Case Study ‘Blu-ray versus HD-DVD: A Standards Battle in High-Definition Video’ Discussion Questions 1. What factors do you think influenced whether (1) consumers, (2) retailers or (3) movie producers supported Blu-ray versus HD-DVD? Every party in this standards battle had its own reasons for chosing one standard over the other. For instance, the motives for movie producers to choose Blu-ray were completely different from the motives for consumers to choose Blu-ray.
In our opinion, the main factors that influenced (1) consumers in their decision to support either Blu-ray or HD-DVD were technical differences, complementary goods and the size of the installed base. Supporting one of the standards, from a consumer-perspective, can be defined as buying a Blu-ray- or an HD-DVD-player. Roughly, the consumers can be divided into two groups: Early adopters and the majority. Early adopters gave their support to one of the standards based on technical differences and complementary goods.
In this case, early adopters are consumers who are interested in technology and do their own research about what is the ‘better’ standard. The complementary goods are the number of movies released on one of the standards, which obviously is also important. The majority based their decision on the size of the installed base and also the complementary goods. Again, the number of movies is important, but for the majority the size of the installed base of one of the formats is most important. The benefits of a technology can only be observed after a certain critical mass of users has been achieved. (Suarez, 2004).
This means that it was a race to the tipping point of the installed base. When this was reached by one of the formats, the race would have been won and this format would become the dominant format. Eventually, the decision from Sony, to incorporate a Blu-ray-player into their Playstation 3, which essentially came down to giving away Blu-ray-players for free, turned out to be an good one. This way, the installed base of the Blu-ray-standard rose explosively, which led a number of movie producers switching to the Blu-ray-standard, increasing the number of movies released on Blu-ray, also known as complementary goods.
It’s a self-reinforcing cycle. The main factors that influenced (2) retailers to support one of either standards were pricing and demand (installed base). From retail-perspective, supporting one of the standards, can be defined as offering it. A lot of retailers, like Wal-Mart and online video rental service Netflix offered both formats in the market introduction-stage. The costs for offering both standards were not higher than the revenue it produced, compared to offering only one of both standards. For consumers, especially for the majority, it would be hard to accept that the exact same movie would cost more on Blu-ray than on HD-DVD.
So, retail pricing would be similar for both standards. However, production of HD-DVD’s was cheaper, so with this standard a higher profit could be made for the retailers. When Wal-Mart made the decision to discontinue HD-DVD-hardware and movies, Gary Severson, senior vice president, Home Entertainment said in a press release: ‘We’ve listened to our customers, who are showing a clear preference toward Blu-ray products and movies with their purchases’. This was released on February 15, 2008. At that point, HD-DVD-players were still being produced.
The consumers chose the Blu-ray-format and so, all retail stores discontinued the HD-DVD-format. The main factors that influenced (3) movie producers to support either the Blu-ray- or the HD-DVD-format were technical differences, pricing and installed base. Supporting one of the standards out of the movie producers-perspective can be defined as releasing movies on of the standards. Walt Disney Pictures and 20th Century Fox supported Blu-ray because of the DRM-possibilities Blu-ray offered, which HD-DVD did not. On the other side, manufacturing costs for HD-DVD-discs were lower, especially in the market introduction-stage.
Over time, the manufacturing costs of Blu-ray-discs dropped to a similar level of the HD-DVD-discs. When the numbers of sold Blu-ray-players was much higher than the number of sold HD-DVD-players, more and more movie producers switched to releasing their movies exclusively on Blu-ray instead of HD-DVD. 2. Why do you think Toshiba and Sony would not cooperate to produce a common standard? In practice, Sony and Toshiba didn’t cooperate to produce a common standard because in the development-phase they didn’t agree about which laser-technology to use.
Sony wanted to use the more expensive blue lasers earlier on already, while the DVD Forum, chaired by Toshiba had doubts. The DVD Forum decided to create a technology that was based on the ‘old’ DVD-format. A little later on, Toshiba and NEC discovered that this option was not a real solution, but it was too late and too expensive to join Sony. So, they decided to develop their own technology. It is highly likely that both Sony and Toshiba wanted to create a first-mover-advantage for themselves. By developing the standard for video-playback for the coming years, huge profits could be made.
Profits would be made on the sales of blu-ray-players, the licenses sold to movie producers, but most important, the licenses sold to competitors. If Toshiba wants to produce a Blu-ray-player, a license had to be bought from the Blu-ray-licensing organisation, of which Sony is a member. This way, money streams directly from Toshiba to Sony. 3. If HD-DVD had not pulled out of the market, would the market have selected a single winner or would both formats had survived? It is very likely that the market would had selected a single winner.
The breaking moment was the exclusive choice of the retailers for the Blu-Ray-players. At this moment Toshiba realised that the HD-DVD would not be the dominant design of this market, and so it would be very hard for them to gain large profits. Toshiba could have made deals with some small retailers, but the expenses would be bigger than the profits, so Toshiba decided to take their loss and stop with HD-DVD. The profits they would have gained with HD-DVD would be so small, that the effort was not worth it for Toshiba.
Even though the costs they had made so far are sunk costs, it was a good choice to pull the plug, because the dominant design was not in their hands. They would have survived for a short period of time, but after that the market would be hard and consumers will only buy the dominant design. So they could have survived for a short time, but at the end the market would select a single winner: Sony. This is why it is not only a sportive decision of Toshiba to stop with HD-DVD; it is also a smart one. 4. Does having a single video format standard benefit or hurt consumers?
Does it benefit or hurt consumer electronics producers? Does it benefit or hurt movie producers? For the consumers you can look at it in two ways. First, it benefits consumers of having a single video format standard. Especially for users conform it is good. They have one video standard, and all the products (movies for example) that are made can be played with the standard. So they will never buy a product and find out later that it can not be played. Also will the quality of the products be better because they are designed to be played in the exact standard all the consumers have.
But secondly, can the video format standard can hurt consumers. The Blu-ray is the dominant design, and so Sony has got a sort of a monopoly in this market. And the downsides of monopolies are known: Sony can ask a real high price and gain lots of profits by doing so. This will hurt the consumer. The consumers have got to buy this standard, because there is no other option for them to play their movies etc. So if Sony uses his position to overprice their product, it can affect the consumers while they do not have another option. For electronic producers a singe video format standard easy their job.
It is very clear what to make, because it has got to be “Blu-ray proof”. On the other hand this downsises the variety in products and in innovation. We think it both can benefit and hurt electronic producers. When the producers can come up with innovative and basic products for the Blu-ray, they will obviously benefit from it. But when they can not make outstanding products, which is possible when there is not a lot of variety, they will get hurt. Also the brandname is important. For movie producers it is the same story again, it can hurt them and they an benefit from them.
Movie producers can not make the big deals with competitors anymore, since there is only one dominant design. In that way they get hurt from it. On the other hand movie producers have got more certainty about distribution for their movies, their movies are more “safe”. The total profits will be less, but on the long term they benefit from it more. Literature Suarez, F. F. 2004. Battles for technological dominance: an integrative framework. Research policy, 33:271-286. Online sources Walmart Corporate Stores. 2008 http://walmartstores. com/pressroom/news/7944. aspx. February 16.
