Literature Critique:The DVD vs. DIVX Standard War: Empirical Evidence of Network Effects and Preannouncement Effects

Essay by kooriaiUniversity, Master's March 2006

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The introduction of new technology, DVD, for replacing videocassettes was an open format to avoid format wars. However, preannouncement of DIVX made confusions to the market on different formats. Hence, it had slowed down the adoption of DVD. The effect was short-lived; DVD survived and became a successful technology, while DIVX failed to enter the market. In the following, the success of DVD, the effects brought by preannouncement of DIVX, and the failure of DIVX will be discussed.

The introduction of DVD was a breakthrough video product throughout 1990s. One of the concerns of emerging a new product was the technological standards. To avoid standard wars like Betamax format and VHS format, video hardware manufacturers and movie studios sat together to compromise for one single standard, DVD. Its success can be viewed by two dimensions, its stand-alone value, and network externality value. Let's consider DVD's stand-alone values. First, it was physically the same as CD, which had been emerged into the market for several years.

This means that, it could be easily accepted by consumers and consumer electronics manufacturers. Second, DVDs store ten times more information in which, its visual clarity is twice of the videocassettes and it support more special features such as five-channel surround soundtrack, widescreen presentation, etc. The advanced video technology brought to a higher level of insight on seeing movies. Third, as it was an "open format", DVD players could be used, and produced more efficient and effective. Consumers could also attain DVD players and DVD discs easily. For the consideration on network externality, some leading movie studios had been committed to release DVD disc even before the first DVD player release. The nation's second largest electronics retailer, Best Buy, had also indicated to fully support the DVD; they believed that DVD would become mainstream in...