Breakthrough Ideas (continued):
Enduring Strategic Principles from Past Standards Wars
In a network market like mobile wireless, a latecomer like Qualcomm, with a standards-based strategy that seeks architectural control of the crucial air interface in mobile telecommunications, must expect to engage in a standards war: a struggle between two or more incompatible airlink specifications to become the de facto standard in the marketplace. As that struggle unfolds, certain events are significant, even crucial, to reaching a company’s desired outcomes. A field of forces that was already in place required a strategy that positioned the standards war at the contextual heart of Qualcomm’s potential future: requiring strategies and counterstrategies that were informed by the past, committed to excellence in the present, and designed to shape the future.
In Information Rules: A Strategic Guide to the Network Economy, the economists Carl Shapiro and Hal Varian (1999) offered many valuable ideas rooted in economic principles that are robust even in the consummately high-tech area of standards, networks, interfaces, and compatibility. History foreshadows the future. We learn its lessons or pay the price. Here, I summarize the strategic principles they derived rather than presenting the contextual details of the actions, events, and circumstances in these standards battles. (All Shapiro and Varian quotes throughout are from
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From the battle to establish a de facto standard for railroad track gauges in America, Sharpiro and Varian (pp. 209-210) concluded:
1. Incompatibilities can arise almost by accident, yet persist for many years.
2. Network markets tend to tip toward the leading player, unless the other players coordinate to act quickly and decisively.
3. Seceding from the standard-setting process can leave you in a weak market position in the future.
4. A large buyer (such as the U. S. Government) can have more influence than suppliers in tipping the balance.
5. Those left with the less popular technology will find a way to cut their losses, either by employing adapters or by writing off the assets and joining the bandwagon.
From the battle of AC versus DC electrical systems, Shapiro and Varian (pp. 211-212) derived these principles, which I number consecutively:
6. Technologies can seek well-suited niches if the forces toward standardization are not overwhelming.
7. Ongoing innovation (here polyphase AC) can lead to victory in a standards war.
8. A first-mover advantage (of DC) can be overcome by a superior technology (of AC) if the performance advantage is sufficient and users are not overly entrenched.
9. Adapters can be the salvation of the losing technology and can help ultimately defuse a standards war.
From the battle of the local telephone networks, the authors (p. 214) found that the competitive advantage of providing and controlling long-distance service proved decisive, once this timeless economic lesson was learned (my paraphrase):
10. If you control a key interface or bottleneck, you should open it up, but on your own terms and conditions, including technical conditions to preserve system integrity and economic terms that fairly compensate you.
From the battle of black and white versus color TV, I paraphrase (p. 217) the following principles:
11. Adoption of a new technology can be painfully slow if the price/performance ratio is unattractive and if it requires adoption by a number of different players (chicken-or-egg dilemma).
12. The collapse of the (CBS, a political or formal) standard shows that first-mover advantages need not be decisive, even in markets strongly subject to tipping.
13. It is important to build alliances, but winners still must take greater risks, moving before a formal standard is set.
14. It is dangerous to sit back and assume that you can maintain market dominance just because you control the current generation of technology or have a large installed base.
From the battle over the standard for High Definition Television, the authors (p. 223) extract:
15. Early leaders (Japan) can easily fall behind if they standardize on technology that is not a sufficient advance on previous generations to achieve critical mass.
16. A powerful group (the computer industry) can upset the apple cart late in the day.
17. It is often possible to make a truce in a standards war (the Grand Alliance) by merging technologies and agreeing to cross-license essential patents.
18. It can be hard to hold a coalition together if some members (broadcasters) would rather delay or sabotage the new standard.
Finally, Shapiro and Varian (p. 221) noted that the U.S. took the lead in HDTV precisely because it entered the fray late with a technically superior (all-digital) system, and said, “This turn of events not only shows the perils of rushing ahead prematurely. It also illustrates the advantage of using competition, rather than central authority, to select technology.” For Shapiro and Varian (p. 218, emphasis added), their analysis of the set of principles that led to success in past standards wars bolstered their “theme: the technology changes, as does the cast of characters, but not the underlying economics.” |
