Adobe Labs has updated DNG conversion options in Lightroom, ACR, and the DNG Converter that offer some (possibly confusing) new options. You now have a preference pulldown for compatibility settings. What’s up with that? The short answer is that new functionality has been added to the DNG specification (and to the latest version of Camera Raw) that can do new tricks to the pictures.
For instance, there is now a way for Adobe (and others) to remove lens distortion from the image. Since this is a new function, it’s necessary to make a new version of the spec that details how to save and apply the instructions. One thing this enables is for cameras that don’t work well with the current DNG spec to now be supported. Check out Tom Hogarty’s blog to see the new camera support.
Some new DNGs that make use of these new tools won’t be fully compatible with all DNG applications. You can save them so that they will work with the older software, but they will lose some of their rawness. 
How the heck does one decide which to use?
Answer after the jump.
Case 1 – You use the latest Camera Raw (or Lightroom) If you are using the latest Camera Raw (5.4 ) or Lightroom 2.4 or 3 beta, the best thing to do is to save with the latest specification.
This will have all the latest features, and will save the images in their rawest possible form. Even if you’re using older software, you should still try to save with the newest capability. Only go back to an older version because Lightroom won’t open your DNG files with latest compatibility.
Case 2 – You need to send these files out to someone with an older Lightroom or Camera Raw version
If you need to send the images in DNG form to someone who does not have the latest version of Camera Raw or Lightroom, they can first check to see if the files open properly (in most cases, they will). If there is some new feature being used in the DNG that is not compatible with the older software, they will get a notice that the file can’t be opened. If they (or you) still want to open the files, the DNG can be run through the free DNG Converter a second time, with an earlier version of compatibility selected.
Case 3 – You are using a new camera, the new DNG converter, but an older version of Camera Raw or Lightroom
If you find that you can’t open your own files, you may want to save the files with the earlier compatibility setting. There could be a real trade-off, however, if the DNG Converter is forced to Linearize the files to make them backwards compatible. (Essentailly, this step takes a lot of the rawness out of the file). You’ll know this is happening because the resulting DNG files will be three times as large.
If you have to save a linearized DNG (or, if you are forced to save with an earlier compatibility), you should strongly consider embedding the proprietary raw in the DNG for later conversion. While this makes the DNG get significantly larger, it keeps a copy of the raw data attached to the file so that you aren’t throwing away your raw data. This may not be necessary for all your cameras – only ones where latest compatibility chokes your copy of Lightroom/ACR.
(This article was originally posted MAy 27, 2009)