SIMS Standards Hal R. Varian. SIMS Standards Basic issues –Standards are like network effects: the more people that adopt a standard, the more valuable.

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

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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

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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

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Historical standards

• Standardization as cost saver

• Auto parts standardization c. 1910– 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

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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 [http://ubiqx.org/cifs/SMB.html]

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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

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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 3rd party

• Ethernet, C#

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Battle of sexes

Action

Movie

Love

Story

Action

Movie

2,1 0,0

Love

Story

0,0 1,2

Ms ColumnMs Column

Mr. RowMr. Row

Two pure strategy equilibria + mixed strategyTwo pure strategy equilibria + mixed strategy

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Follow the leader

• Dominant firm sets standard, others follow– Microsoft SMB and Samba– Microsoft document formats and decoders

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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?

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Classification of Wars

Compatible Incompatible

Compatible Rival Evolution

Evolution v. Revolution

Incompatibe Revolution v. Evolution

Rival Revolution

E

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Examples

• Rival evolution– VCRs (Sony/Betamax v VHS)– Video games

• Rival revolutions– IRC v IM

• Evolution v. Revolution– Windows 98 v. BeOS

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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

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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

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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

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Key Assets

• Control over an installed base

• Intellectual property rights

• Ability to innovate

• First-mover advantages

• Manufacturing

• Strength in complements

• Reputation and brand name

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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!

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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

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Once You’ve Won, cont’d.

• Attract important complementors

• Leverage installed base– Expand network geographically– Expand network vertically

• Stay a leader– Develop proprietary extensions

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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

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Microsoft v. Netscape

• Rival evolutions• Low switching costs• Small network externalites• Strategies

– Preemption– Penetration pricing– Expectations management– Alliances

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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

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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?

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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

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Lessons, continued

• When you’ve won the war, don’t rest easy

• If you fall behind, avoid survival pricing