DP3935 Surviving a Standards War: Lessons Learned from the Life and Death of DIVX

Author(s): David Dranove, Neil Gandal
Publication Date: June 2003
Keyword(s): network effects, standards war
JEL(s): K21, L82
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=3935

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.