Stephen J. Dubner’s March 4th, 2008 blog post “What Are the Lessons of the Blu-Ray/HD-DVD Battle? A Freakonomics Quorum” closely relates to many topics that we have discussed throughout the Networks 204 semester. The main ideas that his quorum covers is the ideas relating network effects, information cascades, herd behavior, and some relation to game theory. Dubner is a credible economics author who wrote the book Freakonomics along with Steven D. Levitt. This bestseller book sold over three million copies worldwide. Furthermore, Dubner and Levitt have kept this blog through The New York Times website since 2005 to keep discussion going regarding the economic stories and events of current events.

In Dubner’s blog post, he asks Shane Greenstein, a professor of management and strategy at the Kellogg School of Management at Northwestern University, Andrei Hagui, an assistant professor of strategy at M.I.T.’s Sloan School of Management, Michael Santo, an assistant professor of business administration at Harvard Business School, and Pai-Ling Yin, the executive director of RealTechNews and a technology blogger, to discuss the late format war between Sony’s Blu-Ray format and Toshiba’s HD-DVD format. One can see that the variety of sources proves of worthy analysis of the past couple years of the format battle between these two major corporations.

The blog post focuses on the recent news that Sony’s Blu-ray format has finally won the format war after about three years of battle with the HD-DVD format backed by Toshiba. However, this victory proves to be a very costly one to Sony, Toshiba, and the market’s consumers. One theory that Shane Greenstein speaks about is that a format war victory does not necessarily mean profitability to the company. As a result of both of these formats trying to battle for the network effects to kick in and dominate the consumer market (consumers being regular people, but also entertainment producers of movies, music, and video games), both companies have suffered enormous sunk costs in marketing, subsidies, and general forms of attraction through basic bribery to large institutions. Although Sony has technically won the format war after large producers declared they were going to use primarily Blu-ray discs, the biggest move being by Wal-Mart, Sony must sell a tremendous amount of units for a very long time to recover the initial expenses. Furthermore, the furocious battle in the technology sector over high definition discs might prove to be a major loss as new technology from other companies such as Microsoft and Apple potentially taking over the technological media markets.

The blog post also mentions the positives and negatives gained by patient and impatient consumers through the idea of network effects. Impatient buyers which bought the HD-DVD format are now at a loss, since the whole market is going to shift to Blue-ray discs. On the other hand, the impatient consumers which purchased the Blue-ray discs were at a loss because they paid more money for the technology than the patient consumers will. The patient consumers did not suffer any losses at the beginning, but it can be said that they could have influenced the tipping point of one of the technological disc formats which could have lowered costs earlier. The major problem discussed by the interviewed experts in the blog post is the theory that the two companies, Sony and Toshiba, could have benefited more if they had settled on one format and not battled so strongly for the market. If they had used their money assets in different ways such as coming up with new technologies for the future, or marketing their product over the other competitor in the same format, they could have both profited more than the huge amounts of sunk costs that they took.

The idea of network effect is prominent in the format war because the more users one format had, the closer it was to the tipping point for the network effect to take over the whole market. Furthermore, game theory applies to this situation because of the positives or negatives that the two companies could have received if they had committed to their own format or decided on a common format. Sony is the technical winner of the battle, but as the experts say in the blog post, there is no winner in this situation because of the already sunk costs of the initial expenses and the way that technology and innovation usually spans out with new products created by different companies.

http://freakonomics.blogs.nytimes.com/2008/03/04/what-are-the-lessons-of-the-blu-rayhd-dvd-battle-a-freakonomics-quorum/