Working Paper: CEPR ID: DP3935
Authors: David Dranove; Neil Gandal
Abstract: In April 1997, a consortium of hardware manufacturers and movie studios launched the DVD format. By that fall, electronics retailing giant Circuit City announced its intentions to launch a partially incompatible format known as DIVX. This Paper assesses Circuit City?s strategy to establish the dominant standard for digital video technology. We identify several key principles that any firm must consider when deciding how to compete in a market with evolving standards. We argue that virtually all of these factors weighed in against Circuit City, so that its effort was destined to fail.
Keywords: network effects; standards war
JEL Codes: K21; L82
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Circuit City's decision to introduce Divx as a partially incompatible format with DVD (L15) | Circuit City's failure to win the standards war (L15) |
| Consumer confusion and lack of studio support (L15) | Circuit City's failure to win the standards war (L15) |
| Early adopter preferences (D16) | success of technology adoption (O33) |
| Failure of early adopters to embrace Divx (D16) | Circuit City's failure to win the standards war (L15) |
| Network effects (D85) | value of Divx product (D46) |
| Lack of consumer adoption (D19) | lack of network effects for Divx (D85) |
| Circuit City's choice to pursue a one-way compatibility strategy (L15) | discouragement of software developers from creating Divx-exclusive content (L17) |
| Failure to build a supportive value net (D85) | Circuit City's failure to win the standards war (L15) |