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Sony Initiates Standards War in e-Readers

April 2010 Pricing

In the last weeks of March 2010, just before the media hoopla hit a crescendo on the release of the first Apple iPad, Sony took a shot to establish a more tenable position within the e-Reader market by dropping the price on the Sony Pocket Reader to $169.  Is this the beginning of a standards war or a last ditch attempt to move units before Sony finds itself left in the wake of the Apple iPad?

Standards Wars

Sony has fought standards wars in the past.  First, in the late seventies, Sony fought and lost a decade long standards war between the Betamax vs. VHS videocassette formats.  More recently, in the mid zeros, Sony fought and won a two year long standards war between the Blu-ray and HD-DVD video disc formats.  From their experience, Sony should be in a position to detect the early signs of a standards war, understand the value of winning a standards war, and know the early steps to take to win a standards war.

Step 1:  Take Market Share.  Standards wars are won and lost on market share.  If we consider the economics of standards, we quickly realize that value is driven through network effects where the value of the network increases with the square of the number of members within the network.  Hence, market share becomes an indicator of value in and of itself.  And, market share is the largest determinant of winning.

Sony discounted their Pocket Reader by $30 only through April 4th, the day after the iPad was available at retail.  At the time of writing, we can’t be sure whether Sony will lower the price further in the coming weeks, hold steady, or raise it again.  But we are confident that the price drop was motivated by the desire to take market share.

But is this really the beginning of standards war?  True, the e-Reader market does benefit from some network effects as publishers find it increasingly expensive to prepare newspapers, magazines, online periodicals, and books for the increasing variety of e-Readers.  However, to date, the publisher side of the market has accepted the variety of publication formats with some level of grin-and-bear-it.  We don’t know if or when a majority of publishers will decide to streamline costs and adapt a single e-Reader format.  (For instance, The Wiglaf Journal boasts nearly 4,000 monthly readers yet has chosen to avoid the expense of publishing in a variety of formats for the increasing variety of handheld electronic devises.)

Price to Value Differential

Hence, the price drop might be better positioned as an acknowledgement of the value differential between a pure e-Reader and a more multifunctional device such as a netbook, iPad, or iPhone.

While a pure e-Reader may currently provide a superior experience in reading periodicals digitally, it is not hard to conjecture that the iPad will soon meet or exceed that experience.  Furthermore, the iPad provides further functionality similar to a netbook or PSP to provide a mobile computing, gaming, and entertainment platform as well as e-Reader functionality.  Hence, the economic value of having a pure black & white e-Reader may be significantly less than that of a $500 multipurpose color device, which encourages some analysts to conjecture that the appropriate price for a pure e-Reader is in the sub $100 range.

If the value of a pure e-Reader does drop below $100, then Sony’s move might best be interpreted as a last ditch effort to move product at a profit before it determines that it is in their best interest to exit the pure e-Reader market.  If Sony can maintain the desired volume in the increasingly crowded e-Reader market however, then we might be seeing the beginnings of a technological standards war.  Which is true?  To take a lesson from the effectual decision making patterns of highly successful entrepreneurs, the future is co-created by our own actions and those who we can encourage to join us.  At least we can all agree that Sony is trying to improve its position for the multiple future scenarios.

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About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

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