SIMS Standards Hal R. Varian

SIMS Standards Basic issues –Standards are like network effects: the more people that adopt a standard, the more valuable it becomes –Like networks, standards can be propriety/open/voluntary/mandated –Standards strategy become more important as systems proliferate and interconnect Example: SiteMaps

SIMS Examples Historic –RR gauges –Edison v. Westinghouse in electric power –NBC v. CBS in color TV Recent –3Com v. Rockwell/Lucent in 56Kbs modems –Microsoft HTML v Netscape HTML –Writeable DVDs (R-,R+,-RW,+RW) –AOL et al Instant Messaging –HD DVD v BluRay

SIMS Incentive to interconnect Value of network depends on size, so ther are strong social benefits to interoperability But not necessarily private benefits due to loss of monopoly power –Bell System in 1890s and long distance –Marconi Intl Marine Corp But even dominant incumbent may find interconnection compelling –Your value = your share x industry value –If industry value increases dramatically, may be worth loss of monopoly –See auto industry, next slide

SIMS Historical standards Standardization as cost saver Auto parts standardization c –Risk avoidance for suppliers –Economies of scale for manufacturers –Lack of interest on part of Ford/GM –Role of Society of Automotive Engineers –Eventual adoption of standards

SIMS Standards setting competition Standards war: competing standards –HD DVD v BluRay Negotiation: want a common standard, negotiate to determine it –Original CD and DVD standards Standards leader: dominant firm creates standard, followers adapt to it –Adobe PDF –Microsoft SMB [

SIMS Standards wars Strategies in standards wars –Penetration pricing AdWords –Alliances with Complementors DVD and Hollywood –Expectations management Dangers: Osborne computer –Commitment to low prices Internet Explorer

SIMS Bargaining Both want a standard, but prefer their own (as in “battle of the sexes” game) –Must disclose rule in negotiations –License on “fair, reasonable, and non- discriminatory terms –Cede control to a 3 rd party Ethernet, C#

SIMS Battle of sexes Action Movie Love Story Action Movie 2,10,0 Love Story 0,01,2 Ms Column Mr. Row Two pure strategy equilibria + mixed strategy

SIMS Follow the leader Dominant firm sets standard, others follow –Microsoft SMB and Samba –Microsoft document formats and decoders

SIMS Extending a standard Have an existing standard, want to extend it –E.g., DOS to Windows –DVD to high density DVD Backwards compatibility or high performance?

SIMS Classification of Wars

SIMS Examples Rival evolution – VCRs (Sony/Betamax v VHS) – Video games Rival revolutions – IRC v IM Evolution v. Revolution – Windows 98 v. BeOS

SIMS Recent Standards Wars AM stereo –Auto industry invested, radio didn’t Digital wireless phones (1998) –Europe: GSM –US: GSM, TDMA (cousin of GSM), CDMA TDMA: 5 million CDMA: 2.5 million GSM: 1 million –Not much of a direct network effect since they all interconnect through the PST

SIMS Standards Wars, cont’d. 56K modems –US Robotics x2 attempted preemption –Rockwell/Lucent K56 Flex –Expectations management, switching costs –Settled Dec 97: estimated then would triple size of market

SIMS Current standards Educational courseware XML –XML1.1 (W3). Issues: unicode, backward compatibility –CBL, FXML, LegalXML,MML,MathML (see oasis.org)S DVDs (4.7 gigs) –DVD-RAM: plain data, written over, not movies –DVD-RW: works for video, need to be erased –DVD+RW: written over, like big floppy –New standards war: Blu-Ray and HD DVD

SIMS Key Assets Control over an installed base Intellectual property rights Ability to innovate First-mover advantages Manufacturing Strength in complements Reputation and brand name

SIMS Two Basic Tactics Preemption –Build installed base early –But watch out for rapid technological progress! GSM v HDTV Expectations management –Manage expectations –But watch out for vaporware!

SIMS Once You’ve Won Stay on guard –Minitel’s loss to WWW Offer a migration path (Apple/Intel) Commoditize complementary products –Intel and DRAM Competing against your own installed base –Intel and Moore’s law –Durable goods monopoly

SIMS Once You’ve Won, cont’d. Attract important complementors Leverage installed base –Expand network geographically –Expand network vertically Stay a leader –Develop proprietary extensions

SIMS What if You Fall Behind? Adapters and interconnection –Wordperfect –Borland v. Lotus –Translators, etc Survival pricing –Hard to pull off –Different from penetration pricing Legal approaches –Sun v. Microsoft

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

SIMS Standards setting process? Disclosure of relevant IP –But who enforces? –If IP exists and is incorporated into standard, under what terms is it licensed? W3C: RAND IETF: Royalty Free -> RAND –What if there is misrepresentation? FTC-Dell case

SIMS Policy issues FTC subsequent complaints –Rambus failure to disclose in JDEC meeting –Sun-Kingston case Stronger disclosure rules = chilling effect? Or weaker rules=chilling effect?

SIMS 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

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