Electronic commerce and corporate strategy - a case of DaViD and Goliath

European Business Review

ISSN: 0955-534X

Article publication date: 1 February 2000




Herbane, B. (2000), "Electronic commerce and corporate strategy - a case of DaViD and Goliath", European Business Review, Vol. 12 No. 1. https://doi.org/10.1108/ebr.2000.05412aag.001



Emerald Group Publishing Limited

Copyright © 2000, MCB UP Limited

Electronic commerce and corporate strategy - a case of DaViD and Goliath

Keywords WWW, Electronic commerce

Electronic commerce represents an essential parameter within organisations' strategic decisions. This represents a move beyond the decision to launch a corporate Website or sell goods or services online. It requires senior managers to examine how, when and why the Internet will affect the fundamentals of current and future strategies. Geographical borders which had previously inhibited the expansion of retailers and availability of products to consumers have been broken, marking the increasing strategic importance of the Internet as a technology which facilitates a new distribution channel with low entry barriers. A new dawn has broken but, as with any such rising of the sun, elsewhere the effect is that of the setting sun. Specifically, the sun has started to set shortly after the introduction of a new technology - Digital Versatile Disk (DVD), a case in which the electronic commerce has challenged elements of the DVD strategy.

Digital Versatile Disk (DVD) was developed in the mid-1990s as a replacement for the conventional compact disc and CD-ROM, and for the Video Cassette Recorder (in the medium term). Having learned the lessons of technology format battles and failures in the 1970s and 1980s, several of the major consumer electronics manufacturers led by Philips, Sony and Toshiba sought to develop the technology through consortia collaboration (in order to reduce development costs and mitigate risk). In addition to the hardware manufacturers, film studios and distributors were involved to ensure that the new technology would have sufficient software (films) support to enhance the likelihood of success.

A central tenet of DVD is regional coding, which is designed to protect film studios' revenues. The DVD specification makes a deliberate and specific provision for the segmentation of the global market into six regions (or locales). The objective of including this specification is to control the release of films in the same way that film distributors dictate the release dates in different global regions. For example, a Hollywood blockbuster is normally released on DVD format several months after its premiÉre in North America. The system of regional coding is intended to prevent DVD owners purchasing or renting films prior to their cinematic release in any given country. Both hardware and software are designed to prohibit region 1 discs which are launched first (in the USA) being played on a region 2 DVD unit (in Europe and Japan). The regional code is stored within the DVD disc itself and within the microprocessors controlling the DVD player.

Regional coding and its adherence are central to any licensing agreement for hardware and software manufacturers. Traditional distribution channels for software (films) seemingly consolidated the locales by selling region-specific discs, in many instances due to the requirements of local regulators (such as the British Board of Film Classification in the UK). However, the success of regional coding could not simply depend upon legal and regulatory provisions. Indeed, as the market for DVD grew following its launch in Japan (1996), the USA (1997) and Europe (1998) two factors soon threatened the regional coding system; the crack and the lack. The Internet proved to be a consistent feature of each factor.

Whether inadvertent or not, a few hardware manufacturers (notably Philips and Samsung) had retained multi-region modification within players' resident firmware. Internet user groups quickly publicized codes which enabled the regional codes to be "cracked", thereby permitting the user to play discs from any region. In a recent example, Samsung's 709 model could be modified using a hi-fi remote control. Within days of the product's launch, modification information appeared on reputable Websites. In cases where the firmware could not be changed, several companies offer physical modification of the player. In the UK, the major companies involved in DVD player modification have Web presences.

Compared to the format's launch in Japan and the USA, the lack of software in region 2 (Western Europe) was reflected in the slow sales of DVD players, noted as a threat to the success of the new technology (Herbane, 1998). Early adopters quickly found that a modified player was the only way to have access to a greater selection of films and documentaries on DVD. Several companies in the USA and Sweden offered mail order facilities. Coupled with demand for domestic demand in the USA, several online retailers now offer mail order facilities for region 1 DVD player owners outside the USA. This alternative distribution channel enables consumers to purchase discs:

  • prior to or shortly after their theatrical release;

  • with additional features which will not be made available in subsequent region 2-6 versions;

  • with the original versions of the film (without censorship cuts);

  • which may never be released in individual countries (e.g. A Clockwork Orange in the UK).

Whilst the online purchase of DVDs would seem to draw parallels with compact discs and books, a critical difference which arises is the ambiguity surrounding the importation of filmed content. Whilst it is illegal to sell an unclassified film in the UK, the private importation of a film is not formally regulated. In addition, UK fiscal authorities will charge import duty and Value-Added Tax to postal packages labeled "merchandise".

Whilst early print media supporters of DVD in Europe were reluctant to advocate the modification of players and the purchase of region 1 discs on the basis that the success of region 2 could only be achieved by discouraging hardware modification and disc importation, a sea change has taken place in the attitudes towards importation, arguably as a reflection of customers' actions. Indeed, magazine and Website actively encourage disc importation (and by implication hardware modification) by reviewing region 1 discs and producing guides to online DVD shopping.

The emerging dominance of the Internet as a source of region 1 hardware and software can be seen in the volume of adverts for modified region 1 players and region 1 discs. For example, over a three-month period (July-August 1999) adverts for region 1 software available via the Internet represented 62 per cent of total adverts for software in the three bestselling UK DVD-oriented magazines (Total DVD, Home Cinema Choice and Home Entertainment). In the same publications and period, adverts for companies offering multi-region players accounted for 88 per cent of total adverts for DVD player retailers. Whilst precise figures for modified players and region 1 discs cannot be determined with accuracy, it seems clear that the stimulus for further demand of region 1 films is firmly in place, with online DVD retailers in a primary position to fulfil demand.

Unless fiscal enforcement, content regulation and import vagaries are addressed, the intention of regional coding will remain, as such, an intention. DVD was designed to ensure that the balance of power for this new audio-visual format would lie firmly in the hands of its originators - the hardware and software manufacturers. Control would reign over chaos. Ultimately, if regional coding is eventually abandoned (digital film technology could play an important role in this respect), the Internet could be credited as the distribution channel which empowered individual retailers and consumers whilst emasculating the consumer electronics and film distribution giants. A case of DaViD and Goliath.

Brahim HerbaneDepartment of Corporate Strategy, De Montfort University, Leicester, UKE-mail: bhcor@dmu.ac.uk


Herbane, B. (1998), "Inconsistencies which hit DVD", Marketing Week, 26 November, pp. 40-1.

Listed below are a selection of online sources of information about DVD and retailers of hardware and software.

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The author has no affiliation with the organisations listed.

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