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Toshiba Knew When to Quit -- So Should Your Biz

Toshiba's losing battle over DVD formats is a lesson for small businesses.

Losing an all-out business battle can sting.

Just ask executives at

Toshiba

. This week the electronics maker threw in the towel in its format war with

Sony

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by announcing it is abandoning HD DVD, a format it developed for high-definition movie players and DVDs.

Competition can be a great motivator. But when a business rival sprints too far ahead, can quitting be a winning strategy?

For Toshiba, the answer may be yes. The company likely made a wise move by walking away and leaving Blu-ray, a competing standard from Sony, as the lone player in the field. (Sony, you may remember, was in Toshiba's shoes once, when its Betamax format lost out to Matsushita's VHS in the 1980s.)

Gearheads can debate which format was better technically, but the larger story is that Sony outplayed its rival, winning crucial supporters to its side.

The lesson for your small business?

It's not enough to be the first (as Toshiba was). It's not even enough to be the best (as Toshiba might have been). At some point, a rival may outpace you, and good managers know when to cut their losses rather than hang on out of pride.

Granted, it's no fun to fail. But smart companies don't drag out costly wars. They back off and stay in business, ready to fight another day.

Initially, HD DVD and Blu-ray were evenly matched. DVDs are dependent on content from movie and TV studios, so their choice of format was critical. Some studios signed exclusive deals with Toshiba for HD DVD, others went with Blu-ray, and some offered both.

But sales remained so negligible that no clear winner emerged. As Americans began upgrading to ever-larger high-definition TVs in recent years, retailers and content providers assumed those consumers would invest in high-definition DVDs to play on those huge screens. But faced with two incompatible formats, shoppers were wary of committing to either one, afraid they'd be caught on the losing side.

Until recently, the battle was still anyone's game.

Then came the big blow: Warner Home Video, a division of

Time Warner

(TWX)

, announced it was going with Blu-ray exclusively. As Warner Brothers has the largest film library of any studio, it was the beginning of the end for Toshiba's HD DVD format.

"That was the pivotal point," says Steve Swasey, vice president of corporate communications for video rental service

Netflix

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, which was at the Consumer Electronics Show in January when the announcement was made. "The change in attitude was apparent immediately."

Gradually, the dominoes began to fall.

Best Buy

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and

Wal-Mart

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announced they would stock only Blu-ray discs, as did Netflix.

"As long as there was no consumer or studio preference, we were agnostic on the format," says Swasey. "But once you have four of the six major studios behind Blu-ray, we'll follow the trend that has been established."

How did Sony get the crucial Warner Brothers endorsement? According to

an article in

TheNew York Times

, Toshiba offered financial incentives to studios. Sony probably did as well, though no one is talking.

Was it simply a matter of Sony bribing its way to the top?

Not necessarily.

Analysts estimate that Blu-ray titles were outselling HD DVD movies by two to one, perhaps because anyone who owned a PlayStation 3 could play them. Last summer,

Blockbuster

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decided to stock only Blu-ray titles in its stores, citing customer rental patterns.

At Netflix, Blu-ray titles have been rented more frequently than HD DVD movies, but Swasey notes that both remain a tiny proportion of the company's business. Like others with a stake in the movie-rental business, he expects the move to one format to jump-start the high-definition movie business.

"Customers have been sitting on the sidelines," he says. "Over time, this will give further life to the DVD format. For us, it's good news."

And for Toshiba, the news isn't all bad. The company says it expects profits to rise next year, since it will save the money it would have used to promote HD DVD.

Elizabeth Blackwell is a freelance writer based in Chicago. She is the author of Frommer's Chicago guidebook, and writes for the Wall Street Journal, Chicago, and other national magazines.