1. Information Rules A Strategic Guide to the Network Economy Cooperation and Compatibility Carl Shapiro Hal R. Varian Modified by Mahesh Maryada & Tarakeshwar Mandala

2. Information Rules Spring 98 2 Openness Strategies Open Migration Ex : Modems & Fax Machines Discontinuity Ex : CD Audio Systems

3. Information Rules Spring 98 3 How Standards Change the Game Identify natural allies Microsoft – Unified Unix Beware of companies participating in the standard setting process

4. Information Rules Spring 98 4 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

5. Information Rules Spring 98 5 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

6. Information Rules Spring 98 6 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?

7. Information Rules Spring 98 7 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

8. Information Rules Spring 98 8 Change Game, cont’d. 6. Competition to offer proprietary extensions –Extending a standard Sony & Philips – CD Players High Density CD’s

9. Information Rules Spring 98 9 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

10. Information Rules Spring 98 10 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

11. Information Rules Spring 98 11 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

12. Information Rules Spring 98 12 Formal Standard Setting Standard-setting bodies Official - ITU, UL, IEEE, NIST Unofficial - ACM, SIGART, SIGIR Too slow Ex- HDTV Critical for new technologies

13. Information Rules Spring 98 13 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?

14. Information Rules Spring 98 14 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

15. Information Rules Spring 98 15 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

16. Information Rules Spring 98 16 Building Alliances Keep competitive advantages yourself Time-to-market Manufacturing cost advantage Brand-name advantage

17. Information Rules Spring 98 17 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

18. Information Rules Spring 98 18 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

19. Information Rules Spring 98 19 Building Alliances, cont’d. How much do you need allies : Existing Market Position Technical Capabilities Control over Intellectual Property Rights Ex : Nintendo – Game developers

20. Information Rules Spring 98 20 Interconnection Among Allies History of interconnetion –Post office, telephone –Apple’s PC Vs IBM’s –Java – Microsoft retains right to “improve” java

21. Information Rules Spring 98 21 Negotiating a truce –Do the benefit cost calculation –How to divide a larger pie?

22. Information Rules Spring 98 22 The standards game Player A Player B

23. Information Rules Spring 98 23 Maximizing Return Your reward = Total value added x your share Cooperation between Netscape and Microsoft –Open Profiling Standard –VRML –SET

24. Information Rules Spring 98 24 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)

25. Information Rules Spring 98 25 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

26. Information Rules Spring 98 26 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?