Chapter 115 Question 104

Why is the DVD format used in the US different from Europe and elsewhere, but the CD format is the same everywhere? (Valerie Boucherio) If a French tourist, visiting relatives in New York, brought a DVD bought in Paris as a gift, they would quickly discover that American DVD players would not play it.Likewise, if she buys a DVD in New York, she will be disappointed to find that the American DVD won't play on the French DVD player at home.But the CD has never had this kind of problem.CDs purchased anywhere on the planet will play on any CD player sold in any country.Why do DVD manufacturers adopt multi-format solutions, but CD manufacturers do not?

To find a plausible explanation, first see that the movie studios market two products to the mass market, theatrical movies and DVDs, while the music companies have only one CD.These three products have one thing in common: they have an extremely low marginal cost of serving additional consumers.For example, with most movies shown in theaters, there are always extra seats available at certain times.And after the movie or music album is produced, the cost of producing an extra DVD or CD is only a few cents.The studio had two products for sale, prompting them to employ a unique marketing strategy.

The goal of every seller is to get customers to pay as much as possible for their products.As mentioned earlier, one effective way to do this is to offer discounted prices, but only those consumers who are willing to cross a certain threshold can enjoy this discounted price.A particularly useful hurdle has been used by movie studios, charging a premium price for a film released in theaters but a lower price for a DVD release a few months later.A family of four can spend about forty dollars at the theater to see a new movie that just came out, but if they're willing to wait a few months, they can rent a DVD for three dollars to watch at home.Releasing DVDs at the same time as movies are released jeopardizes the sale of expensive movie tickets.

Studios typically stagger a movie's opening day in key international markets to allow actors to travel to promote it.Therefore, a movie may be released in September in the United States, February in Europe, and June in Asia.If the DVD format is the same all over the world, DVDs in the United States will be released in February, and rental stores in Europe and Japan will be able to buy them from Amazon.com and rent them to local consumers.As a result, consumers in Europe and Japan can see the movie before it is released in local cinemas, saving on higher movie ticket prices.Different countries have different DVD formats, an attempt to avoid this from happening.

Music companies face similar incentives.After all, staggering CD release dates in various markets allows musicians to travel to the country before the album is released.But while movie companies get revenue from movie theaters and DVD sales, record companies get revenue only from CD sales.When a band tours, concert ticket money goes directly to the musicians, not the record company.Therefore, CDs can freely cross national borders, and there is no harm to record companies. Some international differences have nothing to do with differences in income, prices, or economic policies, but rather arise from different motivations brought about by different social mores.