Standards Wars
Hal R. Varian
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Examples
• Historic
– RR gauges
– Edison v. Westinghouse in electric power
– NBC v. CBS in color TV
• Recent
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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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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
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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
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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]
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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
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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 nondiscriminatory terms
– Cede control to a 3rd party
• Ethernet, C#
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Battle of sexes
Ms Column
Mr. Row
Action
Movie
Love
Story
Action
Movie
2,1
Love
Story
0,0
0,0
1,2
Two pure strategy equilibria + mixed strategy
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Follow the leader
• Dominant firm sets standard, others
follow
– Microsoft SMB and Samba
– Microsoft document formats and decoders
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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?
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Classification of Wars
Compatible Incompatible
Compatible Rival
Evolution
Evolution v.
Revolution
Incompatibe Revolution Rival
v.
Revolution
Evolution
E
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Examples
• Rival evolution
– VCRs (Sony/Betamax v VHS)
– Video games
• Rival revolutions
– IRC v IM
• Evolution v. Revolution
– Windows 98 v. BeOS
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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
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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
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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)
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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
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Key Assets
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Control over an installed base
Intellectual property rights
Ability to innovate
First-mover advantages
Manufacturing
Strength in complements
Reputation and brand name
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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!
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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
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Once You’ve Won, cont’d.
• Attract important complementors
• Leverage installed base
– Expand network geographically
– Expand network vertically
• Stay a leader
– Develop proprietary extensions
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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
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Microsoft v. Netscape
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Rival evolutions
Low switching costs
Small network externalites
Strategies
– Preemption
– Penetration pricing
– Expectations management
– Alliances
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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
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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?
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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
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Lessons, continued
• When you’ve won the war, don’t rest
easy
• If you fall behind, avoid survival pricing
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