What Are the Lessons of the Blu-Ray/HD-DVD Battle? A Freakonomics Quorum

Even if you don’t care one bit — and this probably describes the vast majority of Americans — you have probably heard by now that a Great Format War has been fought, and apparently won. The HD-DVD format for DVDs, backed by Toshiba, has lost out to Sony’s Blu-ray format. To be sure, there are some caveats. In this Computerworld article, for instance, Lucas Mearian writes that Blu-ray’s victory may not be remotely as meaningful as it seems. Having recently spent a cold, rainy, but thrilling afternoon walking the Freedom Trail in Boston, I would put it this way: the Blu-ray victory may end up being as expensive, and as predictive of ultimate victory, as was the British victory of Bunker Hill. (This is not to say that HD-DVD will come back and win the war; it likely won’t. Still, the Blu-ray victory is hardly unqualified.)

So what are we to make of this format skirmish? We gathered up a group of smart people who think about such things — Shane Greenstein, Andrei Hagiu, Michael Santo, and Pai-Ling Yin — and asked them the following:

Is the battle between HD-DVD and Blu-ray really over? What can we learn from it?

Here are their answers. Thanks much for their participation and insights.

Shane Greenstein, professor of management and strategy at the Kellogg School of Management at Northwestern University:

While the history of format wars teaches analysts not to infer lessons too hastily, it is much more fun to throw such caution to the wind. So here goes. I see three lessons from this recent battle, one for vendors and two for buyers.

The lesson for vendors: a format victory does not guarantee profitability. Neither side in this fight committed a strategic error. Each hardware vendor lined up a large coalition, launched a sophisticated campaign, and fully funded their marketing efforts. Such sophistication led to large sunk expenses. That put both sides in a position to lose money unless the war settled quickly. It did not. HD-DVD had its best chance when it came to market earlier than Blu-ray. HD-DVD did not win because it did not build enough early sales to slow its competitor’s later sales, which went well enough to nearly tip the market.

The HD-DVD coalition responded by offering subsidies for content providers, keeping the fight alive. Reportedly, buyers bought a million units of HD-DVD and a million of Blu-ray, with the latter being more recent. Retailers – especially Wal-Mart and Best Buy – have recently lost patience with splitting precious shelf space between formats, and have settled on Blu-ray, the format that sells more content.

In brief, neither side exits this war with profitability. HD-DVD will soon assume niche status, and the coalition will take a write-down. At best, Sony avoided disaster by not losing completely. Still, that avoidance happened only with a very high initial expense that Sony cannot possibly recover until Blu-ray sells many units for a long time. In brief, neither side has profited, or will do so for some time.

The lesson for an impatient buyer: a format war does not benefit every impatient buyer. An impatient buyer wants the latest functionality at almost any price and wants it soon. Those buyers exist in every market for consumer technology gadgets, benefiting from the usual free-for-all. Things will turn out well for one group of impatient buyers, those who bought Blu-ray, but not necessarily as well for the other group, or HD-DVD buyers. The latter own a system with a good chance of becoming orphaned by hardware vendors and movie title providers. There is no way to buy insurance against such a contingency, nor is there a large tax deduction for donating obsolete equipment to museums stocked with 78 RPM turntables, 8-track tape players, and laser discs.

The lesson for a patient buyer: patient buyers gain certainty by ceding control. Patient buyers usually do not itch to change their situation quickly, waiting for a new gadget to exhibit a clear and pragmatic value proposition. Vendors believe that there are many such buyers in this market, comprising the vast majority of VCR owners. Indeed, it looks as if patient buyers benefited from waiting out this format war, and will soon experience lower prices, larger libraries, more convenience, and reduced uncertainty. Yet, as in prior wars, waiting has its risk. Patient buyers ceded control over the format choice to impatient buyers and sellers. Did earlier market participants make a choice that serves the interests of later market participants? It is difficult to say at this point.

Pai-Ling Yin, assistant professor of strategy at M.I.T.’s Sloan School of Management:

Unfortunately for Sony and Toshiba, both Blu-ray and HD-DVD lost the battle long before Toshiba’s withdrawal. To see this, it helps to remember that this is indeed only one battle in a much longer and larger war.

First, the longer war: technology markets are characterized by waves of innovation, where the latest and greatest of last year is replaced by the latest and greatest of next year. Joseph Schumpeter described this pattern as “the perennial gale of creative destruction.” Blu-ray and HD-DVD are simply the next generation of discs, replacing the standard DVD of the last generation. Thus, there is but a limited amount of time (until the appearance of the next generation technology) for the firms and the technology of this generation to reap the rewards of being the shiny new item on the block.

In the presence of indirect network effects, that window of opportunity can be eaten away in a standards battle between two incompatible technologies. Movie studios and game developers want to produce DVDs compatible with the standard that the most consumers adopt, and consumers want to buy the DVD player for which there exists the largest selection of movies and games. Consumers, worried about buying the losing technology (think Betamax vs. VHS), may delay adoption of both technologies until the battle is resolved.

To avoid delayed consumer adoption, Sony and Toshiba tried to coordinate on one technology standard in 2005. Their failure to do so led to the protracted fight in the market for content and distribution allies that leads us almost 3 years later to ask, “Is the battle over now?” The reality is that relative to the sales that could have been garnered from faster and higher volumes of DVD players had Sony & Toshiba been able to come to some agreement, both firms have lost. (It is interesting to note that the straw breaking the camel’s back may have been Wal-Mart’s decision to stop carrying HD-DVD players, reinforcing the importance of distribution and access to new technologies in market-tipping episodes such as the browser wars between Netscape and Internet Explorer — see Bresnahan & Yin’s “Standard Setting in Markets: The Browser War” — and from floor-based to electronic exchanges — see Cantillon & Yin’s “Competition Between Exchanges: Lessons from the Battle of the Bund.”)

Even worse, the window of opportunity is closing. This battle will end with both HD-DVD and Blu-ray retreating in the face of a new challenger: digital downloading. Disney movies can already be downloaded via Apple iTunes, cable companies offer videos on demand, and consumers can record shows and movies in high definition on their HD-compatible digital video recorders. The ability of consumers to perceive this challenger just over the horizon further stalls DVD player adoption. Why bother investing in a player when it may soon be obsolete?

This question brings us to the larger war: the next-generation DVD player is only one battle in the larger war over the living room. Who will control the home entertainment center? As digital technologies converge, firms like Sony, Microsoft, Apple, and TiVo continue to add more and more features to their respective products, allowing consumers to use a single device to manage pictures, music, video, games, etc. Blu-ray or HD-DVD is one feature. Another feature is network capability. Even when Blu-ray becomes obsolete, Sony hopes the device upon which it entered a household will maintain its prime real-estate position in the living room, and download a Sony Pictures movie via its Internet connection, as well as manage all other digital media in the home. As a result of Sony’s ownership of content, Sony may have a stronger interest than Toshiba in holding out in this losing battle, if only to get a foot in the door of as many homes as possible.

Andrei Hagiu, assistant professor of business administration at Harvard Business School:

Even after Time Warner’s announcement last month that it was dropping support for HD-DVD and becoming Blu-ray exclusive, and after Best Buy, Netflix, and Wal-Mart all announced earlier this month that they would give more prominence to Blu-ray and gradually but surely retire HD-DVD hardware and DVDs from their offerings, there were still some people who thought that HD-DVD had a small chance. Not any longer, after Toshiba officially conceded defeat recently: the HD-DVD format has lost — that much is certain.

The more interesting question is, “Has Blu-ray has really won?” This epic standards duel has lasted about two years and, as a result, both camps have sunk hundreds of millions of dollars into trying to gain the upper hand — not necessarily by improving their respective standards technologically, but, say, by paying bribes to large content providers in order to win their support.

For example, as a result of such tactics, Paramount and Dreamworks signed 18-month exclusive deals with HD-DVD last summer. (They were reportedly paid $150 million by Toshiba and its allies.) Given the outcome this winter, that looks pretty wasteful. Sony and the Blu-ray camp have also had to throw out a lot of money to sway movie studios, as well as to convince retailers and consumers that Blu-ray is the wave of the future rather than HD-DVD. It is not clear that the current size of the “pie,” which is now available for sharing between Sony and its allies, is big enough to offset these losses. In fact, the greatest irony of all is that Toshiba’s price went up 5 percent after the announcement last week. That’s not so surprising, in light of the above: investors must be relieved that Toshiba will finally stop throwing money away in order to get people on its standard.

Most importantly, what if this heavily publicized standards battle ends up being just a footnote in history, an irrelevant battle for an obscure technology, once the spotlight has shifted to other technologies (e.g., video on demand, IPTV and Internet download service) that might completely leapfrog DVD standards? And Sony, for all its might in consumer electronics, has generally looked awkward, slow, and uninspired when it came to designing content portals. (Think Sony Connect in digital music — about 3 years late on Apple’s iTunes; or its silly approach to content for its eBook — why would anyone pay for electronic books that you have to read within 3 months before they disappear?) Today, the company is nowhere to be seen in digital video services. Yes, the Blu-ray victory must feel especially sweet after the Betamax debacle 20-odd years ago, and given the reinforcing effects with PlayStation 3. But the company would be well advised to start looking into services such as Apple’s iTunes, Amazon’s Unbox, and many other advances that are threatening to make physical digital formats irrelevant.

So did we learn any new lessons about how to win a standards war? I’m not sure: it’s still all about doing whatever it takes to secure favorable expectations (from consumers and content providers) and getting exclusive deals for content or distribution (in the end, that’s what carried the day for Blu-ray, despite more expensive hardware). And oftentimes, these actions are not related to making better products.

Perhaps one lesson that this particular war drives home particularly well is this: not fighting in the first place might be a very good strategy to win, if only the contestants could be smart enough at the beginning. Mounting investments in standard wars is akin to a bidding war for a $20 bill: once you’ve decided to participate, you are sucked into a wasteful battle, in which people bid higher than $20. The worst consequence of fighting between incompatible standards is that consumers will simply not buy either until one has clearly won; why would anyone pay $400 plus for a 50 percent chance of getting stuck with a losing technology (a new Betamax if you will)? And then, when one technology has won, consumers might not rush to the winner if substitute technologies have appeared.

Bystander players in standards wars (in this case, content providers such as Hollywood studios) also have a lesson to learn: indecisiveness can be very wasteful for them, too. Sitting on the fence for too long rather than taking a stance and trying to make the market tip to one standard (which they have the power to do!) makes the pie shrink for everyone, including themselves. For example, why did Time Warner have to wait so long before committing?

Michael Santo, executive editor of RealTechNews and technology blogger:

For a long time, this war was a relative standoff, with HD-DVD selling more players and Blu-ray more titles, with an almost 2-1 margin in the first three quarters of 2007. Then the hammer fell, just before the Consumer Electronics Show in early January, when Warner Bros. announced that it would support Blu-ray exclusively.

This move left only Paramount and Universal as the major studios supporting HD-DVD, and gave Blu-ray a huge advantage in what counts the most in the war: content, with 70 percent of titles released only in Blu-ray. After all, what good is a player with nothing to play?

In the past few weeks, it’s been like a snowball rolling downhill, gathering speed. Netflix announced it was dropping HD-DVD, then Best Buy promoted Blu-ray over HD-DVD. And finally, Toshiba is throwing in the towel. And perhaps the biggest blow: on Friday, Feb. 15th, Wal-Mart announced that it would drop HD-DVD. When the world’s largest retailer drops you, you are toast.

Yes, the war is truly over. The lesson learned is an expensive one, for the companies involved as well as for consumers. For the former, the lack of a unified standard will end up costing the “losers” millions. You would have thought this lesson would have been learned after Betamax, but apparently it was not.

For consumers, the lesson is: don’t rush in immediately when something new comes out. Even without competitive standards, the number of problems in the early players, particularly Blu-ray, screamed, “wait.” Consumers should at least give new technology time to shake out the bugs, and, with competition such as this, let the dust settle. With this war over, though, there may be a new war beginning that the consumer can win: Blu-ray player price wars.

But does Blu-ray still have its work cut out for it? I believe this is the case, though its fate will take some time to play out. One need only look at recent announcements from HBO and Netflix to see the writing on the wall. Streaming video is the future, and will probably dethrone optical discs in the end – though probably not so fast that the Blu-ray Disc Association won’t have time to gloat.


Jay

Yawn ... Downloads
Where does this belief that downloads are the future come from? Is no one paying attention to the fact that more and more companies are trying to charge us more for our bandwidth? I will not pay twice for content and I will stick with physical media that I can do whatever I want with.

janpi

Must be reduction in price

www.radioboville.blogspot.com

Andy

We do have the infrastructure to support super-fast downloads (tons of unused fiber optic cable practically everywhere). It's just that there is no incentive for internet companies to do it because there is often minimal competition. In many areas only one company (Comcast/AT&T/Verizon) dominates.

One possible solution is a government subsidy for higher speed broadband (10 Mbps+). That should encourage new players and existing ones to invest in those technologies.

The DaybreakBoy

Many of you refer to unlimited download caps, which will allow the downloaded movies format to be successful. This does, however, seem to be exclusively an American phenomenon. In countries without strong telecommunications competition and decent infrastructure downloading anything more than 10-20 gb a month is extremely expensive.

Similarly, when in America, I noticed that strangers in LA would refuse to take my money when I offered to pay them for letting me call NY on their cell phones. In my country (New Zealand) a cell phone call of five minutes would cost around $8, the after tax equivalent of an hours work for an unskilled worker.

Denis-Carl Robidoux

The movies on blue ray discs are recorded on streams up to 36 Megabits per seconds and when then majority of people will have access to such speed on the Internet then and only then blue ray could become obsolete

But also I like having a refined product in my hand and downloadable movies do not fulfill this.

I do not think that the Blue-Ray failed, I believe it will flourish.

Having a nicely transfered movie on high-definition is like magic, my eyes feast on those really fine pixels and whoever believes that a regular DVD or a "upconverted" DVD is enough missed the point on what is HDTV, completely

Even HDTV by cable is not up to the challenge, they have too much mpeg artefacts due to re-compression of the data stream, maybe it's just my area but I don't think so.

So I believe Blue Ray will flourish.

doppleclutch

The panelists seem to exist in their own echo chamber and don't seem much beyond it.

The real test of whether Blu-Ray has "won" the war will be 02/19/09 when analog OTA transmissions will cease. This will be a major push for consumers to trade up to HDTV sets. If the manufacturers are wise, they will bundle Blu-Ray players wth the sale of their HDTVs (may do so now) so the consumers will see (and show off) the benefit of the HDTV they just bought. This bundled-sale will in turn generate a long term sustained sale of Blu-Ray discs.

That's not to say Blu-Ray will overtake DVDs. DVDs for all intents and purposes are "good enough" that the inertia to change is too great to overcome. DVDs and Blu-Ray will co-exist for a long time as DVD will be the "Value" and "Mainstream" format while Blu-Ray will become the "Prosumer" and "Enthusiast" format.

I'm not terribly confident in the prospect of digital downloads, as there is a major trade off between download time / bandwidth and quality. This will of course change over time, but for now, high quality downloads is NOT PORTABLE. If you're taking a road trip / plane trip, DVDs are still the best format for bringing along portable entertainment as they're easy to copy (within Fair Use provisions, of course) and inexpensive to replace in case of loss. In time, we may see Movies on an USB key (with or without downloading), but the distribution infrastructure for DVDs is already in place. Kids get bored in the middle of a road trip? Stop by Wal-Mart or Blockbuster and pick up another movie on DVD.

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Kenny

I agree that digital downloads will eventually overcome Blu-ray, but theres only one problem with that prediction for the near future. The current internet framework is no where near able to withstand the sheer bandwidth required to deliver high definition content on the Blu-ray level to individual homes, computers, and etc. Take Comcast for example. Currently they're offering 6-8Mbps download speeds for the typical cable internet user. I'm living in an apartment with mostly college students, and it shows. The apartment's been contracted out to Comcast so we don't have a choice, and so everyone in the building has the same or similar service. Already the pitfalls of current technology shows itself as I never go above 1.5Mbps download speeds. That speed is not enough to stream Blu-ray quality movies. Recently we tried to watch a Netflix DVD quality movie, and it had some troubles near the center. This was even after Comcast came out and upgraded all the hardware in the building.

So from personal experience I would have to say that Blu-ray will have at least as much time as DVDs did to stay in the market before it's outdated by the next technology, namely streaming/downloaded movies.

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Eduardo

People seem to forget that the decision of when to offer downloads is in the hands of the studios, so some people will still prefer to buy the disc rather than wait. I also believe that there is a large number of people who like to own a copy of the movie although it is available for rental.
On a different note, the format war was not only about in which format movies will be distributed. The artcile also mentions the positive effect on PS3 but the overall effect of the availability of 1080p content on sales of 1080p TVs (giving Sony an edge over both 720p TV manufactures in Taiwan and China and plama manufactures which don't have price advantage on 1080p). Hard-disc recorders and, as prices fall, bluray recorders also benefit from the move to full-HD. Another market which will benefit is optical storage for computers, which should see a much faster adoption thanks to cheaper blue diodes (Sony is poised to be the leader in optical drives).

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Ray Rivera

Yes I agree to that downloads are the future but the current abysmal state of broadband in the US is the thing that will hold it back. Cable and communication companies like AT&T will continue to stifle it in lew of their own media distribution options/monopoly. I guarantee that psychical media will always have a place as long as storage density increases. Their may be a lull here and there as new technology develops but the tangible will have it's place regardless. Now give it 3 or 4 years after the recession for broadband to catch up with Europe, when Americans have the money to be leeched by the com companies again, then we will see viable speed options for almost instant on demand down loadable movies, "But for a price Urgarte, for a price"

Jeff M.

Funny how everybody keeps talking about digital downloads being the future. I don't know ANYBODY who utilizes this, nor anyone who is interested in such a thing.

Do I live in a weird part of Chicago or something?

Everybody I know was waiting out the format war. Now, they are waiting for a BD Profile 2.0 player to be released and then they will consider buying.

On Demand is nice for "renting" a movie, but if it is something I want to own, give me a physical disc. Even though I listen to a lot of music on my computer, the songs are ripped directly from physical CDs that I own. Am I in the minority here?

Jabba

Blu-Ray (and HV DVD) will go the way of the 2.8 Mb floppy disk. You never heard of it? Exactly my point.

http://www.digicamsoft.com/AA/DE/4EF0374D1A29F5A5B99E5837FA07081A973D1.html

Analog Wave

Digital Downloads are a pipe dream in the US. They will be doing in elsewhere faster, if and when it comes. The US is busy trying to CURB the use of high speed lines, not encourage it. Imagine what Comcast would do trying to provide 60 Gig downloads across its network. Its not going to happen. Too little infrastructure, too little speed to make that happen.

The other issue is quality. I understand most Americans don't care about audio or video quality, but you cant get HD video or Studio Master quality audio out of a compressed source that looks marginal on a 50" HDTV, and sounds like crap on a proper Home Theater (NOT a home theater in a box for $300).

For those that demand quality and that their purchase be put to good use, optical will be the format of choice for them.

EGL

"The HD-DVD coalition responded by offering subsidies for content providers, keeping the fight alive....At best, Sony avoided disaster by not losing completely. Still, that avoidance happened only with a very high initial expense that Sony cannot possibly recover until Blu-ray sells many units for a long time. "

Isn't this pretty standard microeconomics: two entities competing for control of a monopoly will consume the expected monopoly profits in the competition?

KDW

The market would claim that I'm an early adopter and a net loser. I disagree.

I purchased an HD-DVD player specifically to watch Planet Earth in high definition, and it is still capable of doing that neatly.

I have always intended to continue further purchases using TV, or an equivalent digital download device. I have a very hard time investing in shiny silver platters when storage costs have plummetted to the point where it was cheaper for me to put all of my DVDs onto hard drive, uncompressed, than it would have been to buy a high-quality piece of furniture to hold the DVDs.

Mitch

Thank you commenters 14,15,16,20,31 for making some good points.

The Experts brought absolutely nothing to this discussion.

B-ICAL

the upscalers only fill in 50% of the screen with filler. every 2 lines are the same, every 3 lines are different. With Blu-ray every line is different. Thats why it says "true 1080p" with HDMI or an effective video cable. This is way better than DVD.
A
ll this lol..... For me Blu-Ray is huge. 8gb dvd's suck now. Less shelf space used for BD-R's and BD-RW's. Thats what im talking about, Just Im talking GB/shelfspace here. I make discs for my PS3 720p/1080p You can fit a lot more movies onto a disc than just one ;)

BD supporters know where its at. 4 and 8 layer BD discs??? People. Its basically a HDD in your pocket :)

Allt he BS I have dealt with over the last 3 years. All along I knew Blu would win.

The jokes on MS and fools who tryed to breed idiots into thinking they were soooo good. Truth hurts doesnt it. Your bad format wouldnt trick us who knew the Blu. It wasnt just early adopters. I dont call em that. The "early adopters" you speak of are people who know what is going on. The others were cheap buying HDDVD and got stomped. I have no respect for HDDVD format cause all of its adopters (lies) treated me very horrible whenever I met one. So for me I am extremely happy.:)

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stephen

For anyone who has a 1080p display and wants decent visual quality it's absolutly essential technology. CD did the same thing for audio in the 1980's. While DVD was cheap, had improved mechanical stability and slight improvement in visual quality over VHS tape it is so far from cinema quality.

DVD is expensive when compared to blu-ray which offers 1080p Hi-def, widescreen cinema Experience 7.1 channel sound and extra features for around the same price.

I only get blu-ray now it's visual quality is absolutly outstanding.
Watcing DVD it seems like everything is out of focus after you get used to the visual quality of blu-ray and you begin to notice so much more you simply cant see on DVD.

It would be like someone who is visually impared suddenly getting glasses and everything comming into focus.

I suspect many people who cant see the difference may suffer from eye problems or must have their equipment set up incorrectly.

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David

Digital downloads are far off from being a competitor with Blu-ray. Many people may be doing it at this point but there's still more people who would rather have a real library of their favorite movies. For one, a computer with any amount of storage will quickly be consumed with high definition downloads. Also having a library of these HD downloads is not so smart unless you really believe that hard drives are never likely to take a dump. I've seen that happen a lot since I use to work in a store with a computer shop. I bet everyone would just love to lose all of what they collected because of a hard drive crash. Also it is obvious that there are many people who really enjoy the bonus content that many movies have which isn't available on digital downloads. In fact there are more people who are just naturally collectors and they want to have the feeling of true ownership of a movie. These reasons alone is good reason to throw the digital download vs Blu-ray idea in the trash. It's just the media dreaming up more controversy.

Someone also mentioned DRM. DRM is necessarry for movie studios so to make it harder for people to rip them off. Everyone has pushed the studios to this point. I don't think anyone anywhere should be complaining about that subject. If you buy the movie, you can watch it whenever you want, wherever you can play the disc. It doesn't control how you use the movie in a legal way, it's there to control how you use it in an illegal manner. Apparently Blu-ray had a better system for this than HD-DVD. The music business really need DRM anymore. It just cost too much to try and find new ways to keep people from ripping music. It's too easy for people to find a way around it. That's why iTunes doesn't have DRM on music anymore but they do on movie rentals. It makes perfect sense.

Honestly I believe the better format won. It will eventually open things up for studios and game developers to do more on one disc than the HD-DVD would have been. Also Blu-ray will have more interactive extras soon. Apparently it's not there yet but it will be. The Playstation 3 can already support Profile 2. Those of you who don't understand what that is, I suggest you Google Blu-ray Profile 2.

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William Bryson

Here's a lesson we've already learned from VHS and BetMAX: Don't become an early adopter.

A quality DVD upconverting player will suffice, especially if you have a huge DVD collection.

JCN

Given that the cost of a blank DVD-R of high quality is now about 25 cents or less and an average rental is $2-4$ , anyone with a basic computer and DVD Shink and DVD Decrypter and a DVD burner can produce a great copy for 25 cents of any movie rented . In addition , almost any released DVD is quickly available in the DIVX or XVID format , and it will fit on a standard CDR for 18 cents or a cheap USB flash drive on a USB DVD player like the Phillips 5960, available for about $60( it even up-converts!). This form of downloading is already here and popular all over the world. I can't see even bothering with Blu-ray or huge download sizes for the vast majority of films. Consider how MP3's have replaced CD's. DIVX and XVID are the same revolution in Video. The only thing missing is a high quality Hard Drive player with well supported software . They are just available now and will then enable storage without the need to burn to any disc at all.

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