1. Waging a Standards War: What to Do Once You’ve Won Jeremy Bolton 14 February 2002 Competitive Strategies for Network Economies MGT523 Professor Shor

2. Outline Once you’ve won –Staying on your guard –Commoditizing complementary products –Competing with your own installed base –Protecting your position –Staying ahead Rear-guard Actions –Adapters and interconnections –Survival pricing –Legal approaches Lessons –Case study

3. Part I Once You’ve Won

4. Staying on your guard Being first usually means making technical compromises –Apple Newton vs. Palm Pilot (vs. Windows Pocket PC?) –French Minitel vs. Internet (American cultural imperialism) –TDMA vs. CDMA –OnStar vs. Wingcast Strategic implication: have a roadmap or migration path –“Microsoft is the master with its “embrace and extend” philosophy of anticipating or imitating improvements and incorporating them into its flagship products 1 ”: Windows95, Internet Explorer, MSN Messenger –Intel: 386, 486, Pentium, MMX, Pentium II, III, 4 “Only the paranoid survive” – Andy Grove, Intel 1 Shapiro, Carl and Varian, Hal R., Information Rules: A Strategic Guide to the Network Economy, 1999, Harvard Business School Press, Boston, MA; p 278.

5. Commoditizing complementary products Pay attention to products produced by your complementors, not just your own products –Retain market leadership position, but… –Encourage a vibrant market for complements Avoid the temptation to meddle, unless: –Adjacent products add value to your customers –You can offer competition that keeps prices low Microsoft and Intuit/PowerPoint/Hotmail/etc. “Produce product, capture emerging market, be bought by Microsoft 2” 2 Shapiro, Carl and Varian, Hal R., Information Rules: A Strategic Guide to the Network Economy, 1999, Harvard Business School Press, Boston, MA; p 279.

6. Competing with your own installed base Once your product reaches the saturation point, you can: –Drive innovation like Intel Develop apps that require faster processors Develop/encourage complements that require hardware upgrades –Discount your product Keep lowering your price until the hold-outs buy it Known as the “durable-goods monopoly” problem put forth by Ronald Coase over 25 years ago Problem is that information and software are very durable Solution: rent instead of sell (Microsoft’s.NET initiatives) “The stiffest competition faced by Steinway comes from used Steinways 3 ” 3 Shapiro, Carl and Varian, Hal R., Information Rules: A Strategic Guide to the Network Economy, 1999, Harvard Business School Press, Boston, MA; p 280.

7. Protecting your position Defensive tactics designed to secure your position –Offer attractive deals to critical players Nintendo and its developers and distributors FTD and its discounts to exclusive florists Microsoft and its OEMs –Avoid post-contractual hold-up Refer to notes from MGT322 “This is where antitrust limits come in most sharply 4 ” 4 Shapiro, Carl and Varian, Hal R., Information Rules: A Strategic Guide to the Network Economy, 1999, Harvard Business School Press, Boston, MA; p 281.

8. Staying ahead Patents or copyright protection are not necessary in order to maintain a competitive advantage If you know more about “what’s next” than others do, you can use this to your advantage –IBM, in opening up the PC, did not recognize the OS as the key asset –But Cisco did: all its efforts (and money) are spent on identifying companies that are developing the next generation of products –Ensemble: Lucent vs. Cisco “We don’t do research, we buy research” – John Chambers, Cisco

9. Part II Rear-guard Actions

10. Adapters and interconnections Adapters: make your product work with someone else's –Atari did not have the IPRs to make a Nintendo cartridge adapter for its machines –Memory card adapters –Apple machines that could read DOS/Windows, but does this undermine the confidence of Apple’s niche in the market? Interconnections –Try to connect your network with a larger one –Telecommunications Act of 1996 was designed to give CLECs access to ILEC networks “If you fall behind, target a niche or interconnect with a larger network 5 ” 5 Shapiro, Carl and Varian, Hal R., Information Rules: A Strategic Guide to the Network Economy, 1999, Harvard Business School Press, Boston, MA; p 286.

11. Survival pricing The marginal cost of producing an information good is close to zero, so you can cut your prices drastically and continue to cover incremental costs So, if you find yourself losing in a network industry, it is tempting to cut prices to stimulate sales Avoid the temptation; it is a sign of weakness and will not work Encyclopedia Britannica vs. Microsoft Encarta –Simply Money vs. Microsoft Money and Quicken –Borland vs. Lotus 1-2-3 and Microsoft Excel Survival pricing is not the same as penetration pricing Bottom line: avoid survival pricing “Survival pricing doesn’t work; it just signals weakness 6 ” 6 Shapiro, Carl and Varian, Hal R., Information Rules: A Strategic Guide to the Network Economy, 1999, Harvard Business School Press, Boston, MA; p 288.

12. Legal approaches The landmark Kodak case opened the door to antitrust lawsuits in this form Many companies have taken to this strategy –Sun –AOL Time Warner But, it should be a last resort –Protect yourself early on by recognizing key assets –Wage a standards war! “If all else fails, sue 7 ” 7 Shapiro, Carl and Varian, Hal R., Information Rules: A Strategic Guide to the Network Economy, 1999, Harvard Business School Press, Boston, MA; p 288.

13. Part III Lessons

14. Review of Chapter 9 1.Understand what type of standards war you are waging 8 2.Strength in the standards game is determined by ownership of seven critical assets 8 : 1.Control of an installed base 2.Intellectual property rights (IPR) 3.Ability to innovate 4.First-mover advantages 5.Manufacturing abilities 6.Presence in complementary products 7.Brand name and reputation 3.Preemption is a critical tactic during a standards war 8 4.Expectations management is also crucial to building positive feedback 8 5.When you’ve won your war, don’t rest easy* 8 6.If you fall behind, avoid survival pricing* 8 8 Shapiro, Carl and Varian, Hal R., Information Rules: A Strategic Guide to the Network Economy, 1999, Harvard Business School Press, Boston, MA; pp 295-296. * Covered in this document

15. OnStar vs. Wingcast OnStarWingcast Type of standards warRival revolution Control of installed baseYes: 1M+No, but… IPRsUnclearYes Ability to innovateYes First-mover advantageYesNo Manufacturing abilitiesYes Complementary products?? Brand name/reputationYesNo

16. OnStar vs. Wingcast OnStarWingcast PreemptionYesNo Expectations mgtYesNo Resting easy?NoN/A Survival pricing?Too soonN/A PREDICTION: DUOPOLY