You Probably Still Remember "Cue the VCR!" — Now the VCR's Own Story Is Over

These stories are the first sketch of how today's film and TV companies do business. In the dozen-odd years the internet has ruled, the story of the videocassette recorder has simply been remade and re-released, again and again.

Had Japan's Funai Electric not announced a little over a month ago that it had built the world's last batch of videocassette recorders (VCRs), there would be no reason at all to talk about the VCR and the videotape again.

Never mind videotape. Streaming has grown so much faster than anyone expected that even the DVD — which only a few years ago was the one that felt threatened — is now an old subject. Blockbuster, the famous video rental chain, closed its last stores two or three years ago. Nobody still asks whether Netflix, which began by renting out discs, can make it as a video service; what people ask now is when the next season of a Netflix show like House of Cards or Narcos is coming.

Streaming sites and set-top boxes have even produced new words for the pleasure they deliver — "binge watching," for instance: wolfing down a show one episode after another, one season after another.

Think about it, though, and none of this is new. The pleasure people get from video sites today is the pleasure they got 40 years ago from videotape.

In the golden age of the tape, you could clear an afternoon, haul a dozen cassettes home from the rental shop — or record a whole evening of television yourself on a home VCR — add some beer, and burn a full day in the living room, which was then the center of home entertainment.

The story of the videotape does not stop there. It is tangled enough to fill a business textbook. In it you can see how a new technology wins a mass market, how Hollywood, shaken by the tape, began to think of itself as an entertainment company rather than a film factory, and whether the high margins finally sit with the technology or with the content.

Taken together, these stories are the first sketch of how today's film and TV companies do business. In the dozen-odd years the internet has ruled, the story of the videocassette recorder has simply been remade and re-released, again and again.

How to Win a Mass Market

Videotape goes back to 1956, when the American company Ampex introduced the world's "first practical videotape recorder". It cost US$50,000, so only TV networks and large private stations could buy one. Even so, it sold 100 units in its first week — close to a full year of Ampex's revenue.

Until then, images on a screen ran on the linear time of ordinary life and vanished as they went. Now, for the first time, people found they could run time backwards and see it again. Ampex's orders did not stop coming.

By the 1970s and 1980s the home VCR was common among ordinary consumers, who used it to record programs, watch television on their own schedule, and watch movies. Analysts at the time estimated that 15 million American households owned one. By 1990, two-thirds of American households did.

This was, without question, the golden age of the videotape and the best years of the VCR business.

To take that mass market, two Japanese companies — Sony, and JVC, a subsidiary of Panasonic — launched two rival recording formats in 1975 and 1976: Betamax and VHS. Each wanted the market to itself. The fight is now a standard case study in how a company reads what consumers want and controls its channels, and it is probably the most famous business story the VCR ever produced.

Sony was always sure Betamax recorded a better picture. But in business the best and most perfect technology does not win; the one that answers the need does. Against Sony's Betamax, JVC's VHS recorded three times as long. VHS also encouraged blank tapes, and it was cheaper. All of that matched what buyers actually wanted — recording time, the act of recording itself, value for money — rather than the picture quality Sony was so pleased with.

JVC went further. It licensed other companies to make tapes, it had many rental chains, and Hollywood adopted the format, so more films came out on VHS. The result was a network effect, sometimes called the fax machine effect: the more people use VHS (or a fax machine), the more each of them gets out of it, because more material is easier to reach. That fed the same appetite for more films and shows.

In 1984, 40 companies used VHS and only 12 used Betamax. In 1987 Sony admitted defeat, and the next year it began making VHS recorders of its own.

A Studio? Why Not an Entertainment Company

Someone is always unhappy about a new technology. Hollywood was.

The studios watched the numbers with alarm. In 1971 only 15.8 million Americans went to the cinema; in 1929, when movies had barely caught on, the figure was 95 million. Part of the reason was that people had moved to the suburbs and television had arrived. The other part was videotape, which let them watch television programs whenever they liked.

Hollywood did not sit still. In 1976 two of the biggest studios, Universal and Disney, took Sony to court. Consumers, the two giants argued, were using Sony's recorder to copy their copyrighted films without permission, which was infringement; they asked for damages and for an order barring Sony from making and selling the machine.

Sony had launched the recorder only a year earlier. Its effect was already too large to ignore.

The verdict is easy to guess: watch the VCR spread over the next 20 years and you can tell Sony won. The case climbed from the U.S. District Court for the Central District of California to the Ninth Circuit Court of Appeals to the Supreme Court, which ruled for Sony in 1984 and left home viewers free to record what they wanted.

What that case did to Hollywood is still with us. The studios were forced to try channels and revenue beyond the cinema — and then to ask why they should not run the new market themselves. The structure of the entertainment business changed.

The Australian film scholar Richard Maltby wrote in Hollywood Cinema: An Introduction to American Film: "By 1986, the major studios were earning more from home markets such as videotape than from cinemas. Over the same period, pay-cable subscribers rose from 9 million to 42 million. In 1990, revenue from videotape rentals reached US$840 million, almost twice the box office."

Videotape is what made Hollywood notice "ancillary markets," and it began turning itself into an entertainment company rather than a film factory. The studios could not know who would command the most attention in the future, and the safest answer was the one the industry analyst Harold Vogel gave: the majors merely wanted to build the supporting machinery of "an integrated entertainment complex" — to own every exit.

Pushed by Wall Street, film and television companies went on a merger spree. In 1985 Murdoch's News Corporation bought the 20th Century Fox studio and its television stations, creating America's largest independent TV network. In 1990 Time Inc. and Warner Communications merged into Time Warner. In 1994 Viacom bought Paramount. In 1995 Disney bought the ABC network. In 1996 Time Warner absorbed Turner Broadcasting.

Whether a film could earn well on videotape and other ancillary channels also became a test of whether it got made at all. That is how the pre-sold sequel became Hollywood's favorite genre. A sequel starts with a far bigger audience than a new film, so more of its tapes are rented and bought — and viewers tend to want the earlier and later installments too.

Sequels are still Hollywood's surest box office. Of the ten highest-grossing Hollywood films from 2006 to 2015, eight were sequels.

The VCR exposed Hollywood's conservatism and forced it to correct course. At first the studios waited months after a theatrical release before grudgingly allowing a tape out; then the "window" kept shrinking. Today a new film reaches video sites, discs and rental shelves far sooner.

Even so, none of it is as generous as Netflix dropping a whole season at once.

New Technology Keeps Arriving; the Way to Take the Market Hardly Changes

The DVD player, which arrived in 1997, announced the VCR's death early. Each new medium beat the last one on size, capacity and sharpness, and offered more to do besides. Five years later, DVDs outsold videotapes. That same year Sony stopped making the Betamax recorder.

Then the DVD makers had a format war of their own, HD DVD against Blu-ray, and again the winner was decided by which side could license its format to more manufacturers.

At first Paramount, Universal, Warner Bros., New Line, HBO and other Hollywood studios all backed Toshiba's HD DVD, while Sony's Blu-ray camp had only Disney and Fox behind it, on top of the MGM and Columbia studios Sony already owned.

Then NBC, Universal, Microsoft, Intel, and Viacom's Paramount and DreamWorks declared for HD DVD. The fight grew sharper until 2008, when it turned. On January 4, Warner Bros. announced it would stop supporting HD DVD. That forced the HD DVD Promotion Group to cancel its press conference at the Consumer Electronics Show (CES), and the chain reaction tipped the whole industry to Blu-ray.

On February 15, Walmart agreed to sell Blu-ray players exclusively. Four days later, Toshiba abandoned HD DVD. Andrew House, Sony's chief marketing officer, said: "We can let the ghost of Betamax rest."

The licensing-and-rental model that videotape started has carried on without much change. DVDs, DVDs rented and sold online, digital delivery, then Netflix and Amazon — all of it comes from that model. Netflix, founded in 1997, spent the next 20 years running subscription services across DVD, Blu-ray and streaming. Streaming technology itself appeared at the end of the twentieth century, and Netflix seized it fast.

What Netflix's rise showed, most people now agree, is that the high margins are moving to content. The same was true of the film libraries the big studios sat on: that was their real strength, and the hardest thing for anyone else to match. By Richard Maltby's account, the majors' libraries were valued at US$8 billion in 2000 — 20 times what they were worth in 1980.

Make the Technology, or Make the Content?

Make the technology, or make the content? Sony, the VCR maker of those years, faced the same question.

Founded in 1946 by Akio Morita and Masaru Ibuka, Sony had engineering in its blood and concentrated on inventing and building consumer electronics. In the company's founding prospectus that year, Ibuka wrote: "We want to establish a stable company where engineers can devote themselves wholeheartedly to their work, knowing they are enjoying the pleasure of technology while fulfilling their obligations to society." Out of that came world-class products: Trinitron picture tubes, the Walkman, the PlayStation.

Then, on September 25, 1989, at Morita's urging, Sony announced it was buying Columbia Pictures for US$3.4 billion and taking on US$1.6 billion of the studio's debt. Columbia's film library came with it. Owning the rights meant Sony could keep earning from tapes, DVDs, streaming and licensed adaptations.

It was the largest purchase of an American company by a Japanese one to that point, and Americans said so with worry and irritation. Newsweek's cover put the Statue of Liberty in a kimono under the headline "Japan Invades Hollywood."

"You Americans won't understand! Look at the videotape format war. Sony's Betamax was the better technology, but Hollywood chose VHS. By buying a Hollywood studio we can make sure that never happens again," Morita told Brian Roberts, chief executive of Comcast, America's largest cable company.

The fight with American entertainment companies over videotape showed Sony where the power in that industry actually sits, and the company began shifting from technology to content. In 1999 it appointed Nobuyuki Idei, its first chief executive who was not an engineer; he set out to make Sony a "media and technology company." In 2004 Sony bought MGM as well.

Idei's successor in 2005 was an American, Howard Stringer, a journalist turned film producer who was not thinking about Sony's engineering culture either. "Without content, most devices are no better than junk," Stringer said. "Like a new world orbiting an ancient sun, the planet of broadband entertainment will revolve around content. Sony is an entertainment company first."

Kazuo Hirai took over after him. In 2012 Sony sold its chemicals business; in 2013 it sold buildings; in 2014 it sold the personal computer business (VAIO) and spun the TV business off into a separate company; in 2016 it sold the battery business.

Sony's most recent quarterly results show the old consumer electronics business in chronic loss while the audio-visual, games and entertainment units keep making money. In the first quarter of fiscal 2016, games and network services brought in US$3.208 billion in sales, up 14.5% year on year.

No company ever became a giant by making videocassette recorders alone. Funai Electric, which built the last of them? You had probably never heard of it.

Cover image from: qz