(FORTUNE Magazine) – It is fitting that the first man to place big bets on the digital convergence of electronics and entertainment should have been Akio Morita, a student of both physics and marketing. Well over a decade ago, understanding that consumer electronics hardware and software were no longer distinct businesses, he steered Sony Corp.--the company that brought us the transistor radio, the Trinitron TV, the Walkman, the camcorder, and the CD player--into the music business. Then, as his parting gift to Sony upon retiring as CEO in 1989, Morita set in motion an even bolder strategy: the $3.4 billion acquisition of the Columbia and Tri-Star film studios. It was a grand gamble that continues to be emulated by big media and technology companies the world over, melding the whimsical and mysterious world of music and film with the reassuringly rational realm of bytes and megahertz.

Sony's foray into the movies under Morita's successor, Norio Ohga, is already a Hollywood legend: In five short years, the glitz merchants hired to run the studios drove them into the ground so hard that they damaged Sony's cosmopolitan image and left a crimson legacy of $3.2 billion in write-offs and losses. It was the kind of cataclysm that might have flattened a less established company, but Sony soldiers on. After all, it has built a brand name that rivals Coca-Cola and Kodak as the world's best known, and its real strength lies in hardware.

Or does it? Astonishingly, Sony now finds itself facing the possibility of a hardware drubbing that could make its Hollywood misadventures look almost trivial. Last November, in the same month that Sony took its humiliating write-offs, distracted top managers suddenly found themselves playing catch-up in a race to develop what will probably be the most important consumer electronics innovation of the 1990s: a successor to the videocassette player called the Digital Video Disc, or DVD, player. Essentially, the new disks will do for moving pictures what the CD did for sound, at last making it possible to play digitized images on TV screens. Belatedly, the consumer electronics industry also has come to understand that this protean device will be the one that brings interactive video to computers, finally fulfilling the promise of true multimedia. Sony had presumed it was out front in the race to establish standards for DVD, but now a phalanx of serious competitors has stolen a march on it. Suddenly, Sony faces the very real prospect of a replay of the Betamax/VHS fiasco, a defeat Morita and Ohga had vowed would never happen again.

One has to wonder what Morita thinks of it all, but one can only guess: He has been in seclusion since suffering a stroke in late 1993 that left him partially paralyzed and in a hospital for months. Since last fall, Morita has been recuperating at his modest condominium in Hawaii. Friends say that he is usually chipper and perfectly lucid, but that on some days he has difficulty speaking and moving. Part of his therapy calls for him to speak English and Japanese on alternate days.

Morita relinquished the largely ceremonial title of chairman just a few months ago, but he is still Sony's patriarch. He stays in touch by phone and fax. Ohga and other Sony executives pay him calls, stopping over in Hawaii on trips between Japan and the U.S. Like a reclusive oracle who speaks only rarely and often inscrutably, the ailing Morita continues to wield enormous influence over the company he helped found nearly 50 years ago.

Few know it, but it was Morita who gave the final go-ahead last November when Ohga, approaching his 65th birthday, made what is perhaps the most crucial decision of his career by picking an utterly unexpected candidate, Nobuyuki Idei, to guide Sony through its next perilous passage. Idei is a marketing man, not an engineer, a resourceful improviser who believes fervently in a strategy of digital convergence. In placing his imprimatur on the appointment, Morita sent an unmistakable message: Although Sony now finds itself strangely at sea in the Digital Age it helped create, the new man at the tiller must stay the course, come hell or high water. Every company that really matters in the world needs an engine that's going to drive them for a decade, something that they can identify as theirs that gives them a turbo boost," says Steven Jobs, founder of Apple Computer and now CEO of two small software concerns. "So what is the engine that's going to drive Sony? After Betamax, it was the CD player, but that's over now. It's obviously not the movie business itself, and it's not game machines. So it has to be DVD."

For electronics companies, few things are more important than authorship of technological standards. That is what has made Microsoft and Intel, for instance, the biggest beneficiaries of the PC revolution. Standards bring royalties, marketing advantages, and clout. The problem is, as you move up the electronic food chain, setting standards becomes ever more complex. In the Digital Age, new consumer electronics devices and data formats must be designed from the outset to make software "content" immediately useful in many contexts.

In other words, Sony's new hardware and data formats must not only address the requirements of makers and consumers of music and movies, but also mesh with the requirements and aspirations of the computer, telecommunications, cable TV, and satellite broadcasting industries that are the lead contractors of the information superhighway. All this imposes a philosophical shift upon Sony, a company whose most popular products were oriented precisely in the opposite direction: isolating electronic entertainment so that people could enjoy it anywhere, anytime, and without having to be plugged into anything. What could be more "stand-alone" than a pocket radio or a camcorder or a Walkman?

As Idei puts it: "The digital revolution will shake our total business platform so that brand image and production power and even the best technology won't be enough. We have to recognize that in the future most of our products will become part of a larger digital network. From now on, then, Sony's work is to build bridges between computers and consumer electronics and communications and entertainment, not mere boxes."

Sony has always been a solo navigator, if there can be such a thing in Japan. Founded in a bombed-out Tokyo neighborhood in 1946, Sony shunned affiliation with any of Japan's keiretsu. Unlike many of its competitors, Sony chose to make consumer electronics gizmos rather than products aimed at government customers.

Moreover, almost from the beginning, Sony, unlike most Japanese industrial companies, believed international markets would be its gold mine. But Morita also knew that being perceived as a Japanese company would be a liability in those postwar years, when the country was mainly known for making cheap tin toys and plastic flowers. Rather than use a family name or a Japanese-sounding acronym, Morita and his co-founder, Masaru Ibuka, chose a catchy cross between "sonus," the Latin root for sound, and the English diminutive "sonny."

To this day, Sony's Japanese peers consider it an arrogant outfit that hogs the spotlight, much the way Microsoft is viewed in the U.S. Consequently, Sony often prefers to go it alone or to hook up with foreign partners, especially when trying to establish a new genre of electronic device. Occasionally that kind of collaboration has worked spectacularly well, as when it co-developed the audio CD and CD-ROM with Philips NV of the Netherlands. Last year makers of CD and CD-ROM players and disks generated $50 billion in revenues; Sony and Philips collected a nickel for every CD sold.

Sony and Philips expected to have another hit on their hands when they started working in earnest on their DVD format about three years ago. The partners agreed on a common standard and divided the work load: Sony concentrated mainly on the living-room version and on rounding up the support of other Japanese manufacturers and Hollywood, while Philips took on the longer-term chore of devising a successor to the CD-ROM player.

In the summer of 1993, Sony and Philips discovered that they were in a consumer electronics arms race: Toshiba and Time Warner informed Sony that they had teamed up to develop a DVD format of their own. At first, Sony and Philips didn't take the threat too seriously. After all, Toshiba was better known for its semiconductors, portable PCs, air conditioners, and power-generating equipment than for consumer electronics, and Time Warner, an agglomeration of movie, cable TV, and media operations (including this magazine), had virtually no experience in designing digital gadgetry. (The two had become strategic partners after Toshiba invested $500 million in Time Warner in 1992.)

More important, Sony and Philips were counting on the support of Matsushita, the maker of Panasonic and Technics brand components. In fact, by the spring of 1994, Matsushita had orally indicated that it would likely back the Sony/Philips format, even though it had been tinkering with its own DVD designs. It seemed like a solid alliance, despite the fact that Sony and Matsushita fight like cats and dogs in the marketplace. Neither company really wanted a replay of the Betamax/VHS blowup. Moreover, Matsushita and Philips have worked so closely over the decades that a statue of Philips's founder adorns a garden at Matsushita's Osaka headquarters.

With Matsushita apparently on board, Sony and Philips wanted to go public with their DVD plans last June in an attempt to preempt the Toshiba/Time Warner format before it got off the ground. But Matsushita, ever cautious, declined to participate in an announcement until it had a better idea of what the rivals would actually propose. And that's when Sony's strategy began to unravel.

How compelling will this new technology be? Imagine that you're watching TV at home, gripping the sofa cushions as the runaway bus in the movie Speed sideswipes a semitrailer truck, launching it off a freeway overpass to explode below in a visceral, six-channel blast that rattles your windows. Suddenly the kids march in, grab the remote control, and switch to Masterpiece Theater. Cursing only gently, you walk over to the TV, eject the silvery CD look-alike from its player, and carry it upstairs to your study. There you plop down at your desk, slip the disk into your PC, and pick up where you left off. When the show's over, you try your hand at the computer game version of the movie, which happens to come on the very same disk. Joystick in hand, you sit in the driver's seat and maneuver the hot-rodding bus through many of the same harrowing scenes you just watched.

Or how about this: Your boss gives you new PC software to master for your job. It comes with an instructional CD for your computer. You start it up, and there, onscreen, is Bill Gates, outlining the special features of the new program, in the manner of Michael Eisner introducing The Wonderful World of Disney. After his hokey filmed preface, you work through a video tutorial hosted by one of the programmers, skipping things you already know and jumping around to learn about the features you'll really need.

Or how about this: Over the years you've amassed dozens of videocassettes of the kids at their cutest, but your production values are so bad and your camera hand is so shaky that most of the resulting tapes are too jerky and embarrassing to show even to Grandma. So you sit down at your PC, plug the camcorder into it, and knit together a poignant classic, which you store on a recordable CD-like disk. Then you mail the disk to Grandma, who plays it back on the disk player hooked up to her living-room TV.

Eventually, the DVD circuitry that translates the microscopic data "pits" on the spinning silvery disk into the images on the PC screen conceivably can also be harnessed to convert digital video signals pouring in through a cable or via satellite. That could make it possible to receive CNN or pay-per-view movies at your desk. (Any bets on when the term "desk potato" enters the lexicon?) No wonder Ohga and Idei want to win the DVD format wars in the worst way: A victory would implant proprietary Sony digital video technology right in the guts of the information infrastructure.

The beauty of DVD, says futurist Paul Saffo, is that it has so many potential uses as a flexible, interactive medium that it lends itself toward reinvention by clever entrepreneurs. Says he: "We may not know yet what the actual 'killer application' will be. But compared with DVD, the VCR is a brittle technology."

During the summer of 1994, it became alarmingly clear to Sony that Toshiba and Time Warner were making serious progress. Their format--dubbed SD for "super density"--could hold data on both sides of a disk, just like an old LP record. (Actually, the SD is a sandwich made of two disks, each half the thickness of a conventional CD, that are glued together back to back. The Sony/Philips DVD is the same thickness as previous disks, with data imprinted only on one side.) The SD approach promised to deliver at least twice the data capacity of the Sony/Philips DVD--and hence more space for long films or collections of movies. SD's main drawback was that viewers probably would have to flip the disk by hand when the first side played out.

Just as important, it became obvious that Toshiba and Time Warner, owner of Warner Bros., had been outhustling Sony and Philips in Hollywood, prodding studio executives to form a council to set performance criteria. After coming up with its wish list, the eight-member council scheduled demonstrations for September and November.

At the final demonstration, Sony and Philips unveiled specifications for a disk that could hold 3.7 gigabytes of information (a gigabyte is one billion computer "bytes," each of which denotes a printed character or a patch of color on the screen)--enough space to contain 135 minutes of video. That would be sufficient space for 97% of all movies, Sony contended. Sony also said its engineers were devising a way to put a second, semitransparent layer of data on the same side of the disk, which would nearly double the total data capacity without forcing users to flip the disk over.

At the same meeting, the Toshiba/Time Warner team showed a version of its SD that held five gigabytes on each side. That's enough total space to contain both Batman and Batman Returns on a single disk. They also implied that if Sony could perfect a semitransparent layer, so could they, thus creating a disk that conceivably could hold nearly 20 gigabytes. The damage was done. Matsushita, whose previous DVD research dovetailed more neatly with the SD format, began to think it might have more influence over DVD--and reap more patent royalties--if it cast its lot with Toshiba and Time Warner.

Minoru Morio, the president of Sony's consumer audio-visual products unit and once the apparent front-runner to succeed Ohga as president, was until then the de facto director of Sony's DVD efforts. A soft-spoken man and a gifted engineer, Morio, 56 years old, had a couple of weaknesses. Marketing wasn't really his forte, and he spoke little English. Consequently it was difficult for him to personally promote the DVD format to Hollywood moguls in a compelling way. Toshiba, with the help of its glib American partners, managed to focus the competition on disk capacity, which is only one of several variables that affect the cost and performance of the vying formats. Sony, which has always been admired for its worldly marketing savvy, was beaten at its own game.

After the November technology demonstrations, Ohga realized that no amount of engineering magic alone could rescue Sony's DVD. So he put Idei, then Sony's top marketing executive, in charge of cobbling together a brand-new DVD strategy. Idei, whose peripatetic career included a stint in Sony's ill-starred computer division, was intimately familiar with how PC makers might use interactive digital video in interesting ways. He also had observed the meteoric growth in the past year or so in the sales of PCs equipped with CD-ROMs. His conclusion: Sony and Philips had their marketing priorities backward. Sure, he agreed, the DVD will be a great movie format, but it is the PC that can best tap the full potential of the medium, and thus PC makers and customers might embrace it more quickly and enthusiastically than conventional home video consumers. While Redirecting the engineering priorities would take some time, Idei moved quickly to change the marketing message. On December 19, Sony and Philips formally announced their format, which was hastily renamed the Multimedia Compact Disc, or MMCD. Within weeks Sony and Philips executives began wooing the likes of IBM, Compaq Computer, Apple Computer, NEC, Hewlett-Packard, and Microsoft. The Sony/Philips announcement rang a little hollow, however, because Matsushita was conspicuously absent.

Nathan Myhrvold, Microsoft's senior vice president for advanced technology, wonders why it took so long for either side to wake up to the potential of DVD in PCs. "How long were they working with Hollywood? Three years?" he asks. "I don't think we were even on their radar screens until a few months ago. We think DVD technology actually will take off much faster in the PC arena, because it's so much better than the technology we now have."

While Sony and Philips were scrambling to reorient their strategy, Toshiba and Time Warner were preparing for their own coming-out party, and what an event it turned out to be. While they didn't make much mention of the multimedia potential of the SD format at their press conference, held on January 24 in Hollywood, they didn't have to. Their most compelling argument was sitting on-stage with them: a stunning array of allies that included representatives of Hitachi, Pioneer, JVC, Thomson, Mitsubishi Electric--and, to Sony's shock and dismay, Matsushita.

At the press conference, Toshiba and Time Warner predicted that they would have SD-DVD players on the market sometime in 1996, priced at under $500 (a price they now concede is unrealistic, given the strong yen). They also suggested that movie disks would be priced much lower than most prerecorded VHS tapes--somewhere around $20. Says Taizo Nishimuro, a Toshiba senior vice president who is masterminding the SD strategy: "That's about the price of two movie tickets and popcorn, but you get to keep the movie." Finally, they disclosed that Matsushita would provide a special lens technology that would enable the SD-DVD players to be compatible as well with conventional single-sided audio CDs and CD-ROMs.

That afternoon Ohga and Idei, stung by what they perceived as Matsushita's betrayal, called an impromptu news conference with Japanese television journalists to defend their embattled format. After concluding the irksome session, Ohga suggested that Idei drop into his office for a chat. Idei recalls, "All I had been thinking about for three months was DVD, DVD, DVD, and I expected a lecture about what was going wrong. But instead he told me he wanted me to be Sony's president. I was stunned. Speechless. So I listened. Meetings with Ohga-san usually are over in ten minutes, but this one lasted nearly an hour. He told me about all the challenges Sony faced, that we must remain dedicated to our goal of building a complementary software business, and that we must maintain Sony's strong image. By the end of it, he looked immensely relieved, as if a great weight had been lifted from him. Now, of course, I realize that much of that weight is on me."

To Ohga, who remains chairman and CEO, Idei's new job responsibilities boil down to one priority. Says he: "Our biggest asset is four letters: Sony. It's not so much our buildings or our engineers or our factories, but our name. Idei-san will have to do things his own way, of course, but a new president must above all else preserve and build our reputation, because that determines the value of the company in the 21st century." He pauses, then adds with a chuckle, "If Idei-san can't do that, I'll just have to fire him."

The passing of the baton wasn't supposed to turn out this way; Sony has been, until now, an exceedingly deliberate dynasty. Ohga, a jet pilot, operatic tenor, and recreational symphony conductor, was only in his 20s when co-founders Morita and Ibuka first told him that he would one day run the company. Through the years the founders put the precocious musician in charge of one key project after another. In 1982, Ohga was named president and chief operating officer, as promised, and in the intervening years Sony quadrupled in size. The only shrill passage, until recently, was the Betamax fiasco in the early 1980s.

So when Morita ceded him the title of CEO in 1989, Ohga's remaining years seemed destined to be a triumphant finale. Sony had just bought Columbia and Tri-Star, and Ohga assigned physicist and fellow jet pilot Mickey Schulhof--the effervescent president of Sony Corp. of America--to turn his wits from electronics and records to Hollywood. Back in Japan, Sony's skunkworks teemed with remarkable new digital audio, video, and semiconductor technologies.

But then it all began to come apart. In August 1991 doctors ordered Ohga to undergo a coronary bypass, slowing him down at a crucial time. In 1993, Morita suffered his stroke. "Ever since that day I felt I had lost my mentor," Ohga says. "Of course, on small things and daily operations I was able to manage Sony myself, but on big decisions I had always sought the advice of Morita-san."

In the meantime, the movie studios, now called Sony Pictures, veered out of control as the studio executives Schulhof had hired proved as inept in their management as they were profligate in their spending (see box). As if that weren't bad enough, the bulked-up yen has hammered Sony for nearly two years, erasing literally billions of dollars in potential overseas sales.

Suddenly Ohga found that he had to throw away his score and improvise. In April 1994 he overhauled the company's entire hardware business, consolidating dozens of product fiefdoms into eight streamlined companies. Then, last November, he agreed to the Hollywood write-off, the biggest financial bloodbath in the history of the movies.

After all that, however, Ohga still knew that he had yet to make the most important decision of his career. Two decades earlier, he and Morita had promised each other that they would relinquish Sony's presidency once they turned 65. The trials of the past few years had convinced him that Sony needed dynamic and provocative leadership as it entered the Digital Age. Says he: "We have many good candidates for president. There is no shortage. But the president must have a plus alpha--something special beyond just being qualified. Sony, you know, was always run by gentlemen who had that special something."

Ohga had pondered the decision for more than a year. Time and time again, his ruminations kept returning to Idei, even though a dozen other executives technically ranked higher on the organization chart. The marketing man--whose varied career can best be described as one long improvisation--was bound to be a controversial choice because, like Ohga, he wasn't an engineer, and also because he hadn't run one of Sony's large operating divisions. So Ohga kept putting off his decision.

Late last November, amid all the Hollywood and DVD turmoil, Ohga flew to Hawaii and and made his way to Morita's condominium. It was one of Morita's Japanese-speaking days. Ohga mentioned his plan to promote Idei, but Morita, who was less animated than usual, didn't say much. But he didn't say no. Ohga knew he had to have Morita's blessing before he floated the idea to other executives, so he returned to visit Morita during the Christmas holidays. This time it was an English day. Morita welcomed his protaga with a smile and said, "Idei may be a good idea."

That settled it. After breaking the news to Idei in January, Ohga told a handful of other senior Sony executives, some of whom were surprised and more than a little puzzled. Eventually they all supported the decision, however. Ohga went public in early March, telegraphing even more changes to come. Says he: "In times such as these, I believe we need drastic measures that might surprise people. Mr. Idei will feel as if he is sitting on a carpet of needles, and it will be a little awkward and tense. But so it must be . The marketplace is changing, and Sony must change faster." The company Idei inherits may be on the brink, but it is still impressive on paper. Sony, employing 130,000 people worldwide, expects to report that in 1994 (the fiscal year ended March 31) consolidated sales rebounded by 5% to roughly $40 billion, despite Japan's sluggish economy and the strong yen. (In 1993, sales shrank 6.5%.) Thanks to its Hollywood follies, however, the company likely will post a consolidated net loss of nearly $3 billion. Above and beyond the $2.7 billion write-off, Sony Pictures also will saddle its parent with an operating loss exceeding half a billion dollars as the result of abandoning some costly movie projects and settling contract claims with former executives, not to mention a bad year at the box office. That really hurts, given that Sony Pictures accounts for less than 9% of Sony's worldwide sales.

In contrast, 1994 was a banner year for Sony's "other" U.S. operations, namely New Jersey-based Sony Electronics Inc., which grossed about $8 billion, nearly three times the revenue of the movie company. Not only did U.S. hardware sales grow by $500 million last year, but the unit also reduced its dependency on imports from Sony factories in Japan, cranking up the proportion of U.S.-made Trinitrons, VCRs, semiconductors, and the like to 40%, from 33% in 1993.

Elsewhere in the world and across the organization, Sony held its own. Sony Music Entertainment was buoyed to a record year by the release of Mariah Carey's latest pop CD and the Forrest Gump soundtrack. (Too bad Sony Pictures didn't make the film itself. The Paramount production has grossed about $650 million worldwide in screenings alone for its parent, Viacom Inc., to date.) Still, nobody can be too pleased with Sony's overall results: If you factor out the Sony Pictures operations, it's unlikely Sony's net profit margin (after taxes) will exceed 1%. Sony shares, which trade both in Tokyo and on the New York Stock Exchange, peaked at $63.25 before the Hollywood write-offs and lately have been bouncing around in the 40s.

If Sony hopes to grow and remain influential in the converging worlds of electronics and entertainment, it must find ways in which its vaunted brand name can create value in a digital media world. Cutthroat price competition is a fact of life in the consumer electronics industry worldwide, now that South Korean, Taiwanese, and Chinese manufacturers have entered the fray. Says Idei: "It's hard to believe how fast prices are falling. I visited a Circuit City store in Los Angeles in February, and they were selling a [South Korean] full-featured VCR for $99. Ninety-nine dollars! We can't possibly make one [to sell at retail] for that, and we invented most of the technology."

Historically, Sony has managed to dodge the price wars by inventing new genres of consumer electronics products that render older, less lucrative ones obsolete. But the company's batting average since 1980 for setting new standards isn't as high as one might think. The audio CD was a home run, of course, and Sony also calls the shots for professional broadcast video equipment, controlling more than 80% of the $1 billion annual worldwide market. Its 8mm camcorders remain hot sellers, but Sony never managed to establish the 8mm format as the successor to VHS, and Sharp stole its thunder by being the first to introduce camcorders equipped with a flat-panel LCD monitor rather than a conventional eyepiece viewfinder.

Several other truly novel audio products and formats have taken their lumps too: The pristine-sounding Digital Audio Tape, or DAT (a joint effort with several other competitors) foundered after record companies, fearing piracy, refused to support the format. Another recordable digital audio medium--the MiniDisc, or MD--has been a disappointment. Sony has sold only 750,000 units since 1992, mostly in Japan.

Moreover, Sony has learned the hard way that quality and originality aren't always the deciding factors in creating a standard consumer electronics format. The VHS videocassette is the most obvious example. Matsushita and its affiliate Victor Co. of Japan (JVC) prevailed with their VHS format because they anticipated that markets would evolve for prerecorded full-length movies and for machines that could record an entire football game, so they sized their tapes accordingly. Sony, whose Betamax cassettes were physically smaller and provided a clearer video image, initially held only one hour. Moreover, Matsushita sweetened the pot by giving away cassette-duplicating machines to film distributors. (Ironically, VHS decks are laden with patented Sony technology, and to this day the company collects licensing royalties from Matsushita, JVC, and all the other VCR makers.)

In the end, who profits the most from a new product and data format? Often not the hardware company that invents the technology, but rather the software suppliers that own the unique programming people want to hear or view. The audio CD, for example, revived the moribund record business in the 1980s as music aficionados replaced their old vinyl collections with static-free digital disks, which, incidentally, carry a higher profit margin. And while Hollywood initially feared the recording capability of videocassette machines, it was virtually resurrected by them.

In this increasingly interdependent electronic world, perhaps it is not so surprising that a jack-of-all-trades like Nobuyuki Idei should be chosen to lead Sony. A decade ago, Idei's meandering career path would likely have impeded his chances to be president. But in hindsight, he probably couldn't have prepared himself any better for the job.

The son of an economics professor, the lanky, wavy-haired Idei studied international politics and economics at Tokyo's Waseda University, where his father taught. A month after graduation in 1960 he joined Sony, and because of his language skills--he spoke English, French, and a little German--he was soon dispatched to Europe. There he spent five years in Switzerland, founded Sony's French subsidiary, and developed a taste for fine wine and Italian loafers. Early on he caught the attention of Morita, who was intent upon building an international reputation for Sony.

After spending more than a decade overseas, Idei returned to Japan, and by 1979 he was general manager of Sony's audio division, in charge of marketing products like the Walkman and helping Ohga promote the audio CD. He spent the 1980s jumping from one product group to another: After a stint running Sony's home-stereo component group, he became a senior manager in Sony's disappointing effort to become leader in engineering workstation computers, and from there he moved to the video group, just in time to help promote Sony's last big hit product, the 8mm camcorder.

Then in 1990, Idei sensed it was time to move out of the product groups and into a position with broader, more image-oriented responsibilities. He landed a job once held by Ohga as the director of Sony's Design Center, a group that makes sure all Sony products adhere to Ohga's strictly minimalist esthetic sensibility. He also was given responsibility for Sony's merchandising and product promotion, and two years ago took over corporate communications as well. That job made Idei Sony's most visible senior executive, not only in Tokyo but also in Hollywood, Silicon Valley, New York, and Europe, as he represented the company at everything from electronics trade shows to the Grammy awards and the Oscars. Also, in many ways Idei had direct involvement in more aspects of Sony's various businesses than any other top executive.

Even so, nobody really anticipated that he would get the top job, mainly because he wasn't an engineer. Says Ohga: "To tell you the truth, I was rather worried what the public would think until I saw the next day's newspapers. But the reaction was generally favorable." No doubt Idei benefited from the fact that he has always been one of Japan's most plainspoken and accessible executives.

Learning of the pending promotion made Idei's already hectic and stressful life even more so during February and March, as he awaited Ohga's public announcement. Not only was he trying to resurrect the DVD strategy, but he was also looking forward to his daughter's wedding in early March. (She is his only child.) He was traveling so much that often he didn't know what time zone he was in. Recalls Idei: "For the first time in my life, I didn't have the energy to play golf on Sundays. All I could do was just sit at home and think about the company."

Despite his broad experience, Idei says he'll spend the first few months on the job simply studying the various operating companies. Clearly he has his own ideas about how Sony should be run. Says Idei: "I have so many priorities. I have to prepare for our annual management conference, where I will give a keynote speech setting our direction as an organization. After that I have to preside over the annual shareholders' meeting, where I'm sure I will be asked lots of nasty questions about the Sony Pictures write-off and how we are dealing with the yen. I also want to set a new future direction for our research and development, so that it is not merely trying to extend our current businesses, but attempting to identify new opportunities for the 21st century. And of course DVD is a very high priority, because setting a format standard energizes the company."

Ever since the January announcement by Toshiba and Time Warner, the DVD contest has become a game of one-upmanship. Sony claimed it had a better "encoding" technology for squeezing images on the disks. Toshiba countered, saying SD would produce a better picture because it didn't require so much data compression. In April, Sony demonstrated its dual-layer technology. Matsushita announced a similar innovation two days later. Sony predicted it would come to market in two years with a blue laser-based DVD, which could hold even more data; and Pioneer demonstrated a working, recordable SD. And on and on.

So who's winning? Clearly Toshiba and Time Warner stole the high ground early, and to this day they have more backers in Hollywood. Still, some key players, such as Disney, Viacom (owner of Paramount Pictures), George Lucas's Lucasfilm, and Dreamworks, haven't officially chosen sides. Sources say Viacom and Dreamworks prefer the Toshiba/Time Warner format but are reluctant to back SD exclusively. And Sony argues that it will cost studios next to nothing to switch formats or to support both. Likewise, SD has won over the bulk of top-line consumer electronics manufacturers, but several others, including Sharp, Goldstar, and Sanyo, have yet to commit.

In the PC arena, however, Sony and Philips seem to be making a comeback. In late April the two companies disclosed that seven CD-ROM drive manufacturers, which together with Sony and Philips accounted for more than half of all CD-ROMs sold last year, had signed agreements to develop MMCD-ROM drives exclusively.

Computer makers themselves hold the key votes, of course, and none of them have publicly announced a preference. They too have formed an ad hoc committee of experts to review the competing technologies. Microsoft's Myhrvold, if he has a preference, won't tip his hand. Nor will engineers at Apple. Insiders at Compaq and Hewlett-Packard say they are seriously considering the Sony/Philips MMCD.

It's quite possible--indeed, it's probable--that both formats will survive for a time at least, thus splintering the potential market and creating obstacles for those who want to start making plans to use filmed entertainment in interactive PC multimedia disks.

Is a compromise format in the cards? Says Warren Lieberfarb, president of Warner Home Video Inc., who is SD's Hollywood point man: "There's nothing I want more than a format that Sony and Philips can also support. We're always willing to talk about it." Realistically, however, a hybrid format couldn't be much of a compromise, because Toshiba and Time Warner already have promised to incorporate so many of the key proprietary technologies from their existing partners that there isn't much left to cede to Sony and Philips.

More than anything, the DVD battle is a parable of competition. No matter which format prevails, the real winners will be consumers, who will be able to enjoy video entertainment in ways they have never imagined. And as an industry, consumer electronics makers will have commandeered a strategic lane on the information superhighway.

Toshiba and Time Warner, too, will be winners, regardless of the outcome, because through it all, they have established themselves as a creative force to be reckoned with in the Digital Age. Ironically, in their own way they have proven the validity of Morita's original strategy.

What about Sony? If it wins, Idei passes his first acid test, and the company can rightfully claim the mantle of being the master of innovation in the digital entertainment business. If it winds up compromising with Toshiba and Time Warner, the company still wins, because it saves face and proves that it is no longer an arrogant outsider but a unifying force in its broadening industry. If Sony loses yet another video format battle, however, its great asset, its precious four letters, will be consigned to the ranks of the ordinary, and Idei, Ohga, and Morita will be left to ponder what might have been.