparison in my view is with the attempt to launch cryptocurrencies. To triumph, one of the multitudes of ‘x-coins’ will need to get mass consumer acceptance in the face of indifference, lack of trust or even hostility. Who, if anyone, will win? The example of VHS versus Betamax suggests that it might be the clever creation of alliances (Banks?  Credit-card companies?  Retailers?) and the resultant network effects – rather than first mover advantage or technological brilliance – that will be crucial.

[1] Cusumano, Mylonadis, Rosenbloom, ‘Strategic maneuvering and mass-market dynamics: The triumph of VHS over Beta’, Business History Review (Spring 1992)

[2] ibid

[3] p222, S. J. Liebowitz and Stephen E. Margolis, ‘Path Dependence, Lock-in, and History’, Journal of Law, Economics, & Organization, Vol. 11, No. 1 (Apr., 1995), pp. 205-226