In class, we developed a model of information cascades where at any point, if an individual sees that the absolute value of the difference in the number of acceptances and number of rejections is greater than one, he/she simply follows the majority and initiates a cascade. However, it is clear that such a model is too oversimplified in the real world. The HD-DVD vs. Blu-Ray format battle has been raging on for years with no clear winner until early 2008 with Warner Brothers announcing that it will terminate production of HD DVD movies. Why was Warner Brothers such a decisive factor in the format war? It was not decided when Intel and Microsoft (both Fortune 100 companies) backed HD DVD in September 2005. Similarly, in August 2007, Paramount and Dreamworks Animations (both major studios) favored HD DVD but were unable to shift the industry in starting an information cascade.

Clearly, we have to evaluate the effect of each individual’s decision in modeling a cascade. In this case, a single decision was sufficient to initiate a cascading effect. The reason that other companies could not start a cascade was because they were not as prominent of a player in the HD DVD/Blu Ray disc industry. Although Microsoft and Intel are powerful companies, they are focused in their respective computer software and semiconductor industries. Paramount and Dreamwork Animations are both major studios but they are still relatively small compared to the giant Warner Brothers which commands a $42 billion market in the global home entertainment industry. The large effect of Warner Brother’s decision was sufficient to start a cascade where over the next six weeks, Best Buy, Netflix and Wal-Mart all announced that they were phasing out HD DVD sales. On February 19, 2008, Toshiba, a key backer of HD DVD announced that it would cease production of HD DVD players. An important note is the speed at which information cascades can occur once started. A battle which was fought over the course of years was settled within a period of just six weeks with manufacturers and retailers coming to a consensus.

One aspect which contributed to Warner Brothers finally coming to a decision was the declining DVD sales from consumer confusion. Consider the network diffusion model presented in class. Although many details will be left out, consider a new model with 3 possible decisions where A represents switching to HD DVD, B represents switching to Blu-Ray and C represents staying with DVDs. Consumers were quite confused between the differences between the two formats and without a decisive winner, they assigned very low payoffs to A and B. Without any mathematical equations, it is still clear that with the low popularity of the two players and such low payoffs, it is difficult to initiate any cascading effect of people switching to HD DVD or Blu Ray. It is also possible that the uncertainty of the dominant future format dropped the payoff of C as well leading consumers to simply wait. (In this model, every individual possesses his own payoffs which may differ from others’ payoffs). Now that the format war has settled, people will realize that it is not worth it to purchase HD DVD players and the payoff to B will drop practically to zero for everyone. Although this model was not developed in class, payoffs do not remain static. This is quite important because a rising payoff can potentially overcome clusters which previously stopped it from cascading. In this case, the payoff for purchasing a Blu-Ray player has spiked in recent weeks because there is no more consumer concern that the technology will be rendered useless if it loses the format war. It may take time but eventually, it is possible that every average American will have a Blu-Ray player just like everyone owns a PC or laptop today. Warner Brothers realized that its decision was crucial to maintain strong sales of discs by bringing in network diffusion concepts which will encourage consumers to adopt new technology.

http://www.nytimes.com/2008/01/05/technology/05disc.html?em&ex
http://pcworld.about.com/od/dvdtechnology/Timeline-HD-DVD-vs-Blu-ray-D.htm
http://www.hollywoodreporter.com/hr/content_display/business/news/e3if32b8f1fa30457d7f93590b04608f673