InnoWiser

When elephants fight, it’s the grass that suffers. Just when you thought that marketers had learnt their lessons from previous format wars, in comes the news that Paramount and DreamWorks would exclusively back the HD DVD format.

For those who are keeping track, both HD DVD and Blu-Ray standards allow storing immense amounts of data (the actual number is not exactly relevant to the story) on optical disks. These are the next-generation of optical storage devices. Blu-Ray, from Sony’s camp, claims storing from up to 200 GB (theoretical), while HD DVD, from Toshiba’s camp, claims up to 60 GB. As far as I am concerned, that counts as  ‘what-will-I-do-with-all-this space’, but I digress. For the curious surfer, Engadget has an excellent overview of the history of these standards, along with a list of organizations in each camp.

What has me worried sick is whether I should spend my hard-earned – and now depreciating — dollars buying a Blu-Ray player or an HD DVD player? I will happily shell out for either of these players, as long I am reasonably confident that there will be plenty of movies available in the said format at a reasonable price; I can borrow or trade-in the disks from friends; backup my data on these disks or exchange the disks without fear of having an obsolete format. And therein lies the crux of the dilemma for marketers of any innovation.

How should innovations that exhibit strong network externalities be marketed? Where should the battle of the formats be played? At the technology standards level? At the political level? In the marketplace?

Many technical products exhibit network externalities or network effects. A user’s utility of the technology (or a product, such as a Blu-Ray player) depends not just on that technology, but also on external factors such as the number of people using the technology, complementary products, etc. (e.g. libraries of movies, backup disks, etc.). More importantly, the utility increases as other people use those products. [Think the early adopter of a fax machine, and his utility versus the late adopter and his utility.]

Traditionally, most technologies that exhibit strong network externalities also exhibit a chicken-and-egg Catch-22 situation. Should firms lay out a network first at huge costs, or should they wait until a large number of users buy a device? Should you, the user, be the first one to buy a new fangled device, or wait until others are already on the bandwagon? Most users fall across the broad spectrum of segments from early adopters to laggards (but I won’t cover that specifically in this post).

The traditional way marketers have resolved this dilemma is to try to create a critical mass of users or customers. Creating a critical mass often requires being (among the) first to bring a product to market. Or at least introducing the product before the major competitors do. Blu-Ray camp introduced its players last year at a price of around $1,000. I understand HD DVD camp also introduce its players and drives soon after. Toshiba now has a new player that retails for less than $500.

For those who cannot create an actual, critical mass, there’s always the illusion of a critical mass. Hence the chest-thumping announcements from each camp in the format wars about their products selling like hot cakes, and bloggers are claiming that the wars are over. The belief being that those who create the most noise must obviously be winning. (I’m not entirely convinced, but I’ll leave that aside for now.)

But there is one critical factor that drives adoption like nothing else: price. Early adopters and innovators often adopt products without (much) regard to the price; for them the utility is often in being the first to purchase, and the bragging rights that go with it. But for the majority of pragmatic users who value practical utility of the product and weigh in on the cost, a certain psychological mark is often required to take the plunge. This psychological mark is sometimes $0 (meaning free), but often it is the value of replacing whatever it is that they are replacing.

When prices start falling below the range of $200-300, and offer movie titles for less than 50% premium over current DVD retail prices, I believe the adoption will increase dramatically. I could, of course, be incorrect, and I’ll be happy to see more adoption - that will only increase my utility when I finally decide to take a plunge.

Obviously, as the battle of the formats moves towards the marketplace where the customers will actually pay for product, the more expensive it gets to sustain the battle. On solution to prevent this expensive battle was to try and stop the battle while it was still being fought in the technical stages. This would have meant creating compatible Blu-Ray / HD DVD players, or merging the standards, or some such technical solution. But apparently, both the camps thought they had power to win and subdue the other. And now we are in this mess again, much like Sony with its BetaMax and JVC with its VHS were, years ago.

For me, the most fascinating aspect of such a business war is how neither of the sides learnt its lesson. For now, I’m just sticking with the plain old DVD and watching the battle from my position atop the fence.