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

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

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

Information Rules Spring 98 4 Battle of the Systems AC Vs DC circa 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 Spring 98 5 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 Spring 98 6 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 Spring 98 7 Classification of Wars

Information Rules Spring 98 8 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 Spring 98 9 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 Spring 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 Spring 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 Spring 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 Spring 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

Information Rules Spring 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 Spring 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

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

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