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Format Wars: Then and Now

If you’re a movie buff (and have the resources to truly indulge yourself), you can look through your collection and visibly see how technology has changed over time.  You’ve got high-definition Blu-ray disc of Inception, your DVD copy of Fight Club, and the original Star Wars trilogy on VHS.  It seems strange that there is only one video-player technology on the market over a given time.  For comparison, just look at the gaming market – Nintendo, Sony, and Microsoft all have competing consoles on the market at the same time, all of which enjoy success.  So why do we only have one way of watching our movies?

The tapes and discs we have in our collection are the victors of the aptly-named format wars.  Roughly speaking, a format war is when two technological formats (in this case video formats) both compete for the same market.  Furthermore, the technologies are owned by competing companies, and the technologies are not compatible with each other.  Applying the study of network effects to this situation, we know that a person’s payoff for using each format depends on the fraction of the population using the format.  Common sense says that people do not want to buy two products that do the same thing, nor do producers of content want to deal with two different formats.  Since the population will only buy one of these products, it follows that one format will reach its tipping point and settle at a stable equilibrium consisting of a large fraction of the population, and all other formats will fail to reach this tipping point and be driven back to zero.

Given this, the best strategy would seem to be to drop the price of the product and do everything possible to get to the tipping point first.  As it turns out, the winners of the format wars used exactly this strategy.  The story begins in the 1980s, with the videotape format war between VHS, produced by JVC, and Betamax, produced by Sony.  Both had technological advantages – Betamax had better picture quality but only one hour of record time, while VHS had two hour record time.   Sony hurt its potential user base by requiring licensing fees from other companies who wanted to produce Betamax players.  The lower price of VHS players further increased the VHS user base.  VHS was winning the war, and the final blow to the Betamax was due to a boom in the video rental industry.  As these video players took off, so did video rental stores, and given that more of the population used VHS, the rental stores carried more VHS tapes.  This encouraged people to buy more VHS players and fewer Betamax players, leading to the eventual demise of Betamax.

The DVD actually managed to avoid a format war, as all involved parties wanted to avoid the high costs of individual development and competitive advertising for each product.  In short, an agreement was reached, and we were left with a single format for a disc-based video player.   However, when it came time to develop a high definition videodisc player, Sony no longer wanted any part of an agreement.

This leads us to the most recent format war – Blu-ray versus HD DVD.    Again, both technologies had their advantages, with neither so much better than the other that it was a basis for someone to make their decision.  Additionally, both Sony, the producer of Blu-ray, and Toshiba, producer of HD DVD, allied themselves with various other companies and movie studios in an attempt to secure production and movie titles, which hopefully would increase their user base past the tipping point.  The war lasted a brief two years, beginning in 2006 and ending with a concession by Toshiba in 2008, leaving Sony the victor.

Sony’s victory can easily be explained by network effects, in that Sony was able to get passed the tipping point first.  This was in large part due to Sony’s decision to include a Blu-ray player in their widely-purchased gaming console PlayStation 3.  The price of the PlayStation 3 was dropped to the point where they were selling the product at a loss, but the move paid off, as everyone who bought a PlayStation 3 to play games was immediately the owner of a Blu-ray player.  HD DVD also tried to expand its base by an association with a gaming console – the Microsoft Xbox 360. However, the HD DVD wasn’t directly included – it had to be purchased as an add-on to the console.  Few gamers wanted to dish out more money after spending hundreds on the console, resulting in only a small increase in their user base. This gave Blu-ray a huge advantage in user base, which eventually convinced several movie studios to switch from HD DVD to Blu-ray.  Without a large movie library for users to purchase, and realizing Sony had reached the tipping point, Toshiba threw in the towel, leaving Blu-ray has the single high definition videodisc format.

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