Master of Arts – Informatics Capstone Presentation DVD: Complementary Product and Technology Diffusion Barbara Mulvenna ~ June 26, 2002

Topics to Be Covered  My Background & Qualifications  Origin of this Study  Hypothesis  Key Definitions  Highlights of Literature Review  Supporting Primary Data Highlights  Implications  Conclusion

Background & Qualifications  Retail Management I started my career with a company called Footlocker Opened four of the first 10 Lady Footlocker stores  Advertising & Marketing 12 years in Yellow Pages sales Brand management for local Harley-Davidson OEM Advertising Coordinator, Buffalo BBB  Education BS. Communication & Information Technology Certificate in Public Relations/ Advertising

Origin of the Study  Media Economics- Dr. Gary Ozanich During the past two decades, new technologies, deregulation, and access to capital markets have resulted in massive changes to the industries that provide communication products and services In the US the structure and performance of the mass media are driven by economics, primarily geared to maximizing operating cash flow* *Communication 622 Syllabus; Dr. Gary Ozanich

Hypothesis  The dramatic marketing shift on the part of Blockbuster Video and other retail outlets of DVD movie titles fueled the acceleration of mass acceptance, adoption, and consumption of DVD hardware.

Key Definitions  Complementary Products Many products consist of a system of complementary components that consumers assemble to meet their needs  Indirect Network Externalities The greater the availability of complementary products, the more attractive the capital good for consumers  Network Effects Firms rarely act alone to create new products, and products rarely function in isolation  Installed Base The number of users or current installations of the technology

Literature Review Highlights  Van den Bulte (2000) If the complementary product structure is in place, the indication is that technology adoption will proceed rapidly  Nambisan (2002) Hardware manufacturers must consider the availability of complementary products during new product development  Schilling (2002) Technologies can rise rapidly to dominate the market when there is a heavy dependence on network externalities If an event gives a technology an initial advantage in adoptions, it may benefit from the development of complementary technologies, and its installed base may increase until the technology achieves an advantage that is nearly insurmountable

Primary Data Highlights  VHS profit vs. DVD profit  Blockbuster increased DVD floor space From 20% to 40%  Blockbuster’s 2001 Marketing Campaigns  DVD’s share of rental market has grown to 29.2% Up from 12.4% year-to-date 2001  VHS rentals decreased 16.8%  Blockbuster Video’s 4 th quarter 2001 charge $450 million

Primary Data ~ Sales Numbers Year Disc Unit Sales (m) Player Unit Sales (m)

Primary Data ~ Diffusion Curve Figures compiled by Ernst & Young on behalf of the DVD Entertainment Group (DVD Report, Jan 2002)

Implications  This study is relevant to all components of the home video software chain Studios / Content Providers 2001 (est.) 44% of studios domestic revenue from rental channel; more than 15% from Blockbuster*  This study is relevant to the manufacturing sector Unexpectedly strong demand for DVD players has pushed demand for DVD chips above expectations Robert Blair, ESS Technology, Fremont CA.**  This study implies that DVD format has reshaped the theatrical aftermarket *Daily Variety (2001) **Purchasing (April 2002)

Conclusion  The DVD business model is favorable to the retailers, particularly the market leader in video rental, Blockbuster  The impetus for adoption by consumers was spurred by the apparent abundance of DVD content and a seemingly shrinking selection of VHS content  The initiative of Blockbuster Video to increase availability of DVD content and the adoption of DVD technology coincide  This relationship has been clearly established in the literature on complementary product strategy and network externalities  This study shows a push from the product complement side toward wider acceptance of the primary technology, DVD players

Questions? A special thank you to Drs. Ozanich and Halavais for their guidance on this project. Thank you to all the Informatics faculty for their inspiration, enthusiasm, and support.