As technology evolves and consumer demands spur further innovation, there is often an advantage to adopting a format standard.  When a new technology emerges, it can be confusing for consumers to understand differences between competing formats in next-generation technologies.  Additionally, using the same format as your peers eases consumer problems, as illustrated in the early frustrations with Mac and Windows formats as well as other examples mentioned in lecture.  As such, the diffusion of these innovations greatly influences the ultimate market winners and format standards.

Recent technology history is littered with various format wars where companies and sometimes partnerships compete to establish the standard for the next-generation of various technologies.  These wars have involved video cassettes, video discs, digital audio players, flash memory cards, digital video data compression formats, and many other technologies.  Of these format wars, the quintessential example is the video cassette format war between Sony’s Betamax and JVC’s VHS.

Of course, the free market has many more factors that make this more than a simple case of a cascading network.  Many people have analyzed this competition in search of the explanation for the fall of Betamax.  The most popular explanation for the triumph of VHS seems to be its initially longer recording time, since Betamax was originally limited to a paltry 1 hour.  Further reasons include the manufacturing cost advantage enjoyed by VHS, which allowed higher profits for producers and lower prices on both players and cassettes, plus Sony’s ban on pornography.  The real reason is most likely a combination of many of these factors, but the interesting case is how Betamax fell from a virtual monopoly on video cassettes with nearly 100% of the market to a niche market player thoroughly beaten by VHS.

When VHS arrived, all published cassettes were in Betamax format, with the blank Betamax cassettes as the only home-recording option.  However, as the limitations of Betamax became apparent, some consumers switched to VHS.  These early adopters started the cascade that ultimately led to Betamax’s downfall.  Of course, consumers wanted to maintain compatibility to share their tapes with peers, but soon the diffusion proceeded as consumers and publishers alike wanted to take advantage of VHS.  Eventually, VHS became the majority market leader, relegating Betamax to its last small strongholds outside of the

United States.

Quite similar to the video cassette format war is the young high-definition video disc format war.  This time, Sony is once again a player with its Blu-ray format, while Toshiba and Microsoft are backing HD-DVD.  Currently, this competition is still quite close, but it would not be surprising to start seeing a similar cascading network effect as more consumers upgrade to the next-generation of technology and demand a common format.

Clearly, the understanding of network effects such as diffusion of innovations and cascading is crucial to battling in the technology business world.  As future technologies emerge, companies will increasingly need to examine the past to learn how to tip the cascade in their favor.