Transcript Establishing the standard

Competing in
Standards Driven Markets
When can you maintain control over the
use of an innovation/idea?
Strong intellectual property rights
First--mover advantages
–– Customer lock - in
–– Network effects
–– Standards
Market
Power
Diffusion often looks quite different
in a market shaped by standards
Network externalities of all kinds may create lock in, so
that once established, a standard can be very difficult
to replaceto replace
Lock - in may occur when the technology is still in its
infancy
––
e.g. VHS vs. Beta, MS Windows vs. OS/2
In markets in which standards are important, it may be
impossible to survive as a small player
Outline
Definitions
Standards & Network effects
Switching costs , “lock-in” and tipping
Do all markets tip ?
Competing in standards driven markets :
Establishing a standard
Making money
Overturning an established standard
Definitions
What is a standard?
A standard is a specification that allows for
interoperability
E.g.:
Cup and lids
Pistons and engines
Telephones and sockets
Speakers and amplifiers
Hardware and software
Standards and Dominant Designs
Dominant design –– “the way we do things,”
overall look & feel
Standard –– particular interface, format or system
Standards or architectures allow for interoperability
Not all dominant designs are standards
e.g., Henry Ford and the Model T
Not all standards are dominant designs…
e.g., WebTV
…But many successful standards embody dominant
designs
e.g., Apple’s operating system
An industry without a standard:
An industry with a standard:
What are the pros and cons of
standards?
Pros
Pros
Cons
Cons
Standards can be “public” or “private”
Public standards
IP in the standards is publicly owned
Often administered by an industry consortium, or by
regulation
Private standards
IP in the standard is contralled and owned by a firm (or
group of firms)
Standards can be “open” or “closed”
Open standards
Details are released to third parties (“complementors”)
So that they can develop complementary products,
service and technologies
Closed standards
Used within the firm, but details are not released
Privates standards may be open or
closed
The technology is :
open
Details of standards are
available to all : no
single firm has control
over how they evolve:
no charge for their use
Public
E.g. TCP/IP, HTML
closed
Standards are owned
and controlled by the
public sector but are not
freely available
E.g. Cryptography
Ownership is :
Private
Details of standard are
made available to all:
but owner has control
over how the standard
evolves and may
charge for use
Technology may be
standard, but details are
not made available
beyond the firm
E.g. Nintendo, Palm OS
E.g. IBM 360 Architecture
All options have both advantages and
disadvantages
The technology is :
open
Public
Ownership is :
Private
closed
With Strong Network Effects Market
Share Itself Creates Value
Value of standards
Driven product
Value to
consumer
Conventional product
Actual (or anticipated) size of the installed base
“Great products” vs. “Architectures”
Great Products
Consumers base their
purchase decision on the
intrinsic value of the product
to them
What would this be worth to
me if I were the only buyer in
the world?
Competition on the basis of
features, price etc
Architectures
Consumers base purchase
decisions on the size of the
(actual or projected) installed
base and/or the (actual or
projected) future availability
of complementary products
and services
How many other people are
likely to buy this product?
Competition on the basis of
the size of the installed base,
availability of complementary
products etc
Standards create value because they
create network effects
Direct network effects:
Network size
• Value increases with the number of other individuals
who own the same product E.g.: Telephones, fax
Indirect network effects:
Complementary products/services
• Value increases with the number of complementary products that
are available: E.g: CDs, Software, VHS/Beta
Modular innovation (plug and play)
• Value increases with innovation across the system (E.g: stereo
systems)
Learning by using
•
Standards mean customers only invest once in learning to use
the technology: E.g.: Qwerty Keyboard, Autocad
Tipping
or
Will all markets eventually
converge
to a single standard?
Tipping
Markets “tip” when one standard becomes the
Preferred choice of nearly every consumer
VHS
Windows on the PC
Not all markets tip: in some markets multiple
Standards co-exist
UNIX vs. Windows on servers
Nintendo vs. Sony in video games
Palm vs. Windows CE in PDAs
With no netword effects, equilibrium
Market share tracks consumer
perferences
1
Probability
the next
consumer
chooses to
buy A
30% of the population
Likes cornflakes
Cornflakes gets
a 30% share
0
0
A’s share of installed base
1
If network effects are important,
markets may “tip”
1
Probability
the next
consumer
chooses to
buy A
0
0
A’s share of installed base
1
Strong network effects & high switching
costs may create “lock in”
All consumers might prefer to adopt a different
standard
If it is expensive to switch between standards, (high
Switching costs) and network effects are important and
Costly to create, then markets may become “locked in”
To particular standards
“Lock in” has dramatic competitive implications
Will all markets “tip”?
Value to
consumer
Size of the installed base
Will all markets will tip?
1
Probability
the next
consumer
chooses to
buy A
0
0
A’s share of installed base
Competing in
Standards Driven Markets
Competing in standards driven markets
Establishing a standard
Making money: exploiting a standard
Overturning a standard
A Caveat: Standards can destroy value
Standards may reduce choice:
Any color so long as its black”
Standards may reduce the rate of innovation:
Innovation is confined to subsystems: no
“systemic” change is possible
Standards may sustain monopoly rent extraction:
“Microsoft is making minor changes in its business model…”
(Of a plan to discontinue the practice of charging for the
estimated number of employees using a program and
replace it with a contract tht charges for every employee)
Thus:
The adoption of a standard standard
is not inevitable and once established,
any particular standard is always
under threat
So standards are established by driving
the adoption of critical mass...
Adoption
Rate
Both adopter types choose A
A leads
0
B leads
Both adopter types choose B
Lock in
To B
Standards in action: Sun
Sun founded in 1982 to focus on the workstation
market
“Open” standard:
Standard components,
UNIX operating system
Sun: Establishing the standard
1980: Apollo founded
1983: Apollo has $18m in sales, dominates the
Workstation market – uses a proprietary operating
system
1983: Sun has $1m in sales, mostly to universities
Lead customer, computervision “likes the technology
But doesn’t find the company credible” – “we love your
technology but there is no way you can supply it.
Apollo is the standard in the industry, well financed
And well managed.”
What should Sun do?
How are standards established?
Standards “win” when a critical mass of consumers
have adopted them.
OR
When a critical mass of key players believe that the
standard will be adopted.
Or by:
The sheer power of the concept, design or delivery of
the product
Coming to market ahead of competition
Building expectations
Very aggressive pricing: “giving the product away”
Developing, or encouraging the development of,
Complementary products and services
Two main routes to capture value
Control – Point
competition
Benefit directly from ownership
from a free or thru a mark-up
on products using the standard
(e.g., Wintel)
Only possible when the
standard is privately held.
Level – Ground
Competition
Make money by competing on
“level ground” through
competing via manufacturing,
service, delivery or other
capabilities (e.g., Ericsson &
Bluetooth)
Standard may be public or
private.
Positioning a standard requires
grappling with this fundamental tension
The Technology Is:
Public
Ownership
is:
No opportunity for
monopoly rents BUT
easier to get accepted
& may be able to
extract rents thru
other superior
information
Private
Open
Open interfaces
allows for creation of
complements; may
also increase
acceptance of
standard BUT may
increase competition
Closed
Complete monopoly
rent extraction BUT
all complementary
products must be
produced by the
firm – hard to get
accepted.
Displacing an
Established Standard
Displacing an Established standard
(Overcoming switching costs)
Raise the benefits:
Introduce an “insanely great” product
Build network effects:
Invest in complementary goods & services
Build market share
Reduce the costs:
Make your standard “backwards compatible”
Lower the cost of your product
How are standards renewed in the face
of incumbents?
Step One - Evolution vs. Revolution
Evolution
Give up some performance to ensure compatibility, thus
easing consumer adoption (e.g., Microsoft, Intel)
Migrating existing users
Revolution
Wipe the slate clean and come up with the best product
possible (e.g. Nintendo)
Gathering new users or innovators who want to
own every gadget
How are standards renewed in the face
of incumbents?
Step Two - Openness vs. Control
Openness hastens adoption, signals commitment
but
Foregoes control of the standard
Incompatible
Compatible
Generic Renewal Strategies
Control
Open
Controlled
Migration
Open
Migration
Performance
Play
Discontinuity
Take Aways
Successful Strategies in Standards-Oriented Markets Are often a
“Hard” Sell“
Giving away profits to customers and competitors
Profits are in the future — losses are upfront!
“Tipping” the Market
Key is to create customer value by first building the “right”
type of installed base (lead users, encouraging complements,
etc…)
Ensure Complementary Technologies, Necessary “Software,”
and the Potential for Future Competition
Debate the Product Development Tradeoffs — Earlier
and Oftener