Information Rules
A Strategic Guide to the Network Economy
Cooperation and Compatibility
Carl Shapiro
Hal R. Varian
Modified by Mahesh Maryada & Tarakeshwar Mandala
Openness Strategies
• Open Migration
Ex : Modems & Fax Machines
• Discontinuity
Ex : CD Audio Systems
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How Standards Change the Game
• Identify natural allies
• Microsoft – Unified Unix
• Beware of companies participating in the
standard setting process
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How Standards Change the Game
1. Expanded network externalities
- Enhance Compatibility
- CD, USB drive
- Share info with larger network
- Attracts more users
- Baltimore fire
- Wireless phones
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How Standards Change the Game
2. Reduced uncertainty
–
–
–
–
No need to wait
Consumers confused
In war, neither side may win
Blu-ray v HD DVD
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Change Game, cont’d.
3. Reduced consumer lock-in
– CD’s
– PC’s
4. Competition for the market v. competition
in the market
– Buy into an open standard, that becomes
closed?
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Change Game, cont’d.
5. Competition on price Vs features
–
–
–
–
Common features
Harder to differentiate the product
Consumers
Producers – Smaller total market Vs Low Price
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Change Game, cont’d.
6. Competition to offer proprietary extensions
– Extending a standard
Sony & Philips – CD Players
High Density CD’s
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Change Game, cont’d.
7. Component v Systems competition
– With interconnection, can compete on components
 Systems Competetion
Nintendo Vs Sega
 Component Competetion
TVs, VCRs, CD Players
 Specialists Vs Generalists
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Who Wins and Who Loses?
• Consumers
–
–
–
–
Generally better off
Less chance of Lock-in
But variety may decrease
May turn inferior
• Complementors
– Generally better off
– AOL, Blockbuster
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Who Wins, cont’d.
• Incumbents
– May be a threat
– Strategies
• Deny backward compatibility
• Introduce its own standard
• Ally itself with new technology
• Innovators
– Technology innovators collectively welcome
standards
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Formal Standard Setting
• Standard-setting bodies
• Official
- ITU, UL, IEEE, NIST
• Unofficial
- ACM, SIGART, SIGIR
• Too slow
Ex- HDTV
• Critical for new technologies
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Tactics in
Formal Standard Setting
• What is your goal?
– National or international?
– Protecting your interests?
• What are others goals?
– Do they really want a standard?
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List of Tactics
• Don’t automatically participate
– If you do you have to license
• Keep up momentum
– Continue R&D while negotiating
• Look for logrolling
– Trading technologies and votes
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List of Tactics, cont’d.
• Be creative about deals
– licensing, hybrids, etc.
• Beware of vague promises
– Definition of reasonable
• Search carefully for blocking patents
– Patents held by non-participants
• Preemptively build installed base
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Building Alliances
• Keep competitive advantages yourself
Time-to-market
Manufacturing cost advantage
Brand-name advantage
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Building Alliances
• Assembling allies
– Pivotal customers should get special deals
• Microsoft IE – Wall Street Journal
• Digital Camera’s – Photoshop
– But don’t give your first customers too big an
advantage
• Offer temporary price break
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Building Alliances, cont’d.
• Who bears risk of failure?
– Usually ends up with large firms
– But bankruptcy favors small firms
– Government is even better!
• Smart cards for pay phones in Europe
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Building Alliances, cont’d.
• How much do you need allies :
Existing Market Position
Technical Capabilities
Control over Intellectual Property Rights
Ex : Nintendo – Game developers
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Interconnection Among Allies
• History of interconnetion
– Post office, telephone
– Apple’s PC Vs IBM’s
– Java – Microsoft retains right to “improve” java
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Negotiating a truce
– Do the benefit cost calculation
– How to divide a larger pie?
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The standards game
Player B
Willing
to fight
Player
A
Willing
to fight
Wants
standard
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War
Wants
standard
Attempt to
block
Attempt to Voluntary
block
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Maximizing Return
• Your reward = Total value added x your
share
• Cooperation between Netscape and
Microsoft
– Open Profiling Standard
– VRML
– SET
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Alliance Examples
• Xerox and Ethernet
– Metcalfe of 3Com
– Digital requests Ethernet
– IBM’s Token Ring made Open Standard
• Adobe PostScript Vs Xerox’s Interleaf
(Page Description Language)
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Managing Open Standards
• Standard is in danger if it lacks a sponsor
• Unix
– AT&T invention by accident
– Gave away source code to EDU
– 1993 Coalition: Novell purchased rights for
$320 million and gave name to X/Open
• SGML and XML
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Discussion Questions
•
IBM will be using Red Hat-based platform instead of
Windows Vista for their desktops, beginning from July.
Will Microsoft need to consider making their software
open source in order to keep their market?
•
Why is FedEx creating a Web site for commerce and
Intel going into video-conferencing ?
•
Why are Oracle, Netscape, and Sun investing in the $100
million Java fund? What is it that adds value to these
investments?
•
Are openness and compatibility always best for the
consumer?
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