Chapter 8: Cooperation and Compatibility

Cooperation & Compatibility

Focus on openness strategies (discussed earlier) which are fundamentally based on cooperation with allies and compatibility of products and services

How Standards Change the Game

•Expanded Network Externalities

•Reduced Uncertainty

•Reduced Consumer Lock-In

•Competition for the Market versus Competition in the Market

•Competition on Price versus Features

•Competition to Offer Proprietary Extensions

•Component versus Systems Competition

Who wins and who loses from standards?

Consumers

• Consumers welcome standards– Do not have to pick the “winner”– Enjoy greatest network externalities in single network– Can mix and match components to their tastes– Less likely to become locked-in to a single vendor

• Disadvantages– Loss of variety– Deprivation of benefits from aggressive penetration

pricing

Complementors

• Complementors welcome standards as long as their products comply with the standards

• Influential complementors can affect the choice of a standard

• Examples– Microsoft and Intel– AOL– DVD standards

Incumbents

• Standards can pose a grave threat to incumbents

• Examples– RCA– Atari

Incumbents

• Incumbents have three choices to overcome a new standard

– Deny backward compatibility to would-be entrants with new technology that would blockade entry altogether

– Rush to introduce its own new generation of equipment

– Ally with new technology

Innovators

• Innovators collectively welcome standards

• Standards can impact innovators in different ways, which can affect the standard-setting process

• Example– Smart cards

Formal Standard Setting

• Most standard setting takes place through formal standard setting processes

• Examples– Underwriter’s Laboratory (UL)– Institute of Electric and Electronic Engineers (IEEE)– National Institute of Standards and Technology (NIST)

• However, these bodies have no enforcement authority

Formal Standard Setting

• Can be a slow process because the standard should be open to all participants and foster consensus

• No one or few companies should control the standard

• Companies have a commitment to license any patents essential to implementing the standard

• Can be a powerful tool for establishing credibility

Tactics In Formal Standard Setting

• Determine your goal at the outset– Quickly establish a standard incorporating your

proprietary technology• Don’t rely on formal standard setting

– Formal standard setting• Participate while following a market-oriented track• Show up at standard setting meetings• Gather information about the objectives of the other

participants • Modem example

Tactics In Formal Standard Setting

• Principles of strategic standard setting– Don’t automatically participate

• Outside alliances may allow you to move quicker

– Keep up your momentum• If standard setting is slow, prosecute pending patent

applications, continue R&D, and prepare to manufacture

– Look for logrolling opportunities• Possible side agreements with other companies

Tactics In Formal Standard Setting

• Principles of strategic standard setting cont.– Be creative about cutting deals

• Use your key assets to extract favorable terms

– Beware of vague promises• Don’t count on vague promises of openness made early on• Make sure that holders of key patents are explicit

Tactics In Formal Standard Setting

• Principles of strategic standard setting cont.– Search carefully for blocking patents

• Beware of picking a standard that requires a patent held by a company not participating in the standard setting process

– Consider building an installed base preemptively• Offer your product before a standard is established• This is risky, but can strengthen your bargaining position

Building Alliances

• Keep in Mind Your Competitive Strategy– Time-to-Market– Manufacturing Cost Advantage– Brand Name Advantage– Developing Improvements

Assembling Allies

• Options for Allies– Customers– Suppliers– Rivials– Markers of Complementary Products

• What does it take to attract an ally?• When is the opportune time to make an offer?• Understand both the concerns and the options of

your potential partner to design a deal that will appeal to them

How Much Do You Need Allies?

• Existing Market Position• Technical Capabilities • Control over Intellectual Property Rights

The stronger your position in terms of these 3 critical

assets, the less important are allies, and the more easily

you can play those allies against each other.• Examples

– Nintendo

Interconnection: End-to-End

Sender

Sender’s Carrier

Recipient's Carrier

Recipient

Interconnection among Allies

• Most Groups– The sender – the sender’s carrier – the recipient – the

recipient’s carrier• Example: Postal Service, Internet, Airlines

– Need to figure out which one you are, and use that to your strength

– If you control a key interface, you should open it up, BUT on your own term and conditions

Negotiating a Truce

• Why is there a need for a truce?– Higher profits in a truce than a war

• If war was to break out, how would you fare?

• Types of war– Inevitable Standards– Game of Chicken– The Strong vs. The Weak

Inevitable Standards of War

• Both sides rather fight – They want to set the standards

• Strategy: Line up allies for the fight and move troops into position

Game of Chicken

• Both sides prefer to set their own standard, but will accept the other’s technologies instead of waging war

• War may come, but the two sides are better off cutting a deal

The Strong Vs. The Weak

• Side 1 – Strong and confident– Ready and willing to fight; wants their way or no way

• Side 2 – Weak and knows it– Wants compatibility in order to reduce disadvantages

Side one usually gives compatibility, but limits full

compatibility and does everything on their terms

Advise for War

• DON’T be Proud– stubborn players can erode or destroy the gains from

trade

• Stay on Guard: – You don’t want to give a rival an edge– Make sure it is neutral now & in the future

• Maximizing your returns does not mean Maximizing your control over technology!

Managing Open Standards

• What happens once a open standard is accepted and successful?– Truly open standards face two fundamental threats

• No clear sponsor of the standard• Without a clear sponsor, who will be willing to invest in the

standard

Splintering

• Splintering (or fragmenting)– Splintering of a standard refers to the emergence of

multiple, incompatible versions of a standardized technology

• Classic example: Unix– 1970s

» 1st standardization attempt– 1980s

» Windows NT threat grows– 1990s

» Novell attempts to take charge

“Hijacked” Standards

• Sometimes companies “hijack” an open standard in an effort to extend them in proprietary directions– Microsoft has been accused of doing this with Java

and HTML

Un-Championed Standards

• SGML (Standarized Generalized Markup Language)– Open standard for storing and managing documents– HTML is a part of SGML– SGML was pushed by the DoD, but no large

organization emerged to champion the standard which led to it’s demise

Championed Standards

• Sun & Java– Sun competitors & complementors would like to see

Java open, yet Sun has resisted this proposal.

Warning on Alliances

• You must not only worry about forming alliances, but also on maintaining them– Examples:

• Unix• HDTV

Summary

• To compete effectively in network markets, you need allies

• To find your natural allies, you must determine how a proposed standard will affect competition– Standards alter competition in several predictable

ways

• Standards tend to benefit consumers and suppliers of complements at the expense of incumbents and sellers of substitutes

• Formal standard setting is now being used to develop more standards than ever before

Summary (continued)

• Find your natural allies and negotiate to gain their support for your technology

• Before you engage in a standards battle, try to negotiate a truce and form an alliance with your would-be rival

• Try to retain limited control over your technology even when establishing an open standard

Questions

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