Standards

1
Standards

• Hal R. Varian

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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

3
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
Ms Column
Action Movie Love Story
Action Movie 2,1 0,0
Love Story 0,0 1,2
Mr. Row
Two 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
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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 didnt
• 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, contd.

• 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
• DVDRW 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 Youve Won

• Stay on guard
• Minitels loss to WWW
• Offer a migration path (Apple/Intel)
• Commoditize complementary products
• Intel and DRAM
• Competing against your own installed base
• Intel and Moores law
• Durable goods monopoly

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Once Youve Won, contd.

• 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 -gt 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 ruleschilling 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 youve won the war, dont rest easy
• If you fall behind, avoid survival pricing