Thursday, January 04, 2007

The next-gen disk format fight is hardly over

Blu-Ray and HD DVD - the two biggest contenders in what will soon be the battle for 2007 and the following years in the home entertainment market. Some folks have declared that the battle is handily won, thanks to the introduction of the HD DVD decryption program for the PC, BackupHDDVD by a user named muslix64 on the Doom9 forum website. Some people will surely think that the ability to copy HD DVDs means that people will attract more consumers to the brand.

However, Sony isn't about to give up so easily. The Blu-Ray brand has a larger following in Japan than in the United States, for one thing. As crazy it might sound, also consider the PS3: Those who have brought PS3s have also bought built-in Blu-Ray players. Sony has sold around a million units, whether consumers know about Blu-Ray or not. Sony's willing to bet that they've got their foot in the door and can keep it there.

So what does the HD DVD brand have? It has "DVD" in the name. That's a sort of advertising you can't get from anywhere else. Consumers see DVDs and see HD DVDs, and the two connect - just like that. Though Blu-Ray may have greater storage capacity, people won't know what the hell a Blu-Ray is, but a HD DVD - Why, that must be an advanced DVD! HD DVD also has Microsoft, the richest corporation in the world, singing the praises of the HD DVD. With 80% of the PC market share, you can bet your donkey that Microsoft is going to have the last say in this fight.

Warner Bros. announced two days ago that they're going to produce a disc called Total HD, a disc comprised of a HD DVD disc and a Blu-Ray disc. That will no doubt further the length of the battle. Don't know which format to pick? Why not both?

So who's the real loser in this fight? Everybody. A likely outcome will be that both types survive. This whole thing will be a big headache for everyone for the next five years. There will be Blu-Ray and HD DVD apologists, separately. It'll be an extension of the ol' Windows vs. Apple OS holy wars. Both HD DVDs and Blu-Rays will occupy space on the high definition disc shelf at your local Best Buy or Circuit City - just like DVD-, DVD+, and DVD-RAM, except worse.

Everybody's going to suffer, because neither company was willing to back down - a classic outcome completely along the lines of game theory. Game theory is applied to economics when talking about oligopolies - a few companies that control most of the market share for specific markets. Sony and Toshiba are oligopolies in the HD disc industry, responsible for Blu-Ray and HD DVD respectively. Note the prisoner's dilemma. According to this version of game theory, there are two options for each player - aggressive and passive. When Toshiba and Sony are aggressive, both trying to push formats on consumers, they both profit, but by very little. When both companies are passive, co-operating with each other (and in this case allowing Warner Bros. to step in and develop both formats on a single disc), their profits will be higher than if they both try to win; allowing both formats to work with each other will give customers leeway and encourage them to choose either type. Now, what if Toshiba chooses to exit the HD DVD market, and Sony wins the day? Or vice versa? One company would then take the prize and leave the other guy with nothing; this is a very unlikely conclusion, as both companies know that there is profit to be had - But when both giants are trying to wrestle for it, the profits for each contestant won't be so impressive.

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