SIMS Standards Wars Hal R. Varian

SIMS Examples Historic –RR gauges –Edison v. Westinghouse –NBC v. CBS in color TV Recent –3Com v. Rockwell/Lucent –Microsoft HTML v Netscape HTML –Writeable DVDs –AOL et al Instant Messaging

SIMS Classification of Wars

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

SIMS Historical standards Cost side standardization Auto parts standardization c –Risk avoidance for suppliers –Economies of scale for manufacturers –Lack of interest on part of Ford/GM –Role of SAE

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 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 already interconnect

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 software (Fred B) 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 –Blu-Ray DVD (27 gigs!)s –Hollywood’s rearguard action

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! Expectations management –Manage expectations –But watch out for vaporware!

SIMS Once You’ve Won Stay on guard –Minitel Offer a migration path (Apple/Intel) Commoditize complementary products –Intel Competing against your own installed base –Intel again –Durable goods monopoly

SIMS Once You’ve Won, cont’d. Attract important complementors Leverage installed base –Expand network geographically 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