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The Conduct of Standards Wars

Standards wars make for the bloodiest of corporate conflicts. And 2006 will bring us two - the first between videogame consoles and the second between battling DVD standards.

Standards wars arise from incompatibility. For example, games written for Sony's forthcoming Playstation 3 won't run on Microsoft's soon-to-be-released Xbox 360. The consoles thus set different standards for game makers. Developers must choose one standard to write for or incur the considerable expense of creating separate versions of a game for each platform.

Game makers will create the most titles for consoles they believe will be the most popular. If, for example, they expect the Xbox 360 to outsell the Playstation 3, they'll create more content for the Xbox 360.

Consumers, too, care about popularity when deciding between standards. When determining whether to purchase a Coke or a Pepsi, consumers generally don't care what soft drink other customers prefer. But when debating which next-generation gaming console to buy, a rational consumer will give considerable weight to popularity, because the most popular machine will have the most games written for it.

Expectations in standards wars become self-fulfilling. If people expect the next Xbox to outsell the next Playstation, the Xbox will have the most initial customers and software, giving it an unsurpassable market lead.

Microsoft has a tremendous advantage in the coming standards war because its Xbox 360 will be available this Christmas, whereas the Playstation 3 won't arrive until sometime in 2006. If the Xbox 360 can attract a critical mass of users, the Playstation 3 might be dead on arrival. So I expect Sony to advertise its Playstation 3 this December in the hopes of preventing Santa from delivering too many Xbox 360s.

Because initial popularity is so critical to victory in standards wars, I expect both Microsoft and Sony to lose money on their gaming consoles at first. Both firms will likely set a money-losing price for their consoles in the hopes of capturing a huge market share.

After a firm has won a standards war it can charge a higher price than its vanquished competitor. This is because most consumers will want to buy the more popular standard product even if it's somewhat more expensive.

Sony is making the Playstation 3 backward-compatible with all games written for the Playstation 2, while Microsoft will probably give its Xbox 360 only limited backward-compatibility. This means the Playstation 3 will likely start out with a huge library of games compared with what's available for the Xbox 360.

But games written for the old consoles will have far more limited graphics than new games do. Furthermore, it's difficult to engineer backward-compatibility, so Sony almost certainly sacrificed some performance capacity in the Playstation 3 to achieve it. Of course, since the Playstation 3 is coming out later than the Xbox 360, Sony's machine might include more-advanced computing technology than that of Microsoft.

Blu-ray vs. HD-DVD

Sony's Playstation 3 will come equipped with a Blu-ray DVD player. The Blu-ray standard is owned by Sony. A Blu-ray disk has enough storage capacity to hold an entire high-definition movie.

HD-DVD is a rival next-generation DVD standard. Blu-ray and HD-DVD are incompatible, so if you own a Blu-ray player you can't play a movie formatted in HD-DVD. Hollywood studios are split on which high-definition-capable DVD standard they'll support.

If the Playstation 3 sells well, Blu-ray will receive a tremendous advantage from being included on every Playstation 3. If enough consumers have a Playstation 3 Blu-ray DVD player, all the Hollywood studios will have to release movies formatted for Blu-ray. Interestingly, Microsoft has strongly hinted that eventually its Xbox 360 will contain an HD-DVD drive, although these drives won't be available on Xboxes sold this Christmas.

Microsoft is taking a huge chance in hinting that future Xbox 360s will be better than ones available this December. Customers might decide to postpone buying an Xbox 360 until it includes an HD-DVD drive.

But since early popularity is critical to winning a standards war, such postponed purchases could result in Microsoft's defeat. Since Microsoft doesn't own the HD-DVD standard, I suspect (without any tangible evidence) that Microsoft has been well-compensated for implying that future Xboxes will contain HD-DVD drives.