The Format War Between HD-DVD and Blu Ray Was Preceded

question 50

Essay

The format war between HD-DVD and Blu Ray was preceded by a nearly identical competition between DVD and DIVX. While DVD technology was used by a variety of manufacturers (including Sony and RCA), DIVX was a proprietary format developed by Circuit City. Both formats could play DVD movies, which cost about $30 each. However, DIVX movies (which could be played only on a DIVX player and not on a DVD player) could be purchased for $5 and viewed for 24 hours, with the ability to renew (including perpetual viewing) for a reasonable charge and a telephone call. Circuit City believed that consumers beginning to buy video disk players and disks would prefer its format, since the disks were less expensive and offered the convenience similar to a rental with the option of a purchase (conveniently by telephone from home) at a later date. But the DIVX format never took off, and in mid-1999, Circuit City announced that it was being discontinued. This left DVD as the dominant format for videodisks. By late 2008 Circuit City stores were in bankruptcy and closed. Relate this example to the model of the innovation stream and corporate attempts to gain competitive advantage through technological innovation. Explain how this competition in formats between DVD and DIVX fits the model of the innovation stream.

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Definitions:

Perfect Competition

A market structure characterized by a large number of small firms, a homogeneous product, free entry and exit, and perfect knowledge, leading to firms being price takers.

Profit-maximizing Price

The selling price per unit that maximizes a firm’s profits, based on its cost structure and market demand.

Demand

The quantity of a product or service that consumers are willing and able to purchase at various prices during a certain period.

Cost Data

Information or figures related to the expenses incurred in producing goods or services, including both fixed and variable costs.