Cooperation and Compatibility
- Strategies for Competing in n/w markets.
- Openness strategy
- Open migration
- Who are allies and enemies?
- Captures the tension between cooperation and competition
- Establish Standards & create a single n/w of compatible users.
How Standards Change the Game?
1. Expanded network externalities
- Enhance compatibility, interoperability
- Make network larger, increase value
- Share info with larger network
- Attracts more users
- E.g. ATM, Fax, Floppy, DVD, etc.
2. Reduced uncertainty
- Reduce technology risk for customers
- Self fulfilling
- E.g. AM Stereo, 56k modem
- No need to wait
- Confidence breeds success, Doubt spells doom
- In war, neither side may win
3. Reduced consumer lock-in
- Netscape’s “Open Standards Guarantee”
4. Competition for the market v. competition in the market
- Buy into an open standard, that becomes closed.
- E.g. Motorola Radio
5. Competition on Price V. Features
6. Competition to offer Proprietary Extensions
- Intel Labs “plug and play” and the “accelerated graphics port“ making them available to component manufacturers.
7. Component V. Systems competition
Winners and Loser from standards
- Welcome standards
- Enjoy greatest n/w externalities
- Mix and match components
- Less likely of lock-in
- But variety may decrease
- Poorly suited to needs
- Deprive from benefits of aggressive penetration pricing during a standard battle
- Generally better off as long as products comply with standards
- Eg. Recording studios and retail music stores are complementors to music CDs and therefore beneficiaries of the CD standard
- May be a threat
- If standards fuel the positive feedback cycle and help launch a new technology, they can easily cannibalize sales from an older technology.
- Deny backward compatibility
- Introduce its own standard
- Ally itself with new technology
- Technology innovators collectively welcome standards
- e.g. EMV card
- If the group benefits, there should be some way to make members benefit.
- Negotiation costs, opportunistic behavior.
- Underwriter’s Laboratory (UL)-Safety standards
- International Telecommunications Union (ITU),
- Institute of Electric and Electronic Engineers (IEEE)
- National Institute of Standards and Technology (NIST).
- Association for Computing Machinery (ACM)
- SIGART (artificial intelligence),
- SIGCOMM (data communications),
- SIGGRAPH (computer graphics),
- SIGIR (information retrieval)
- Participants often complain about the formal standard-setting process:
- it is too slow, it is too political,
- it doesn’t pick the “best” technology, and so on.
- The telecommunications industry has relied on the ITU to set international standards, starting with the telegraph in the 1860s, through radio in the 1920s, to a standard of today:
- from the assignment of telephone numbers,
- to protection against interference,
- to data protocols for multimedia conferencing.
Tactics in formal standard-setting
- What is your goal?
- National or international?
- Protecting your interests?
- What are others goals?
- Do they really want a standard?
- Don’t automatically participate – If you do you have to license
- Keep up momentum – Continue R&D while negotiating
- Look for logrolling- Trading technologies and votes
- Be creative about cutting deals – Second sourcing, licensing, hybrids, etc.
- Beware of vague promises – Definition of reasonable
- Search carefully for blocking patents – Patents held by non-participants
- Preemptively build installed base
- allies can include customers, suppliers, rivals, and the makers of complementary products
- For each potential ally, try to figure out how proposed standard will affect their fortunes.
- Try to shift the risk of failure to a large customer or government
- Assembling Allies
- Interconnection among Allies
- Alliances in Action
Managing open standards
- Open standards are prone to the emergence of multiple, incompatible versions of a standardized technology.
- What happens once and open standard is accepted and successful?
- Open standards face two fundamental threats
- First, who will be in charge of setting the direction in which the standard will evolve, since no one can apply control
- who will invest the resources to make improvements and thus keep the standard from stagnating.
Waging a Standards War
- When two new incompatible technologies struggle to become a de-facto standard, we say that they are engaged in a standards war.
- End up in Information-age standards wars
- Truce- Temporarily stop fighting Eg. modems
- Duopoly- Multiple vendor standard. Eg. Android and iOS
- Fight to death Eg. VCR
Classification of Standard Wars
Key Assets In Network Markets
Just what does it take to win a standards war? Your ability to successfully wage a standards war depends on your ownership of seven key assets:
(1) Control over an installed base of users,
(2) Intellectual property rights.
(3) Ability to innovate.
(4) First-mover advantages.
(5) Manufacturing abilities.
(6) Strength in complements.
(7) brand name and reputation.
What these assets have in common is that they place you in a potentially unique position to contribute to the adoption of a new technology. If you own these assets, your value-added to other players is high. Here we offer a more complete list of assets, noting that some companies have used these assets to fight standards wars, while others have used them to help establish standards favorable to their interests.
1. Control over an installed base of customers. An incumbent(official) firm, like Microsoft, that has a large base of loyal or locked-in customers, is uniquely placed to pursue an evolution strategy offering backward compatibility. Control over an installed base can be used to block cooperative standard setting and force a standards war.
2. Intellectual property rights. Firms with patents and copyrights controlling valuable new technology or interfaces are clearly in a strong position. Qualcomm’s primary asset in the digital wireless telephone battle was its patent portfolio. The core assets of Sony and Philips in the CD and DVD areas were their respective patents. Usually, patents are stronger than copyrights, but computer software copyrights that can be used to block compatibility can be highly valuable.
3. Ability to innovate. Beyond your existing IPRs, the ability to make proprietary extensions in the future puts you in a strong position today. In the color TV battle, NBC’s R&D capabilities were crucial. If you have a crackerjack R&D group, it may be worth some current sacrifices if you think you can outrun your competitors in the long haul. Hewlett-Packard’s engineering skills are legendary in Silicon Valley; it is often in HP’s interest to compromise on standards since it can out-engineer the competition once the standard has been defined, even if it has to play some initial catch-up.
4. First-mover advantages. If you already have done a lot of product development work and are farther along the learning curve than the competition, you are in a strong position. Canon is a good example. It created the personal laser printer market and has continued to dominate the manufacture of the engines in laser printers, in part by exploiting the experience curve to keep costs lower and quality than its competitors. Netscape obtained stunning market capitalization based on its ability to bring new technology to market quickly.
5. Manufacturing abilities. If you are a low-cost producer, owing to either scale economies or manufacturing competence, you are in a strong position. Cost advantages can help you survive a standards war or capture share competing to sell a standardized product. Compaq and Dell have both pushed hard in driving down their manufacturing costs, which gives them a strong competitive advantage in the PC market. Rockwell has lower costs than its competitors in making chipsets for modems. These companies benefit from open standards, which emphasize the importance of manufacturing skills.
6. Strength in complements. If you produce a product that is a significant complement for the market in question, you will be strongly motivated to get the bandwagon rolling. This, too, puts you in a natural leadership position, since acceptance of the new technology will stimulate sales of the other products you produce. The larger your gross margins on your established products, the stronger this force is. Intel’s thirst to sell more CPUs has driven in its efforts to promote new standards for other PC components, including interfaces between motherboards and CPUs, busses, chipsets, and graphics controllers.
7. Reputation and brand name. A brand-name premium in any large market is highly valuable. But reputation and brand name are especially valuable in network markets, where expectations are pivotal. It’s not enough to have the best product; you have to convince customers that you will win. Previous victories and a recognized name count for a lot in this battle. Microsoft, HP, Intel, Sony, and Sun each have powerful reputations in their respective domains, giving them instant credibility. Don’t forget that customers as well as technology suppliers can control key assets, too. A big customer is automatically in “control” of the installed base. America Online recognized this in the recent 56k modem standards battle. Content providers played a major role in the DVD standards battle. IBM was pivotal in moving the industry from 51A” diskettes to 3V6″ disks. Most recently, TCI has not been shy about flexing its muscle in the battle over the technology used in TV set- top boxes. No one asset is decisive. For example, control over an older generation of technology does not necessarily confer the ability to pick the next generation. Sony and Philips controlled CDs but could not move unilaterally into DVDs. Atari had a huge installed base of first-generation video games in 1983, but Nintendo’s superior technology and hot new games caught Atari flat-footed. The early leader in modems, Hayes, tried to buck the crowd when modems operating at 9600 kbps were introduced and ended up in Chapter 11 bankruptcy.
Two Basic Tactics in Standard Wars
- Build an early lead, so positive feedback works for you and against your rival.
- First mover advantage to build installed base
- But compromises in quality and a greater risk of bugs, either of which can doom your product
- Penetration pricing and discounting
- But watch out for rapid technological progress
- Equal threats of discontinued use
- Eg. Early gadget review, free samples for SW
- Expectations management
- Expectations are a key factor in consumer decisions about whether or not to purchase a new technology,
- Vaporware is a classic tactic aimed at influencing expectations
- Vaporware: announce an upcoming product so as to freeze your rival’s sales.
- Predatory products & pre-announcements
- Assemble allies, make grand claims about product’s current or future popularity. Eg Wordperfect & MS
Capstone case: Microsoft vs. Netscape
We conclude our discussion of strategic standard setting by applying our framework to one of the most widely watched and reported standards wars of the last several years: the Battles of the Browsers. During one heated skirmish in this war, interest was so intense that Business Week reported that President Clinton queried Netscape chief executive James L. Barksdale about his strategy. “That the contest caught even the President’s eye underscores just how seminal it is: This battle is for nothing less than the soul of the Internet.”1 For the past three years, Microsoft has been pulling out the stops to overtake Netscape, trying to displace the Netscape Navigator with its own Internet Explorer. Each company has brought to bear substantial competitive assets. When Microsoft went on the attack, Netscape had a far superior product and a substantial installed base of satisfied users. Microsoft, however, had its brand name, a history of dominating one software application after another, control over the underlying operating system, and seemingly limitless financial resources at its disposal.