Principle of Innovation and Entrepreneurship Charatpong Chotigavanich charatc@alum.mit.edu PIE (AIT)

Today… Standard War PIE (AIT)

Nature of Hi-Tech Industry In hi-tech business especially with high externalities, winner usually takes all (or majority) of market share and become standard. Loser ends up being bought or goes out of business. PIE (AIT)

Externality “In economics, an externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit.” Wikipedia Example… PIE (AIT)

Example Search: AltaVista  Yahoo  Google Messenger: ICQ  AOL  MSN  BBM Whatsapp  Line,WeChat Electricity: DC electricity  AC electricity Video tape: Betamax  VHS DVD: HD DVD  BlueRay Cellular network: CDMA vs GSM Web animation: Shockwave vs Flash vs HTML5 Phone: iOS vs Android Browser: Netscape  Microsoft IE  Chrome PIE (AIT)

Why do we need a standard? Benefits of Standards Why do we need a standard? Helps to guarantee compatibility Can help to reduce confusion Can help to reduce production costs Can help to reduce the risks associated with supplying complementary products Standard maybe different from countries to countries: E.g. electric outlet PIE (AIT)

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Mutually agreed by several organizations Market (De-facto standard) How a standard is set? Government mandate Government bodies enact law to mandate the standard. Mutually agreed by several organizations Companies get together to form a standard Market (De-facto standard) Consumers instinctively choose themselves by market share. PIE (AIT)

Government mandate in Thailand: Example Government mandate in Thailand: Thailand simply adopted 220V AC Drivers drive on the left side (same as UK) Size of the railroad width is 1 meter (the majority of other countries use 1.435m) Corporation WWW consotium International Standard Organization Market Windows vs MacOS iOS vs Android PIE (AIT)

When there is lack of government intervention… There are a few outcomes: End in truce: companies agree to form a standard organization (e.g. WWW Consortium) End in duopoly or oligopoly: Browser wars, iOS vs Android Fight to death: VHS vs Betamax North America and South America’s railroad width (after the North won the war, the South had to convert) PIE (AIT)

Let’s look at some example (AC vs DC around 1890) Edisons DC - First Mover Advantage Restricted range due to voltage drops, 1 mile limit between generation plant 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 What do you think Edison did? PIE (AIT)

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. PIE (AIT)

AC won because of far superior technology advantage. Results 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. AC won because of far superior technology advantage. PIE (AIT)

Classification of Standard Wars (cont) Evolution Strategy - new technology compatible with the old; superior performance with little switching costs. Revolution Strategy - incompatibility with the old technology; compelling performance so customers do not mind incurring switching costs. PIE (AIT)

Classification of Standard Wars (cont) Rival Evolutions - competitors technologies are compatible with their own old technologies, but incompatible with each other, e.g. DVD vs. Divx (both play CDs). Evolution vs. Revolution - your technology offers backward compatibility and the rival’s does not. Compatibility vs. Superior performance. Rival Revolutions - competitors technologies are not compatible with the old technologies, e.g. Nintendo 64 & Sony Playstation. PIE (AIT)

Classification of Standard Wars (cont) PIE (AIT)

Betamax and VHS The first video cassette recorder (VCR) to become available was the U-matic system, released in September 1971. U-matic was designed for commercial or professional television production use, and was not affordable or user-friendly for home videos or home movies. The first consumer-grade VCR to be released was the Philips N1500 VCR format in 1972, followed in 1975 by Sony's Betamax. This was quickly followed by the competing VHS (Video Home System) format from JVC, and later by Video 2000 from Philips. Subsequently, the Betamax–VHS format war began in earnest. Other competitors, such as Sanyo's V-Cord and Quasar's "Great Time Machine" quickly disappeared. PIE (AIT)

What happened… In class discussion… PIE (AIT)

Strategy to win the standard 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

Expectations management Two Basic Tactics Preemption Build installed base early But watch out for rapid technological progress Expectations management Manage expectations But watch out for vaporware (what is vaporware?)

Notes on First’s Move Advantages The company that is first to develop revolutionary new products If the new product satisfies unmet consumer needs and demand is high: The first mover can capture significant revenues and profits Revenues and profits signal an opportunity to potential rivals PIE (AIT)

Profit of First Move’s Advantage PIE (AIT)

First-Mover Advantages Opportunity to exploit network effects and positive feedback loops Potential to establish significant brand loyalty May be able to reap economies of scale and learning effects May be able to create switching costs for customers May be able to accumulate valuable knowledge Copyright © Houghton Mifflin Company. All rights reserved.

First-Mover Disadvantages Bear significant pioneering costs More prone to make mistakes Run the risk of building the wrong resources and capabilities May invest in inferior or obsolete technology Copyright © Houghton Mifflin Company. All rights reserved.

Offer a migration path to fend off challenges Once You’ve Won Stay on guard Netscape vs Microsoft vs Opera vs Google Offer a migration path to fend off challenges Commoditize complementary products Early WinIntel and Macintosh Competing against your own installed base Intel again (continuous improvement of its products)

Attract important complementary products Leverage installed base Once You’ve Won… Attract important complementary products Leverage installed base Expand network geographically Stay a leader Develop proprietary extensions to lock in your customers

What if You Fall Behind? Adapters and interconnection (with larger networks) Wordperfect Borland v. Lotus Survival pricing Hard to pull off Different from penetration pricing Legal approaches Sun v. Microsoft

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

Lessons 1st mover does not guarantee a win Superior product quality does not guarantee a win Understand the type of war Rival evolution Rival revolution Revolution v Evolution Etc… Strength depends on 7 critical assets Preemption is a critical tactic Expectations management is critical When you’ve won the war, don’t rest easy (early Netscape’s success) If you fall behind, avoid survival pricing

Question? Question ? PIE (AIT)