The Sony MiniDisc
Brandon Seong-Shin Hong
Econ 113 / STS 107
March 8, 2000
The past few decades have witnessed monumental advances in the consumer electronics industry. With the growing worldwide economy and the advent of new technologies from DVD to MP3 players, it is no wonder that consumer electronics have evolved from just techno-toys to an incredibly lucrative business. One company that has lead if not directed the evolution of the consumer electronics industry is the Sony Corporation. Its global presence is undeniable and its ubiquitous products are an integral part of our lives, whether we realize it or not. As Paul Kunkel, author of Digital Dreams, writes:
These manufactured products - be they telephones, televisions, cameras, clothing, automobiles, or furniture - are "silent persuaders," influencing our thoughts, choreographing our behavior and guiding our decisions in ways that are both obvious and subtle. No phenomenon in modern history has had such a profound effect on human society as the advent of personal electronics.
In particular, this paper will focus on Sony's newest portable audio product, the MiniDisc (MD). The successes of Sony's previous products are quite clear: radios, Walkmans, and Discmans are everywhere, in both the United States and Japan. Interestingly, however, MD's are overwhelmingly popular in Japan but completely lackluster in the United States. As an example, in 1997, 5 million MD players were sold in Japan whereas only 1 million MD players were sold in the United States. This dichotomy can be attributed to several social and economic factors, which will be explained, that resulted in a more receptive Japanese market and a less receptive American market.
Nevertheless, Sony seemingly ignored these factors and mounted four major, multi-million dollar marketing campaigns from the years 1992 to 1998 to increase sales of MDs in the United States. Unfortunately, as we will see, Sony did not realize that the inferior performance of MD sales in the United States did not occur because of its ostensibly poor marketing strategies, but rather because of the unreceptive American consumer market which vastly differed from the receptive Japanese consumer market.
What is a MiniDisc?
Before we begin, it is important to familiarize with MD technology. After all, a significant portion of the American population is still completely unaware that it exists. Sony designed and developed MD in 1986 and launched in 1992. The MD looks like a small compact disc: the diameter of a CD is 5.25" while that of an MD is a mere 2.5". Following CD technology, MD technology uses a laser beam to read the information, but that is where the similarities end. MDs are magnetically encoded whereas CDs use physical grooves and pits to indicate the binary code. Also, MDs are considerably more shock-resistant; the 40-second digital buffer system utilized by MD players is far superior to most portable CD players' shock-resistant technology. Indeed, one can vigorously shake an MD player and no skipping would occur; a CD player would skip endlessly under the same conditions.
Sony emphasizes that MD technology combines the best of both audio cassettes and CDs. Recording mixes on MD is greatly improved over cassettes because MDs treat music as data - computer files that can be manipulated, moved, and erased. In a similar fashion to hard disks, MDs have a Table of Contents (TOC) that indicates which sectors contain important data. In this way, songs can be completely fragmented, with seconds at one sector of the disc and minutes at another sector. Not one precious second is wasted because the reading laser can jump from any sector to sector by simply following the TOC's directions. Therefore, after a full night of recording, one can erase any track at will and still have a seamless mix of music; no ugly gaps of filler appear. This effortless recording manipulation combined with instant playback track access (as we are accustomed to with CDs) seems to present the best of two worlds in one small package.
However, the MD's sound quality is slightly inferior to that of CDs. To fit the same amount of information on a 2.5" disc, Sony utilized a compression system called ATRAC (Adaptive Transform Acoustic Coding), which saves space by recording only audible sounds. As a result, ATRAC has a five-to-one compression rate and all the data is able to fit on the MD. Understandably, several audiophiles have criticized the "near-CD" quality that audio MDs provide. They claim that a substantial amount of clarity is lost with the ATRAC system. But, as Popular Mechanics magazine states, "In the portable listening environment for which MD was designed - outdoors or in a car - you'd be hard-pressed to tell the difference between MD and the original."
Sony Philosophy and MD Product Design
First, it must be warned that this paper will focus exclusively on Sony for the sake of brevity. Sony invented the MD technology and has continued to support it, so by examining Sony one can get an overall picture throughout MD's development. Recently, numerous other companies have produced MD players, recorders, and blank discs. These companies include Sharp, Kenwood, Denon, Pioneer, JVC, Teac, Alpine, and Clarion. In future research, the market behavior of these companies should be taken into account as well.
The Sony philosophy should be very interesting to any business, considering the inconceivable success of the company. In Digital Dreams, Paul Kunkel explains that "innovation is the first goal. The second is "to always lead and never follow." Sony founder Akio Morita once said, "If you ask the public what they think they will need, you will always be behind in this world. You will never catch up unless you think one to ten years in advance and create a market for the items you think the public will accept at that time." As a result, ironically, the "greatest successes have come from products for which there was no proven demand. The classic example is the Walkman, which many people (even inside Sony) greeted with skepticism."
Interestingly, "with technology now within everyone's grasp and prices dropping every year, consumer electronics would quickly become commodity items if people did not yearn for products with an image, tactile quality, symbolism, and story that give the products value and meaning." The Sony Design Center was created in 1961 to fulfill these goals; no other company at the time desired a strictly in-house design and packaging program.
One of the most intriguing ideas from the Sony Design Center is its product development model. The paradigm is called Sunrise/Sunset, based on the passing hours of a single day. This strategy allows the Sony Design Center to "always stay on step ahead of the public's imagination." Paul Kunkel explains:
Take into account that first products are often experimental and too expensive, with more attention given to the engineering than to the design, and thus bear little resemblance to the "ultimate" design that will appear in the months to come. As competition increases, the urge to create a "knockout" version of the product will result in a design that is later seen as the "icon" from which all succeeding versions will flow. As product volumes grow, the multiplicity of tastes that exist in society will require that the design and feature set appeal to many different audiences at one, causing the product line to split into two or more families.
It is at this point where MD Walkmans have evolved. After the first clunky MZ-2P model introduced in 1992, the designers worked to get the "icon" design. The Icon Design was achieved with the MZ-E30 in 1996 when the product size was comparable to the length and width of an MD case. Shortly after, in 1998, the MZ-R55 recorder/player was produced - it was the world's smallest MD recorder/player at the time. Several other models are drastically different in form, reflecting the post-icon stage of design at the Sony Design Center.
It is interesting to realize that MD Walkmans have past the "icon" stage in Japan but have not even gained significant market share in the United States. With further product designs and reduced prices due to economies of scale in Japan, perhaps the American market will more readily accept MD as a replacement for cassettes.
I. The receptive MD consumer market in Japan
The MD format is clearly not a fad and will stay for years to come - in 1997, 6.3 million MDs were sold worldwide and it is expected to reach 22.9 million by 2000. In Japan, sales of MD players finally exceeded that of CD players in 1998, indicating that consumers are becoming more loyal to the MD format. In 1997, it was estimated that MD sales accounted for more than 60 percent of total hi-fi sales, and by 1998, 25 percent of Japanese households had an MD system. This superb market domination is considerable for a relatively new technology.
Several economic and social factors setup the Japanese consumer electronics market to accept the MD as a portable music medium. The most compelling explanation for MD's success in Japan results from examining the effects of Japan's expensive CD market (A). Other explanations include (B) the existence of Japan's "early adopter market" that buys the newest, expensive technology; (C) the popularity of one-hit wonders in the Japanese teenager market; and (D) the network effects on MD sales from this demand for one-hit wonders.
A. The effects of higher CD prices in Japan
In the past decade, CD prices in Japan have been much higher than in the United States. In the late 1980s, a CD priced at $15 in the United States would go for about 3000 yen ($30). Although CD prices in Japan have been falling steadily since then - most CDs now cost about 2000 yen ($20) - the prices are still artificially high. Professor Richard Dasher, Director of the US-Japan Technology Management Center at Stanford University, explains this phenomenon: "The Japan market is generally considered to be an `organized market' (i.e. less sensitive to price competition and more characterized by long term relationships, especially in distribution chains)." In other words, the distribution companies in Japan are not as efficient as those in the price-driven US market and as a result CD prices in Japan are higher.
Interestingly, the high CD prices led to the establishment of CD rental stores. Although the concept of CD rental stores is wholly foreign to Americans, they are "more ubiquitous [in Japan] than video rental outlets in Canada". For just two American dollars, one can rent a CD overnight. Understandably, this practice seems highly illegal and the Japanese recording industry, along with nonprofit royalty organization JASRAC, "was extremely unhappy with rental CD shops. However, they didn't have the political clout to get the government to make them illegal." Instead, the Japanese record companies desperately rallied to setup laws that charge royalties on blank tapes (and later, MDs), but the Japanese government still did not consent.
So as a result, CD rental shops appeared all over Japan. Before MDs, the rented CDs would have been copied onto cassette tapes (which had poor sound quality and would eventually erode), but MD recording technology caused renting CDs to be substantially more appealing. Indeed, it is no wonder why MDs are so popular given the choice of a) purchasing a $30 CD or b) renting a CD for $2 and mixing favorite songs onto MD. The MD recorders perfectly complemented the cheap CD rental phenomenon in Japan.
B. The effects of Japan's early adopter market
Although the "higher CD price effect" discussed above is very appealing, other general factors probably contribute to the higher MD sales in Japan. One such factor is the early adopter market as described by Professor Dasher. In general, Japanese consumers purchase new and expensive technologies faster than the average consumer. He states, " Japan has a very active early adopter market, especially in electronics. The success of new electronic products that have relatively high prices must certainly be related to the large amount of disposable income that Japanese teenagers have." A writer from Popular Mechanics agrees with Professor Dasher:
Japan is a very crowded country. There's not much real estate left to buy nor large homes that are affordable. Consequently, compared to the United States, less disposable income goes toward the purchase of real estate or large products for the home. That leaves lots of disposable income to spend on gadgets. It's no wonder technology moves at a faster rate [in Japan] - to keep up with demand.
With these phenomena in mind, it is easy to see why Japanese consumers are often viewed as technophiles because they purchase the newest technologies despite their outrageous prices. When the MD debuted in 1992, perhaps these technophiles helped to create a significant demand for MD products.
C. The effect of popular singles on pre-recorded MD sales
Although this point is more peripheral than the others explored above, it is interesting to note because of cultural differences. According to accounts from colleagues who have visited Japan, the amount of CD and MD singles sold in Japanese record stores far exceeds that in the United States. The reason for this large difference is the mentality of the Japanese teenager market. They love popular "one-hit wonder" singles, known as "Enka." Tobey Grumet explains in a Popular Mechanics article: "Every month in Japan, a new pop artist comes to market with a brand-new song which sells like wildfire. Enka comprises most of the MDs in Japan, making the format a deep-seated part of the culture."
Indeed, the Japanese youth market is quite unique because of its selective and technophilic nature. David Lammers describes in an EETimes article, "There are interesting differences in priorities among the major markets of the world. Young Japanese commuters, crowded onto trains, value the smaller size. But Europeans prize audio quality, and most Americans look carefully at the price tag." Although Lammers may be generalizing a bit, he makes a valid point by implying that different cultures place value on different aspects of a new technology.
For example, Professor Nathan Rosenberg of Stanford University has emphasized the differences between Japan and the US resulting from their factor endowments (natural resources). One of his examples is the use of airplanes to dump seeds on farmland in America. Obviously this method of "planting" would not work in Japan, of which only a fraction is arable. Thus Japan's interest in size of consumer electronics and America's interest in price could be legitimate claims.
As we will see, in 1992, the American market was highly averse to purchasing the expensive MD players and discs.
D. The network effects from Enka demand
Moreover, the Japanese youths' demand for pre-recorded "Enka" probably produced a network effect that drove MD player sales. An excellent definition of a network effect is found in a paper by Jeffrey Church and Neil Gandal:
The benefit from consuming durables [MD players] often depends on the consumption of supporting of complementary goods [pre-recorded MDs]. The greater the variety of compatible complementary goods, the "software," the greater the value of the services rendered by the capital good, the "hardware," and hence the greater the willingness of a consumer to pay for the hardware good.
In other words, the large demand for pre-recorded Enka MDs allowed producers such as Sony to lower prices of their MD players through economies of scale. Thus, both the consumers and producers of MD technology benefited from the network effect described above. As we will see, the American market lacked this network effect and thus suffered from high prices due to diseconomies of scale.
II. The unreceptive MD consumer market in the United States
In stark contrast to the blistering success of MD in Japan, MD sales in the United States have been dismal at best. For example, within the five years after the 1992 launch, only 500,000 units were sold in the United States. That pales in comparison to the 5 million units sold in Japan in 1997 alone. In response, Sony launched numerous marketing campaigns to get Americans interested in MD technology.
Although these campaigns garnered public awareness, consumers did not purchase MDs because of economic and social factors that, in general, made the American market unreceptive to MD technology. First, (A) the American market lacked the "high CD price effect" described for the Japanese market, and as a result had less disposable income. Thus consumers were more cautious and did not see how MD offered a significant advantage (10X rule explained later) over the CD and cassette. Other factors include (B) the simultaneous emergence of comparable audio formats which led to consumer confusion and apathy; (C) the entrenchment of audio cassettes in American culture; and (D) the Record Industry Association of America's powerful influence; and (E) the lack of record company support for the MD format.
Sony's marketing campaigns in the United States
Before we begin to discuss the economic and social factors that made the American market unreceptive to MD technology, it is interesting to see how diligently Sony marketed its product in the United States despite repeatedly disappointing sales. Almost stubbornly, Sony initiated successively larger and more expensive campaigns.
1992 - Launch
The first launch in December 1992 flopped embarrassingly - within a year, fewer than 50,000 units were sold. Kevin Hunt of the Los Angeles Times parallels this poor performance with Sony's Betamax struggle: "Not since consumers chose the longer-playing VHS format over the technically superior Beta in the VCR market had Sony experienced such a defeat."
The first-generation MD players were priced at $549 while the first-generation MD recorders were priced at a whopping $750. Jeffrey Trachtenberg of the Wall Street Journal describes Sony's blunder: "Sony mistakenly targeted its advertising and marketing efforts at the MTV generation, which couldn't afford MiniDisc players or recorders." Kevin Hunt also explains the flop with MD's lower sound quality: "Hard-core audio enthusiasts also rejected the format because the rate of compression necessary to fit music on such a small disc affected sound quality."
Another explanation for MD's poor entrance in the American market deals with CD's incredible growth in 1992. Mark Viken, senior vice president of personal audio-video products for Sony Electronics, illustrates the phenomenon: "If you look at 1992, the CD was still in an amazing growth stage. People were still converting their LP collections to CD, and the MiniDisc didn't appear to offer them anything new."
1994 - Media Blitz
Sony's second campaign in 1994 was just as disappointing. Jeffrey Trachtenberg explains that from April 1 to December 31, Sony launched a media blitz that included "coupons redeemable for free Sony MiniDiscs, extensive magazine advertising, and a giveaway program tied to Rolling Stone magazine." The coupons, called Sony Mini Money and worth $300 of MD music, were issued to consumers who purchased the new playback-only model. In addition, Sony gave away 1.1 million MD samplers to subscribers of Rolling Stone.
Although this 1994 campaign is "widely regarded as one of the biggest music promotion giveaways ever," sales in the following years were still mediocre. Only about 400,000 units were sold in 1994, leading to concern whether MD was ever going to make it. Although sales were unarguably increasing, it was probably more due to such large-scale marketing than genuine interest in the product. Sony's hubris in its products is apparent in the following marketing campaigns.
1996 - "Where the Music Takes You"
The third major campaign occurred in 1996, labeled "Where the Music Takes You." According to Robert R. Nell, Sony vice president of personal audio, this promotion was "one of the most aggressive and largest advertising and promotional campaigns that has been conducted by Sony." As we just saw earlier though, Sony's 1994 campaign was already one of the biggest promotions ever, so it seems Sony was attempting to out-do itself in 1996.
The focus of the 1996 campaign was on the declining portable audio market, namely cassettes. Nell stated that "50 percent of our print advertising is in MiniDisc," which is a considerable amount devoted to just one product. The advertisements emphasized MD's recording capabilities: "The horse, the automobile. The typewriter, the computer. The cassette tape, the Digital Recordable MiniDisc." This new approach to advertising showed that the MiniDisc is a great complement for CDs; MDs are not a replacement for CDs, but rather a replacement for cassettes. Mark Viken, senior vice president of Sony's personal A/V division, stated that MDs had "a slow start" in the United States because of this consumer confusion. "They assumed we were trying to replace their CD collection." However, the Japanese market did not seem to share this confusion; this issue was never even addressed in any of the publications reviewed for this paper.
It is important to note here that Sony's representatives have not once mentioned factors other than poor marketing as the reason for poor MD sales in the United States. It seems as if they believed pure marketing generates sales and did not realize that perhaps the American consumer electronics market was not ready for MD technology, as we will see.
1998 - "Year of the MiniDisc"
After the aforementioned massive marketing pushes, the public should have been at least aware of the MD format, but surprisingly this result did not occur. According to the Arizona Star, Sony Electronics research found that by 1998 "almost 75 percent of American adults were not aware of the format." In its latest attempt to impress the American public, Sony declared 1998 "The Year of the MiniDisc." Mark Viken, in a familiar tone, stated that "1998 will be the biggest campaign in audio history in the US." A Los Angeles Times article described this campaign, named "Make It With MD": "the company will spend an estimated $30 million and will include extensive retail promotions, co-branding opportunities, and sponsorships." In addition to standard print and television advertising, Sony marketed MD with the NBA's "Million Dollar Shot," on the VH1 Fashion Awards, and in Old Navy clothing stores; the scope of Sony's marketing campaign this time was truly unprecedented for the audio market.
The prices of the 1998 models were much lower than the first-generation models in 1992. For example, bookshelf systems went from about $750 to $400 while portable players went from $550 to $250. Sony hoped that these lower prices would be more amenable to the American market, and indeed, sales increased probably due to its affordability. Viken extrapolated that the difference between US and Japanese listeners is that "the US market is a bit more sensitive to price points." So it seems that Sony's representatives finally decided to regard price as the limiting factor to sales instead of the misconception that MDs were going to replace CDs. Sony concedes that it may take another five to eight years for MD prices to become affordable to the mass public. However, they may still be unaware of more fundamental reasons why the American consumer is unreceptive to MD technology.
A. The effects of American consumers' lower disposable income
Before continuing, it is important to realize that no single one of the following explanations is sufficient to justify the poor sales of MDs in the United States. They may all be necessary, but they are not all sufficient. For example, after examining the Japanese market, the most compelling argument is that since the American market lacks the "high CD price effect" found in Japan (CDs are affordable here), MDs would not offer a convenient solution to the popular CD-cassette standard (as they did in Japan). In other words, no "solution" would be necessary because there is no problem - CDs are affordable here. However, if we suppose that the United States has the "high CD price effect" and CD rental stores found in Japan, we could not immediately assume that MDs would sell here. Indeed, there are several economic and social factors that prevent MDs from becoming mainstream, even with a hypothetical "high CD price effect."
First, it is interesting to notice that the American consumer market is not an active early adopter market (as seen in Japan). Professor Richard Dasher conjectured that the active early adopter market in Japan exists because of a large amount of disposable income among Japanese consumers. As described in the Popular Mechanics article referenced earlier, Americans probably have less disposable income to spend on gadgets because they purchase more real estate and larger products for the home.
Therefore, one can assume that American consumers are, with less disposable income, more impressed by real improvements in new technology instead of novelty or wow-factor. In order to become mainstream, MDs would have to offer a certain affordable improvement over the CD-cassette standard already entrenched in our society. For example, the CD became so popular after its introduction in 1982 because it offered a worthwhile improvement over vinyl records. A 1996 article in The Economist describes this requirement:
Since the success of CDs venture capitalists have introduced a rule of thumb known as the 10X rule to help them decide which ventures to back. They ask themselves the question `Is this thing ten times better than what it is replacing?' Or perhaps more accurately `Will consumers perceive it to be sufficiently better to think it worth the upheaval of changing?'
Although the 10X rule is alarmingly subjective, it serves as a useful guide when considering the performance of a new technology.
An example of a technology that failed the 10X rule is Sony's Digital Audio Tape (DAT), introduced in 1987. Although DAT was better than CDs because it could record and better than tapes because of improved sound quality, it was not worth the upheaval of changing over from CDs and cassettes. In other words, the low prices from the established network effects between producers and consumers of CDs and cassettes were much more appealing than a slightly better product. Therefore, DAT failed in the mass market.
B. Consumer apathy because other audio formats offered just as much as MD
Unfortunately for Sony, MD was introduced and marketed at a time when numerous other audio formats were being introduced. This situation led to consumer confusion and ultimately to apathy and wariness of any new audio technology. So before proving that MD is 10 times better than the widely used audio cassette, Sony had to prove that MD was superior to the other new audio formats. Only then would consumers consider a pure MD versus audio cassette comparison.
As we will see, Sony would have a rough time proving MD's superiority because all of these formats have comparable advantages. First we will compare MD to the new audio formats, then we will return to the more fundamental question of why is it so difficult to replace the audio cassette (with MD or any new format for that matter).
MD versus DCC
At launch in 1992, MD's biggest nemesis was the Digital Compact Cassette (DCC), developed jointly by Philips and Matsushita. Also, as technology improved in the 1990s, MD had to vie for attention with CD-R (recordable CDs), CD-RW (rewriteable CDs), MP3 players, and DVD Audio. It is no wonder then that American consumers kept their cash in their wallets and stayed put until the "winner" of the next audio format war became apparent.
Professor Richard Dasher explains how DCC and MD became antagonists in 1992:
At the time, the market for DAT was already becoming restricted to the high-end audio folks like new artists and artist-wannabees for making master demo tapes to send to the record companies. It was a dud in the mass market. Consequently, there was a lot of speculation over an upcoming market battle between mini-disk and the Philips standard for digital audio cassette. People were expecting Beta versus VHS all over again.
Philips and Matsushita also attempted to use DCC to replace the audio cassette, emphasizing DCC's higher sound quality and durability. Philips and Matsushita bet on the fact that DCC players are "backward compatible," that is they can also play regular analog tapes that are everywhere. However, DCC does have its disadvantages compared to MD: DCC lacks instant track access - one has to wait while the machine rewinds or fast-forwards - and DCC has spools and tape, which can wear and break over time. As described earlier, MDs have instant track access and are much more durable because there are no moving parts.
The 1996 article from The Economist that describes the 10X rule also summarizes the result of the pseudo VHS-Beta war between DCC and MD:
It was billed as the biggest bloodiest fight-of-the-formats since the video-cassette recorder duel between Betamax and VHS. But it wasn't. The two did not lay a glove on each other. Instead both were floored by existing technologies [i.e. CDs].
Indeed, neither format won. Both technologies seemed to fail the 10X rule in America because their features were not compelling enough and they did not offer substantially higher sound quality over CDs. Philips and Matsushita, disappointed with sales and realizing that tapes were becoming low-tech, soon dropped DCC altogether. However, Sony continued to market MD in America because of its phenomenal success in Japan.
MD versus CD-R, CD-RW, MP3, and DVD Audio
The more recent technologies such as CD-R, CD-RW, MP3, and DVD Audio also confused consumers because each has the potential to be the next audio format. Since it is beyond the scope of this paper to investigate the details of each format, it is enough to examine why each format would cause a consumer to think twice when considering an investment in MD technology.
First, both CD-R and CD-RW technology require a computer, which in effect is extra hassle and investment. Current CD-RW prices are about $250, but added to a capable computer the total price soars way above $1000. Although the mass market would normally avoid such extra hassles, CD-Rs have become popular simply because CD players are ubiquitous. Audiophiles burn personally mixed CD-Rs with their computers and can play the discs anywhere. However, unlike MDs, once a CD-R is made, it cannot be altered; for example, if you want a different song on track 7, you would have to start all over and burn another CD-R - the first CD-R you made would go to waste. Although MD tracks can be re-recorded and manipulated with ease, you would still be able to play MDs on MD players. Thus, MD's exclusive compatibility makes CD-Rs more appealing. Nevertheless, it seems that the "near-CD" sound quality of MDs has lead consumers to stick with their CDs.
CD-RWs are quite different from CD-Rs because CD-RWs can play only on CD-RW compatible drives. In fact, it is a common misconception that CD-RWs can be played on normal CD players. This confusion may frustrate some consumers who decide to invest in CD-RWs, believing that they get the best of both CD-R's (knowing you can play them anywhere) and MDs (re-recordability). Therefore, all that CD-RW technology does is add to audio consumer confusion. Until mainstream CD players can play CD-RWs, MDs are more appealing because an expensive computer is not required for MD recording.
MP3 players such as the Diamond Rio or Creative Nomad have burst onto the portable audio market a few years ago. The biggest advantage of an MP3 player over MD is its solid-state technology. With no moving parts, the result is lengthy playback time (12 hours with one AA battery), incredibly small size (smaller than a deck of cards), quick transfer rate (copying from your computer to MP3 player takes a few minutes) and almost infinite shock-resistance (it will never skip). Current prices for 64 megabyte MP3 players run from $250 to $300. These prices are very competitive with current MD prices, which range from $250-$400.
However, there is a downside to MP3 players' solid-state technology: since the music is stored on pricey flash RAM, you cannot feasibly carry around extra flash RAM if you get tired of the same 14 or 15 songs that fit on a 64 megabyte player. In contrast, blank 74-minute MDs cost only $3 so you could feasibly carry four or five MDs to have some variety in music. Thus, the choice between MP3 player or MD player depends on the type of user. Short-duration users such as commuters should use the smaller MP3 player while long-duration users such as joggers should use MDs for variety.
DVD Audio has just begun to hit the market and sounds like new technology, but it is nothing new to the DVD designers at Pioneer. Although most of us are familiar with DVD movies, we are not aware that their goal is to "provide a single format for the audio-visual market, so eventually it will be possible to have one machine for video, hi-fi, and multimedia." Thus DVD Audio is just like DVD movies, only the data is stored exclusively as sound. DVD stores more than seven times the amount of data as CD because the tracks in a DVD are smaller. With that much more information, DVD Audio can have a wider frequency range than CD, giving a fuller and deeper sound.
Indeed, of all the technologies discussed thus far, DVD Audio is the only one to offer an improvement in sound quality. In addition, all DVD machines are "backward compatible" and can play old music CDs. Although it seems like DVD Audio has already surpassed the 10X rule, the true test will be DVD-RW (rewriteable). With DVD-RW, it would be possible to record home movies as well as music with the same type of disc. It seems that in face of DVD Audio, MDs are only better in size. The next few years will be exciting for the portable audio market as all of these technologies become affordable.
C. The entrenchment of the audio cassette in American culture
Although the Sony Walkman was undeniably successful from its launch in 1979, we easily forget how such a widespread product can affect our daily lives. Paul Kunkel explains in Digital Dreams:
The culture of design and the impact that designers and their works have on society at large may be difficult to comprehend because these designed objects are so prevalent in our day-to-day existence. Most people living in industrialized society are in contact with designed objects every moment of their lives.
Indeed, the Sony Walkman has pervaded not only American culture, but the cultures of most industrialized countries. The Smithsonian Institution recognized this phenomenon in 1987 by accepting the Walkman as a cultural icon.
Considering that Walkman owners must have cassettes to play music, it is safe to assume that audio cassettes are everywhere as well. As late as 1991 pre-recorded cassette sales in the United States were comparable to CD sales: 333 million cassettes to 360 million CDs. However, in Japan the prevalence of cassettes were already fading. In 1991, a mere 45 million cassettes were sold while 300 million CDs were sold. The United States followed suit with declining cassette sales: in 1992, cassettes accounted for 50.8 percent while CDs accounted for 46.7 percent (the rest for vinyl) whereas in 1997 cassettes were 20.7 percent while CDs were 78 percent.
According to this general decline in cassette sales, Mark Viken states that "people are just dissatisfied with audiocassette" because of "the sound quality versus what they're used to with digital." Although Viken's statement seems true with respect to pre-recorded tapes, he neglects the fact that people would still probably buy blank tapes to mix because it is significantly cheaper than Sony's digital alternative.
In fact, the RIAA claims that "with full-length cassettes constituting 16% of all album unit shipments, cassettes remain an important part of the overall market, and manufacturers continue to produce and distribute every genre in this format. Cassettes represent more than $1 billion in sales." Although Sony may claim that the public is tiring of cassettes, the sales speak for themselves.
Digital may be better, but it comes at a cost that the average consumer would not pay. Matthew Simmons, Samsung's marketing manager, describes this sentiment: "The problem is that many people are quite happy to record their CDs on to a cheap tape and take it outside. It does not matter if they drop the tape or get sand in it, it's cheap enough to be almost disposable. The new systems are just too expensive for such treatment."
As an example of public discontent at the continual introduction of new, incompatible technologies, one journalist from the Los Angeles Times harshly criticizes the push for MD to replace cassettes:
These new products represent a form of planned obsolescence for existing equipment. Now that the market for cassette and CD players is saturated, the manufacturers refuse to accept the resulting decline in sales. Instead, they will ask us to abandon music collections accumulated over many years for existing equipment and buy new, incompatible equipment.
Overall, it seems that cassettes will be around for a while because pure economies of scale accumulated as the Walkman industry boomed in the 1980s resulted in extremely cheap blank tape prices. Since current Walkman prices are as low as $30 and blank tapes sell at $1 or less, it is no wonder that the $300 MD Walkmans and $3 blank MDs are not appealing to the average consumer. Although prices may be most important to the consumer, cassettes probably hold a cultural and nostalgic meaning to Americans as well. "Mix" tapes have become ubiquitous and almost everyone has a tape player laying around. In short, Sony's difficulties in selling the MD Walkman are probably a result of its own incredible success with the cassette Walkman.
D. The RIAA's discontent at digital technology
In the past, the Record Industry Association of America (RIAA) has shown that it has considerable clout when it comes to copyright policies. Journalist Alan Goldstein of the St. Petersburg Times offers an example of the RIAA's strength: "DAT taught everyone a lesson. The powerful recording industry gets its way. It long argued that the ability to make near-perfect copies of music would promote unauthorized home taping and cut into the $6.5-billion-a-year prerecorded music market." As a result, Sony's DAT manufacturers were required by law to input a special circuit called SCMS (Serial Copy Management System) that prevented DAT-DAT copying. Sony's manufacturers complained because the special circuit increased the overall price of each unit (premiums go to the record companies as copyright compensation), but the RIAA had gotten its way.
So when Sony introduced the MD in 1992, it avoided a similar fate by creating an incompatibility within different MD discs. MDs store data, so theoretically they could be used for computers and to play movies, just like CDs or DVDs. However, Sony made MD-Audio discs (basically MDs that carry audio information) completely incompatible with MD-Data (discs that carry computer data) drives. The seriousness of such an incompatibility raised more than a few eyebrows. MacWEEK writer Stephan Somogyi laments, "The format that could've annihilated the Zip disk (which didn't even ship until 1995!) was sabotaged by its own creator." Indeed, by making MD-Audio only compatible with MD-Audio players, Sony lost its chance to create a viable multi-format disc.
The overall result of the RIAA's influence on MD-Audio (which also carries SCMS so MD-MD recording is inhibited) was a less versatile disc and more expensive equipment. Therefore, MD had an even smaller chance of competing against cassettes as the new recording format.
At this point, it is important to ask how record companies in Japan affected MD development. Japan's RIAA equivalent, JASRAC, a non-profit organization of record companies that oversee copyright compensation, probably demands much of the same requirements as the RIAA. However, as noted before with the failed attempt to shut down CD rental stores, the record companies in Japan do not seem to have much influence in the government. Instead, as Professor Richard Dasher explains: "It's also possible that the Japanese record industry was waiting to see how the US music industry, whose lobbying power was generally looked on with awe in Japan, would react." Therefore, it seems that Japanese record companies did not do much to influence the portable audio market compared to the RIAA.
E. Lack of record company support for MD
As we have seen before, the establishment of demand for popular singles in Japan ("software") led to increased production of MD players ("hardware"). Conversely, Jeffrey Church and Neil Gandal explain the failure of a product due to the lack of network effects: "No software means no hardware sales, regardless of the price or capabilities of the hardware." Part of the reason for MD's failure in the United States is Sony's inability to marshal record company support to produce pre-recorded MDs. In 1997, industry analysts said that "after supporting MiniDisc somewhat at the launch five years ago, record companies have largely ignored the format, simply due to lack of consumer demand."
For example, Time Warner wavered in its support until it finally proclaimed to back MD at Sony's insistence. And although Sony Music, one of the larger record company conglomerates, obviously supported the MD format, it was not enough. By 1999 only 500 pre-recorded MD titles were available. This amount was paltry compared to the thousands of CD labels available.
If anyone, Sony should know that record company support is vital to MD's success. Sony suffered similar problems with Betamax - without the video recording industry's support, Betamax did not establish network effects and could not benefit from economies of scale. Thus, Betamax was outpriced by VHS and Sony had to abandon the product.
In conclusion, it should be clear that Japan and the United States each had distinct economic and social factors that probably caused differing degrees of receptiveness to MD technology. Although one can ask how receptive these cultures are to any new technology, doing so would involve too many general variables. To make this study feasible, factors were limited to the portable audio market.
In Japan, it seems that the high prices of CDs indirectly resulted in adoption of the MD format. The reason for high CD prices is not perfectly clear, but it has been stipulated that an inefficient distribution system (as described by Professor Dasher) led to artificially high CD prices. These high CD prices led to the establishment of CD rental stores, which allow overnight rentals for only $2. Thus, the demand for an easy recording format increased. MDs took over the personal recording industry because they offer higher, near-CD, sound quality and instant track access - both qualities are inferior in audio cassettes.
In addition, Japanese consumers probably accepted the MD format so quickly because of their early adopter behavior. With more disposable income to spend on gadgets, Japanese consumers do not need the 10X rule to justify purchasing the latest technology. Therefore, when MD was introduced in 1992, the Japanese saw it as a worthwhile investment over audio cassettes. Also, the demand for MDs probably compounded from Japanese teenagers' love of popular singles, or Enka. With such a high demand for recordable MD products, a network effect was established between the Japanese consumers and MD manufacturers. As sales increased, the manufacturers could reduce prices through economies of scale.
When all of these factors are considered together, it seems that the Japanese portable audio market was unique and "just right" for the introduction of MD technology. However, when we looked at the American portable audio market, we saw that Sony's marketing troubles probably occurred due to more fundamental economic and social factors.
Through Sony's expensive marketing pushes, which "failed" in the sense that they generated less than expected sales, Sony quickly learned that Americans are much more price-sensitive than Japanese. Why this did not occur to them from previous experience is still a mystery. Perhaps Sony had put so much faith in their newest technology that they forgot how price-sensitive Americans are compared to the Japanese. Indeed, Paul Kunkel in Digital Dreams recognizes that Sony uses "the best technology to create something that excites [them], refine that product and try to create a market for it by educating and communicating with the public."
In the United States, consumers generally have less disposable income to spend on gadgets because of higher expenses on real estate and large household products. This increased price sensitivity required that the MD pass the 10X rule in order to replace cassettes as a recording medium. However, during the 1990s, several other products promised to do the same thing. The arrivals of DCC, CD-R, CD-RW, MP3 player, and DVD Audio all confused the American consumer, who became apathetic and stuck with cassettes due to their cheap prices. Unfortunately for Sony, the MD did not appear to be vastly superior to these other formats so MD was lost among the consumer confusion.
In any case, even if the battle was purely MD versus cassettes, MDs would still probably lose because MDs do not pass the 10X rule. They just are not a worthwhile improvement over cassettes. Indeed, the American culture seems to be entrenched with the audiocassette format; virtually everyone has a Walkman. Therefore, American society just seemed to not need another format, but Sony repeatedly pushed MD in its face with their grandiose marketing campaigns.
Another problem that Sony had was record company support. The powerful RIAA disliked any hi-fi digital format because illegal copies could be made en masse. Therefore, Sony had to sabotage MD's versatility by making MD-Audio compatible with only itself. Even after following their wishes, Sony slowly realized that the companies were not impressed by the MD format. Without record company support, Sony would not be able to fulfill the demand for pre-recorded MDs and thus miss out on the network effects and economies of scale that made MD affordable in Japan.
Although the full story is far from known - more research is required in the record company deals and how each culture assimilates new technology in general - it seems that what we have covered so far is sufficient to tell the tale of the Sony MiniDisc's success in Japan but lackluster performance in the United States.
With the sheer number of new audio formats available at this time, it is extremely difficult to predict the next audio format. DVD Audio is very promising, as it is "backward compatible" and also has higher sound quality than CDs. As far as MD's future is concerned, it will probably be around for a while. Sales of MDs are increasing in Japan, the US, and Europe, so it seems that more people are enjoying the advantages that are unique to MDs (small size, track manipulation, durability). Also, blank MDs can be rewritten over a million times, so their lifespans are basically eternal. However, MDs will always be only compatible with itself, so its utility in the far future is quite limited.
Recently, radio broadcasts in Canada and Europe have been converting to Digital Audio Broadcasting (DAB), which could encourage MD purchases. DAB is basically CD-quality sound from your radio, so an effective recording format would be incredibly beneficial. However, DAB will probably not appear in the United States because of the competition with current FM radio stations. In Canada and Europe, the radio industry is setup differently so no competition would occur with DAB.
Also, MD-Data discs that hold 650 megabytes (compared to the original 140 megabytes) have recently been developed. With these high-capacity discs, perhaps Sony would resurrect the compatibility between MD-Data and MD-Audio discs to create a more versatile medium. For example, MD hand-held video games could be produced that play both video games and music. However, as discussed earlier, the RIAA would probably have to sanction the compatibility change.
Due to the relatively new developments concerning MD technology - everything happened after 1992 - it was very difficult to find reliable information. Almost all of the facts and quotes are cited from magazine articles, which are sometimes not consistent with each other and highly opinionated. Unfortunately, the only MD-related book that I found was Digital Dreams by Paul Kunkel, but it's probably because MD technology is so new. The most frustrating aspect of this research was not finding continuous statistical data on portable audio sales. Perhaps in future studies, sales of MD players/recorders in both Japan and the US from 1992 onward can be analyzed. All I got were random figures that journalists decided to mention.
My thanks go to Professor Richard B. Dasher, Director of the US-Japan Technology Management Center at Stanford University, because he answered many of my questions on such short notice. I wish I had contacted him sooner so I could have delved deeper into some of my arguments.
For more information, visit Eric Woudenberg's MiniDisc Community Page (MDCP) at http://www.minidisc.org and "How Stuff Works" at http://www.howstuffworks.com.
ATRAC Adaptive Transform Acoustic Coding, 5-1 compression ratio used for MDs
Betamax Sony's attempt at video format. Although superior to VHS in technical detail, lost embarrassingly due to lack of video company support
CD Compact Disc. Uses pits and grooves to store data, also used in numerous applications such as CD-ROM
CD-R Compact Disc Recordable. In general, use a computer CD-RW drive to burn a CD-R. Once a CD-R is burned it cannot be changed.
CD-RW Compact Disc Rewritable. Like CD-R, use a computer CD-RW drive to burn the CD-RW disc. Can be changed, erased or rewritten, but is only compatible with specific drives.
DAT Digital Audio Tape. Launched by Sony in 1987. Ultimately failed because of possible hi-fi copying by pirates
DCC Developed by Philips and Matsushita, launched in 1992 right along with MD. Eventually lost out because of clumsy tape technology.
DVD Digital Versatile Disc. Developed by Pioneer. Has become very popular as a high quality movie medium due to its increased data capacity over CDs.
DVD-RW Digital Versatile Disc Rewriteable. Just released to the public, this could replace both VHS and MDs due to its improved picture and sound quality
Enka One-hit wonder in Japan. Also known as "sing-ul-su" to Japanese teenagers
JASRAC Non-profit organization in Japan that protects copyright loyalties. Similar to RIAA.
MD MiniDisc. Developed and supported mainly by Sony. This is what it's all about.
MP3 MPEG layer 3. Compressed audio format popular on the Internet as a medium of exchange for music enthusiasts. Rampant illegal copying can be found with a program at http://www.napster.com
RIAA Record Industry Association of America. Trade group consisting of the biggest record companies, it makes sure we pay for any possible royalties.
SCMS Serial Copy Management System. Encoded on most blank digital software at the insistence of the RIAA, SCMS makes sure you cannot make an MD-MD or CD-R-CD-R copy.
VHS Video Home System. Developed by JVC (Victor Company of Japan). In a bitter struggle, VHS finally dominated the market as the VCR format