A case study in anticipating standards: Ethernet

1
A case study in anticipating standards Ethernet

• A. The formation of communities what happened?
• Fighting inside a standards committee
• Strategic Alliance Formation
• B. Community formation analysis of ethernet
• Why secondary communities have disadvantage
• Why non-proprietary standards might lead to
  bigger markets
• C. Capturing value strategy in communities
• Short term v. long term profitability
• The (dis)advantages of proprietary standards

2
A. The formation of Ethernet what happened?

• IEEE committee meets in 79-80 amid confusion
• Many LAN vendors, unclear technical/mkt
  opportunity
• Many participate just to learn
• Potential need its solution?
• For PCs, factory control, linking minicomputers,
  office equipment, linking incompatible systems
• No clear technical win for wide variety of needs
• Many experiments in labs other innovative
  prototypes
• Supplier situation Table 4.1
• Incumbent vendors looking for complementary
  product (Xerox, Prime, Wang, Apple, IBM, NCR)
• Entrants, entrants, entrants

3
A. The DIX alliance

• The DIX (Dec, Intel, Xerox) alliance
• Overcome interoperability of systems
• Combining different market/technical capabilities
• The role of Metcalfe as evangelist/inventor
• Why DIX favored non-proprietary standard?
• LAN not core mkt ? assumed benefit to core mkt
• Nurture early adoption by users
• Attract in complementary component suppliers
• Higher volume helped defray costs of ICs
• Did the original motives actually play out?
• Is this the strategy of a leader or someone
  catching-up?
• Capturing value in complementary markets primary
  concern.

4
A. Why a split arose in the IEEE committee

• Nobody could garner 2/3 of the votes (of firms)
• Why not look for an alternative venue or
  endorsement?
• Committees of experts, once started, are hard to
  stop
• Firm interests/visions differ ? no common ground
• Factory ring, IBM ring, Ethernet
• Some proprietary LAN companies do not
  participate, why?
• Ethernet positioned as low-end, token ring as
  high end
• Standards committees are human affairs
• Arguments may not have clear technical answer
• Firm self-interest interferes w/compromise
• Previous investment steer beliefs
• Participants attend to learn about technological
  direction

5
B. Ethernet community formation

• Pioneer firms pursued different strategies
• The DIX blue-book acts as road map from 1980
  forward
• Ungermann-Bass pursue mini-terminal connex
• 3Com commits to PC connex
• Bridge, Interlan, Excelan find niche try to
  grow
• Brief window for funding
• The VC community unsure of prospects
• Need to demonstrate a commercial beach-head in
  short run
• Bob Metcalfes endorsement plays a role
• Differentiation specialization increase w/mkt
  size
• Not direct competitors initially, mostly
  complementary
• Mkt scale economies or whole greater than sum
  of parts

6
B. Why the non-IBM LAN technologies failed
eventually

• Inevitable competitive evolution of new
  markets
• Prices decline, increasing commodization of
  components
• More uses arise and more users arrive ? foster
  new niches
• Early designs become mismatched to new needs
• Proprietary LANs vulnerable small communities
• Dependence on external events (Corvus Apple)
• Fear of orphaning (Datapoint mismanagement)
• Dependence on a single application or mkt niche
• Slower virtual cycle in small community
• Variety specialization vulnerable to single
  firm blunder
• Less new entry, so less adoption, then less new
  entry, etc. ? become distant from other
  communities w/virtuous cycles

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C. Capturing value in evolving communities

• A technical capability in search of multiple uses
• DIX wanted complementary products. It got that
  more.
• Who did well at first in the ethernet mkt?
• U-B used the non-proprietary technology for
  connecting minicomputers terminals
• Initial success. Why? Large installed base of
  incompatible systems from proprietary vendors
• Did they use their good start for later success?
  Sort of
• Why 3Com eventually did quite well
• Betting early on connecting PCs when others do
  not
• Niche market at first, growth later. Why?
• Using this lead to stay ahead later. What did
  they learn?

8
C. Capturing value when proprietary communities
compete

• Why proprietary communities stayed small
• Users wary of locking into single vendor for
  durable good
• Users wary of locking into a particular
  technological implementation being orphaned
• If users have choices of only proprietary
  communities, then what does competition look
  like?
• Familiar form of competition with lock-in
• Vendors compete on price early
• Vendors compete on promises early
• Later adopters judge vendors on product lines,
  previous success in evolving the technology into
  customer needs
• Familiar form of competition with lock-in

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C. Capturing value when proprietary compete with
non

• Non-proprietary standard invites more competition
• Multiple vendors ? more users, I.e., the virtual
  cycle
• Bigger variety lower prices grows around
  standard
• Every vendor benefits from being part of standard
  in demand
• Non-proprietary communities grow in fits starts
• Capturing value What points of differentiation?
  New niches
• Profits arise temporarily in niches, but hard to
  sustain
• Profits depend on complementors whole community
• Continuous evolution of capabilities ? there may
  not be a harvesting phase ? looks chaotic to
  contemporaries
• Proprietary standards do OK if not overwhelmed
• The leading firms did well until non-proprietary
  community became big

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C. Strategic choices over proprietary standards

• When all other firms are proprietary
• Early competition matters a great deal
• Vendors must limit downsides of lock-in to
  attract users
• Strong temptation to become non-proprietary for
  temporary SR competitive benefit against other
  proprietary firms
• When at least one firm uses non-proprietary
  standard
• Harder to capture value w/o proprietary standard
• Being part of larger market ? benefit from
  complementors from the inevitable commodization
  of some parts
• Key Finding a unique valuable position within
  community
• Key Creating value around proprietary
  implementation of widely used non-proprietary
  standard

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Learning points

• Community formation
• Strategic actions affiliated with alliances
• Competitive behavior takes place inside community
• The evolution of communities is distinct from the
  evolution of specific firms
• The trade-offs b/w mkt size and firm profitability