The fierce competition between rival high-definition DVD formats HD-DVD and Blu-ray is just beginning to take its toll on American households. This impact is occurring in many ways, most notably in the wallets of consumers, and the inconvenience they are beginning to face which accompanies a market of two rival products. This modern day, more high-tech, competition of multimedia formats is déjà vu for many technology fans familiar with the VHS-Betamax rivalry. With the present day DVD formatting war, however, comes many associated oligopolistic network effects. The largest categories of these effects include the “tipping effect,” critical mass, and negative implications. The three sections that these issues will be outlined in are as follows: network effects, associated risks, and Sony’s strategy.
Network Effects
The current HD-DVD vs. Blu-ray battle falls at a very critical and strategic point on the “tipping effects” graph, which is attached as Graph 1. Theoretically, the company whose product gains the most market share in the long-run is supposed to prevail. I see the HD-DVD standard prevailing in the future for several reasons. Firstly, the availability of HD-DVDs and the players on which to view these discs are much more widely available and inexpensive than Blu-ray technologies and movie selection. Secondly, the delay in releasing the Blu-ray platform has stifled its growth, and the added cost of affording a Blu-ray player does not help to promote the standard in a market where demand for high-definition digital video products is mostly elastic. Mainstream America cannot afford the luxury-good aspect of Blu-ray, and is forced therefore to go with a cheaper alternative, namely HD-DVD.
Sony’s big plan is to produce and ship millions of PS3 units, filling households across the country. At a price of $500-$600, not many people can afford them. However, Sony itself cannot afford to reduce the price of its new platform any further because it is already incurring a $240 loss on each unit sold. Between this high cost, and the delay in releasing the PS3, a critical mass of users has not been reached by the Blu-ray standard, nor will it come for at least another year and a half. HD-DVD on the other hand is much closer to a critical mass of users because it is, relatively speaking, a much more affordable good, and the selection of movies available in the HD-DVD format is approximately 50% greater than Blu-ray’s. Despite it being close to a critical mass, HD-DVD has yet to reach such a point yet because a lack of production volume and interior design improvements make it too expensive to produce, and therefore too expensive for average, mainstream consumers to start buying yet. See the attached Graphs 2 and 3.
Associated Risks
When there are two competing standards, consumers run the risk of picking the wrong one. Eventually the “tipping effect” will occur, and those users who picked the wrong standard will be out of luck and out the money they spent on a now obsolete technology. Producers, on the other hand, face a much larger risk. Our article taken from The Economist remarks how Sony’s Playstation 2 was initially criticized for being too high-tech and pricy, and told it would never make it in the global marketplace. The same article goes on to tell the tale of Sony’s complete bowl over the competition in its sale of over 100 million units in just over half a decade, capturing 70% of the market share. Investing guru Michael C. Thomsett explains the situation in which large companies are placed when forced to compete in high risk industries: “It is a fact of life and of the market that opportunity and risk are joined at the hip” (Mastering Online Investing, 7). Keeping such implications in mind, the reason companies take such huge risks in pushing a technology such as Blu-ray is because of its potential to lead to enormous profits in the future and, therefore, the ultimate success of the product and the company. What producers risk is losing vast sums of money investing in a technology which may ultimately fail. On top of that, such a failure can cause the company to go out of business. In the gaming industry the stakes are high, but companies like Nintendo and Sony have the assets and reputation to handle that kind of risk, because they know that the ultimate payout could be far greater than anyone had ever imagined.
Sony’s Strategy
Sony, in a “Trojan horse” style approach, as The Economist puts it, has attempted to mass market its Blu-ray technology by bundling it with its latest and greatest gaming system, the PS3. Sony plans to saturate the market with its Blu-ray players, installed in all of these PS3 gaming consoles, in hopes that individual users will decide to choose the only compatible standard, Blu-ray’s, discs and products in the future. The only problem with such a strategy is that the odds of selling another 100 million units are slim to none given the high manufacturing costs associated with producing the PS3. This brings to light the implications of network effects that Sony’s strategy is confirming. Because Sony is selling each PS3 right now at a $240 (almost a 50% loss on the cheaper model) loss, it is accepting a short run loss on its product in order to increase the quantity it sells. Ideally this would give Sony the critical mass of users it is looking for to use its Blu-ray standard, however unfortunately for Sony, not many people are buying its PS3. With this in mind, Sony will have a difficult time spreading the Blu-ray standard. Blu-ray discs can only be played on Blu-ray players, and those cost around $750 as standalone devices, or about $500 when coupled with the PS3 console. In this way, the Blu-ray format is incredibly inclusive. Essentially, Blu-ray is a standard that is not functional with any other standard, and ultimately it is this fact that will lead to the Blu-ray’s downfall.
Works Cited
Thomsett, Michael C. Mastering Online Investing. Chicago: Dearborn Financial Publishing, Inc., 2000.
No comments:
Post a Comment