Information Rules A Strategic Guide to the Network

Information Rules: A Strategic Guide to the Network Economy Chapter 9: Standards Wars

Standards War • Focuses on the control strategies (Controlled Migration and Performance Play) in the context of a battle between incompatible technologies. 2 Information Rules Spring 98

Standards War: Historical Examples • DC vs. AC (Edison v. Westinghouse) • NBC v. CBS in color TV Information Rules 3 Spring 98

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. Information Rules 4 Spring 98

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. Information Rules 5 Spring 98

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. Information Rules 6 Spring 98

Classification of Wars Information Rules 7 Spring 98

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 Information Rules 8 Spring 98

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 Information Rules 9 Spring 98

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 Information Rules 10 Spring 98

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 Information Rules 11 Spring 98

Two Basic Tactics • Preemption – Build installed base early – But watch out for rapid technological progress • Expectations management – Manage expectations – But watch out for vaporware Information Rules 12 Spring 98

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) Information Rules 13 – Sony Spring 98

Once You’ve Won, cont’d. • Attract important complementors • Leverage installed base – Expand network geographically • Stay a leader – Develop proprietary extensions – Intel, Sony again Information Rules 14 Spring 98

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 Information Rules – Sun v. Microsoft 15 Spring 98

Microsoft v. Netscape • • Rival evolutions Low switching costs Small network externalites Strategies – Preemption – Penetration pricing – Expectations management – Alliances Information Rules 16 Spring 98

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 Information Rules 17 Spring 98

Lessons, continued • When you’ve won the war, don’t rest easy • If you fall behind, avoid survival pricing Information Rules 18 Spring 98