Information Rules:

A Strategic Guide to the Network Economy

Chapter 9: Standards Wars

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Standards War

•Focuses on the control strategies (Controlled Migration and Performance Play) in the context of a battle between incompatible technologies.

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Standards War: Historical Examples

• DC vs. AC (Edison v. Westinghouse)

• NBC v. CBS in color TV

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Battle of the Systems AC Vs DC circa. 1890

• Edisons DC - First Mover Advantage– Restricted range due to voltage drops, 1 mile

limit between generation house and user. • Westinghouse AC – Technically Best Choice.

– Can Transmit Power efficiently across vast distances due to Transformers that convert low voltage to high voltage for transmission and down to low voltage again for distribution.

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AC Vs. DC Tactics

• Edison moved first with infringement actions which forced Westinghouse to invent around Edison Patents.

• Edison went to great lengths to convince public that AC was unsafe.– Going so far to invent the electric chair, which used

AC.– Convinced State of New York to Execute condemned

prisoners using it.– Edison went so far as to coin the term “to

Westinghouse” with regard to electrocution.

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AC Vs. DC

• AC Won the Battle– Polyphase AC far more efficient method of

generating, transmitting and distributing electric power.

– Rotary converter allowed DC systems to be integrated with AC systems.

– Edison sold his interests leading to the formation of the General Electric Company.

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Classification of Wars

Your Technology

Rival Tech. Compatible

Rival Tech. Incompatible

Compatible Rival Evolution

Evolution v. Revolution

Incompatible Revolution v. Evolution

Rival Revolution

E

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Examples

• Rival evolution– Video machines (DVD/VCD); UNIX variants

• Rival revolutions– Nintendo and Sony Play Station; AC vs. DC

• Evolution v. Revolution– Lotus 123 vs. Excel in 80’s and 90’s

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Recent Standards Wars

• AM stereo– Auto industry invested, radio didn’t

• Digital wireless phones– Europe: GSM– US: GSM, TDMA (cousin of GSM), CDMA

• TDMA: 5 million

• CDMA: 2.5 million

• GSM: 1 million

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Standards Wars

• Ericsson (TDMA) has AT&T, SBC , Bellsouth

• Qualcom (CDMA) has Bell Atlantic, US West, etc– Performance play strategy

• How big are the network externalities?– Geographic scope– Investment is sunk, systems interconnect

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What does it take to win standards War: Key Assets

• Control over an installed base

• Intellectual property rights

• Ability to innovate

• First-mover advantages

• Manufacturing ability

• 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

• Expectations management– Manage expectations– But watch out for vaporware

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Once You’ve Won

• Stay on guard– Microsoft and Google

• Offer a migration path to fend off challenges (Is Longhorn the answer for MS)

• Commoditize complementary products– Intel

• Competing against your own installed base– Intel again (continuous improvement of its products)– Sony

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Once You’ve Won, cont’d.

• Attract important complementors

• Leverage installed base– Expand network geographically

• Stay a leader– Develop proprietary extensions– Intel, Sony again

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What if You Fall Behind?• Adapters and interconnection (with larger networks)

– 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

• Rival evolutions• Low switching costs• Small network externalites• Strategies

– Preemption– Penetration pricing– Expectations management– Alliances

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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