Standards Wars Hal R. Varian SIMS 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 • 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 • 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 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 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 • 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# SIMS 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 SIMS Follow the leader • Dominant firm sets standard, others follow – Microsoft SMB and Samba – Microsoft document formats and decoders SIMS 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 Compatible Incompatible Compatible Rival Evolution Evolution v. Revolution Incompatibe Revolution Rival v. Revolution Evolution E SIMS Examples • Rival evolution – VCRs (Sony/Betamax v VHS) – Video games • Rival revolutions – IRC v IM • Evolution v. Revolution – Windows 98 v. BeOS 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 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 SIMS 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 • • • • • • • 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 • 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 • 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. • Attract important complementors • Leverage installed base – Expand network geographically – Expand network vertically • Stay a leader – Develop proprietary extensions SIMS 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 • • • • Rival evolutions Low switching costs Small network externalites Strategies – Preemption – Penetration pricing – Expectations management – Alliances SIMS 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 • 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 • 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 • When you’ve won the war, don’t rest easy • If you fall behind, avoid survival pricing SIMS