Standards wars
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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

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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


Classification of wars

Classification of Wars

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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