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Standards Wars. Hal R. Varian. Examples. Historic RR gauges Edison v. Westinghouse in electric power NBC v. CBS in color TV Recent 3Com v. Rockwell/Lucent in 56Kbs modems Microsoft HTML v Netscape HTML Writeable DVDs (R-,R+,-RW,+RW) AOL et al Instant Messaging HD DVD v BluRay.

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standards wars

Standards Wars

Hal R. Varian

SIMS

examples
Examples
  • Historic
    • RR gauges
    • Edison v. Westinghouse in electric power
    • NBC v. CBS in color TV
  • Recent
    • 3Com v. Rockwell/Lucent in 56Kbs modems
    • Microsoft HTML v Netscape HTML
    • Writeable DVDs (R-,R+,-RW,+RW)
    • AOL et al Instant Messaging
    • HD DVD v BluRay

SIMS

incentive to interconnect
Incentive to interconnect
  • Value of network depends on size, so ther are strong social benefits to interoperability
  • But not necessarily private benefits due to loss of monopoly power
    • Bell System in 1890s and long distance
    • Marconi Intl Marine Corp
  • But even dominant incumbent may find interconnection compelling
    • Your value = your share x industry value
    • If industry value increases dramatically, may be worth loss of monopoly
    • See auto industry, next slide

SIMS

historical standards
Historical standards
  • Standardization as cost saver
  • Auto parts standardization c. 1910
    • Risk avoidance for suppliers
    • Economies of scale for manufacturers
    • Lack of interest on part of Ford/GM
    • Role of Society of Automotive Engineers
    • Eventual adoption of standards

SIMS

standards setting competition
Standards setting competition
  • Standards war: competing standards
    • HD DVD v BluRay
  • Negotiation: want a common standard, negotiate to determine it
    • Original CD and DVD standards
  • Standards leader: dominant firm creates standard, followers adapt to it
    • Adobe PDF
    • Microsoft SMB [http://ubiqx.org/cifs/SMB.html]

SIMS

standards wars1
Standards wars
  • Strategies in standards wars
    • Penetration pricing
      • AdWords
    • Alliances with Complementors
      • DVD and Hollywood
    • Expectations management
      • Dangers: Osborne computer
    • Commitment to low prices
      • Internet Explorer

SIMS

bargaining
Bargaining
  • Both want a standard, but prefer their own (as in “battle of the sexes” game)
    • Must disclose rule in negotiations
    • License on “fair, reasonable, and non-discriminatory terms
    • Cede control to a 3rd party
      • Ethernet, C#

SIMS

battle of sexes
Battle of sexes

Ms Column

Mr. Row

Two pure strategy equilibria + mixed strategy

SIMS

follow the leader
Follow the leader
  • Dominant firm sets standard, others follow
    • Microsoft SMB and Samba
    • Microsoft document formats and decoders

SIMS

extending a standard
Extending a standard
  • Have an existing standard, want to extend it
    • E.g., DOS to Windows
    • DVD to high density DVD
  • Backwards compatibility or high performance?

SIMS

examples1
Rival evolution

VCRs (Sony/Betamax v VHS)

Video games

Rival revolutions

IRC v IM

Evolution v. Revolution

Windows 98 v. BeOS

Examples

SIMS

recent standards wars
AM stereo

Auto industry invested, radio didn’t

Digital wireless phones (1998)

Europe: GSM

US: GSM, TDMA (cousin of GSM), CDMA

TDMA: 5 million

CDMA: 2.5 million

GSM: 1 million

Not much of a direct network effect since they all interconnect through the PST

Recent Standards Wars

SIMS

standards wars cont d
56K modems

US Robotics x2 attempted preemption

Rockwell/Lucent K56 Flex

Expectations management, switching costs

Settled Dec 97: estimated then would triple size of market

Standards Wars, cont’d.

SIMS

current standards
Current standards
  • Educational courseware
  • XML
    • XML1.1 (W3). Issues: unicode, backward compatibility
    • CBL, FXML, LegalXML,MML,MathML (see oasis.org)S
  • DVDs (4.7 gigs)
    • DVD-RAM: plain data, written over, not movies
    • DVD-RW: works for video, need to be erased
    • DVD+RW: written over, like big floppy
    • New standards war: Blu-Ray and HD DVD

SIMS

key assets
Key Assets
  • Control over an installed base
  • Intellectual property rights
  • Ability to innovate
  • First-mover advantages
  • Manufacturing
  • Strength in complements
  • Reputation and brand name

SIMS

two basic tactics
Two Basic Tactics
  • Preemption
    • Build installed base early
    • But watch out for rapid technological progress! GSM v HDTV
  • Expectations management
    • Manage expectations
    • But watch out for vaporware!

SIMS

once you ve won
Once You’ve Won
  • Stay on guard
    • Minitel’s loss to WWW
  • Offer a migration path (Apple/Intel)
  • Commoditize complementary products
    • Intel and DRAM
  • Competing against your own installed base
    • Intel and Moore’s law
    • Durable goods monopoly

SIMS

once you ve won cont d
Once You’ve Won, cont’d.
  • Attract important complementors
  • Leverage installed base
    • Expand network geographically
    • Expand network vertically
  • Stay a leader
    • Develop proprietary extensions

SIMS

what if you fall behind
What if You Fall Behind?
  • Adapters and interconnection
    • Wordperfect
    • Borland v. Lotus
    • Translators, etc
  • Survival pricing
    • Hard to pull off
    • Different from penetration pricing
  • Legal approaches
    • Sun v. Microsoft

SIMS

microsoft v netscape
Microsoft v. Netscape
  • Rival evolutions
  • Low switching costs
  • Small network externalites
  • Strategies
    • Preemption
    • Penetration pricing
    • Expectations management
    • Alliances

SIMS

standards setting process
Standards setting process?
  • Disclosure of relevant IP
    • But who enforces?
    • If IP exists and is incorporated into standard, under what terms is it licensed?
      • W3C: RAND
      • IETF: Royalty Free -> RAND
    • What if there is misrepresentation?
      • FTC-Dell case

SIMS

policy issues
Policy issues
  • FTC subsequent complaints
    • Rambus failure to disclose in JDEC meeting
    • Sun-Kingston case
  • Stronger disclosure rules = chilling effect? Or weaker rules=chilling effect?

SIMS

lessons
Lessons
  • Understand the type of war
    • Rival evolution
    • Rival revolution
    • Revolution v Evolution
  • Strength depends on 7 critical assets
  • Preemption is a critical tactic
  • Expectations management is critical

SIMS

lessons continued
Lessons, continued
  • When you’ve won the war, don’t rest easy
  • If you fall behind, avoid survival pricing

SIMS

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