Technological Forecasting & Social Change 81 (2014) 300-20 Contents lists available at ScienceDirect Technological Forecasting & Social Change ELSEVIER Standard wars, tied standards, and network externality induced path dependence in the ICT sector @e Torsten Heinrich tino, University of Bremen, Bremen, Germany ARTICLE INFO ABSTRACT Aric history: Received 18 August 2011 Received in esd for 31 December 2012 ‘Accepted 22 Api 2073 ‘alae online 17 May 2015 tis well-established that technological standards are subject to network externalities. These lead to lock-in situations with asymmetric (oligopolistic or monopolistic) industry structure and ‘occasionally to persisting shortcomings in the current industry standard despite technically feasible alternatives. Taking the ICT sector as an example this pape discusses the special case of incer-sectoral tying of standards, interconnected network effects of connected standards in «iferent sectors, andthe resulting impact on the industry structure. Qualitative and quantitative wort evidences suggest tat this phenomenon ery common inthe IT sector posal aso i athe Ledein ‘sectors. The problem is formally analyzed as a replicator model and as an agent-based simulation. Sunda ing inode ts foun hat ng efrces aces and the cst efes, Path dependence Generalized umn schemes {© 2013 Elsevier Ine. Al rights reserved 1. Introduction Path dependent processes have always been an intriguing field of research, escaping usual forms of forecasting and only leaving inaccurate, at most probabilistic anticipations. Tech- nological development has been one of the prime examples of path dependence, yet ithas so far withstood all attempts to capture it in a generalized model (in spite of promising approaches such a [1-3]). One important cause for thisis the pattern of network effects that result in increasing returns* to the number of adopters of a standard, or product, or technology. The value of a technological standard is created by its widespread adoption; the value of a particular product ~ being an instance of a certain technology with a certain standard - is greatly increased by conforming to this standard Ifthe technology is moreover a network technology ths effect {s intensified, that is the adoption of the standard by one user “Erma addres: tortenhenrich@uni-bremende ‘Though model for increasing returns have been discussed by diferent scholars, expecially Sehumpeterian and Kaldorian economist [415-7] such ‘models may. especally when considering direc interdependence between, ‘iro-level actors, quickly exceed the possiblities of purely anascal methods eaving computer simulation asthe best feasible alternative (9040-1625) - se font mater © 2073 Elsevier In. Al ihts reserved. np ide doiong 10.1016) techfore2013.08015 (when she acquires a product conforming to the standard) directly increases the utility of other users. Eg. for information, and communication technologies (ICT) this is usually the case Since the 1980s, when this phenomenon was identified by David [8] in video tape and Keyboard layout standards, followed by several theoretical models by Arthur etal. ([9.10), and eArthur89), and Katz and Shapiro [11] this effect has come to be known as lock-in and has received considerable attention in the economic literature, Extensive research has for instance been conducted on the shape of network externalities, ie. how is utility increasing with increasing network size [12], on. inter-sectoral tying of standards [13], on the effect of switching, costs 14], on the impact anon-global network structure [15,16] as well as the interplay of lock-in's and software piracy and resulting competition strategies (17 ‘There have also been case studies and quantitative em- pirical research, much of it focusing on recent examples of “lock-ins" related to the information and communication technology (ICT) sector [18-23], With plenty of recently developed standards, the ICT sector is nat only an exception- ally well-suited field to study network effects, but itis also a worrying one, The ICT revolutionized the way social and economic systems work during the recent decades; it dominates today much of day-to-day life as well as critical infrastructurex0 1. Hetrichj Technological Forecasting & Social Change 81 (2014) 308-320 Yetif “Tock-ins" are indeed as prevalent inthis sector as may be expected, the pace of innovation, the possibility to integrate new technology, possible cross-industry effects of cost reduc- tion in ICT products as well a the quality of products in use may all be threatened “Lock-ins” ~ thus being by no means unlikely ~ may bring about a number of negative effects. All but one (or possibly a few) remaining standards lose their relative preferability and will not be endorsed any more by any significant number of users, the variety of available technologies will thus declined. considerably. See the examples used in the above mentioned, literature, especially in [8,24], to discuss the problem of lock-ins. Emerging new alternatives lack a user base, they will therefore face enormous difficulty to establish them- selves even if they are technologically superior. What is ‘more, if shortcomings in the currently used standards are detected, they are bound to persist since replacement is, impractical due to the lock-in. Further, there is evidence that the “tying” [13] of products and also technologies or standards may be a feasible strategic option which may even increase the inclination of sectors to end up in a lock-in, This may also help to explain the prevalence of oligopolistic industry structures in the ICT sector (see Table 1 below). This paper’ attempts to contribute to this discussion by offering some theoretical considerations on this problem as well as some recent evidence. Usage shares of ICT standards and technologies are mostly immaterial goods (termed the “weightless economy” (Quah [25))"), and therefore not directly observable by sales statistics. Standard of technology usage may, however, be monitored by collecting data on software and standard usage that may be obtained from internet protocols. This is usually biased but given the lack of alternatives amounts for virtually, the entire available empirical information on software usage (alongside with some equally biased polls). This paper proceeds 2$ follows: it will make some instructive theoretical consider ations concerning the ICT sector in Section 2, then develop a {formal mode! in Section 3 using the approach of generalized urn, schemes. Starting with a one sector model, the phenomenon at, hand is developed into a replicator dynamic system, which is subsequently extended to a two sector case with cross-sectoral, tying. The possible (self-organized) emergence of such tying is then studied in an agent based simulation in the second part of the modeling section (Section 3). Section 4 establishes the relevance ofthe current consideration giving empirical evidence of tied branches inthe ICT economy. Finally, Section 5 draws a short conclusion. 2. Networks, lock-ins and trajectories: qualitative considerations From the dawn of the ICT, it can be seen, that standards develop rapidly and give rise to rapidly growing, sectors 2 The author is indebeed to wo anonymous reviewers for a numberof ‘valuable comments and tothe Wikimedia Project for providing him with the data used in Section 4 alongside with further data from openly avalade > For ther accounts on te specifies ofthe “Agta economy’, see also (26-2623, o 29 able Industry shares in several IT sectors in early 2009, largest 3 competitors and other" eategory, normalized Herfindah indices. (Server side data fromm January 2009 fam 3), PC, smarephone, and web browser data fom Ape 2009 ffom [42), wed search engine usage data from January 2009 from aa Shares Ha PC operating systems (Apr 2008) IMS Winows so407% AppleiMac 50548 ‘GNiLinx 1.480% other 261% ova Server operating systems (Jn 2008) MS Windows 415958 “GNILin 41025% 5D 3.304% other 14076 150 web browsers (Apr 2008) MS Internet Explorer saa8n Fielox so7is% rome 3.858% other B40, ozs Fut web servers fan 2009) Apache -44600% ils a2a72% TBM Web Servers 290%, other os77% os Largest mobite phone (Smartphone) 5's (Apr 2008) ‘Apple Phone e600 Blackberry 122018 Symbian 05 F862 (Other (remaining known 4n3% oar ‘mobile phone OS in dataset) Web search Engines (Jon 2008) Google e008 Yahoo 7.190% Bai s3io8 Other S908 ose Although the first attempts often failed disastrously, the 1950s and 1960s saw the rise of hardware standards and. ‘common programming languages (FORTRAN, C) and by the end, of the 1970s, common standards for a universally compatible computer operating system (Unix), network protocols (NCP and TCP/IP), information exchange protocols (E-mail and FIP) and an operating network structure (ARPANET) were in place. In the 1980s some further standards were added including in the network branch the DNS, EGP, and BGP protocols, used for addressing and routing in large networks and http (Hypertext Transfer Protocol) which was the basis forthe emergence of the “graphical” www. In the operation system branch the POSIX standard for Unix systems was specified while the emerging. sector of operating systems for personal computers was captured by the Apple Mac and the Microsoft DOS/Windows product line. Finally the 1990s and 2000s saw the rise of a rather complex structure of secondary applications relying ‘on both other applications and the aforementioned earlier standards. This phenomenon includes office software, internet browsers, from the extent of the revenues most importantly ‘computer games and lots of other programs. Contrary to earlier times, these were both affordable and of practical interest for the general public, giving rise to a huge and still continuing rise1. Heinrich) Technological Forecasting & Social Change 81 (2014) 308-320 m in demand and thus creating the “new digital economy” as an feconomic-institutional system.* This structure of applications. exists for each of the major operating systems (Windows, Apple/Macintosh, GNU/Linux) usually incompatible with other alternatives (see Table | below) These lock-in effects come only with severe conse- quences, Fist, in order to establish an industry standard, a vendor has to be fast, preferably the first to supply such a product. It may have been the core of Microsoft's success story that they were fast to recognize technology trends and. ‘come up with products.® Second, as itis dificult to establish a standard that would require the construction of huge new infrastructure, technologies that rely on preexisting infra- structure, or standards have an advantage. The consequences of this are illustrated by two cases of today’s internet. The internet was technologically constructed to withstand any external attack (one might think of an atomic bomb) by its decentralized infrastructure; today’s internet is, however, not a cold war national level infrastructure but rather an. international system of communication and decentralized collective data management with a great deal of critical infrastructure at any level depending on it. Faced with attacks from within, the internet is Father vulnerable; several times, attackers were able to disrupt the DNS system at a structural, level thus stealing authority for domain names, Technolog- ically, the solution for this is to use proper cryptographic ‘methods in the DNS system but it is not implemented with the industry settling for measures that are most likely only temporally effective (source port randomization). See, for instance, [33] or [34]. Even more striking is perhaps the extent t0 which the internet is vulnerable to DoS (denial of service) attacks. In 2006, attackers were able to take out a great deal of the countries governmental and commercial infrastructure [35]. The NATO issued a report [36] admitting how gravely the problem of cyber attacks was underestimated at the time but largely failing to recognize the technological~ ‘organizational aspects of the problem. Modern DoS attack. vectors do also rely on either distributed attacks or flaws in the DNS system (or, most likely, both); in turn this is basically the same problem as above. Another illustrative example for the failure to depreciate outdated ICT standards as a result fof lock-ins is the IPv4 protocol. The IPv4 address. space (2% = 4300 million addresses) is expected to be depleted very soon in the growing internet [37], a solution has been ‘worked out almost 15 years ago with IPv6 which fas a much, larger address space. IPV6 is a sophisticated standard and is, nowadays supported by all the major operating systems; yet the intemet as a whole fails to accept and use this technology at, a significant scale. 3. A model of inter-sectoral tying of standards 3.1. Modeling technology choice There are two commonly established ways to construct analytical models of network externalities. One, employed, for For dele accounts ofthe development ofthe ICT and especialy the standard wars ofthe 1950s, se [3031.28] or, in more erkcal wares to “ship ston Tuesday and get tet by version 3" (Anderson (32), instance, in [11,38,6}, focuses on the decision making on the part of rational agents. Using game theory, it predicts at which point the adoption of a particular standard by a number of agents will have shifted the utility function ofa standard to such an extent that users intially (before other agents adopted theit standards) preferring another standard will choose against their ex-ante preferences [11,386]. The other approach focuses fon the process of “locking in” while assuming an extemal probability function (depending on the current distribution of users) forthe adoption by new users. This is usually referred to as Eggenberger-Polya um scheme (as introduced in [39] from {an urn containing a number of balls of different colors, one ball is drawn; then another ball of the same color is added to the ‘um, While this (original) Eggenberger-Peilya process will not Jead toa lock-in®ithas motivated the theory by Arthur etal. [9] later named "generalized um schemes” [40] ‘The former approach is a game theory model that allows to model the agents straightforwardly as conscious decision makers. tis, however, not a dynamic theory: as agents are required to be rational, everything is predictable by any agent and there is typically an ex ante solution (which depends especially on the preferences of the first adopter) that would be obvious to any agent in the game and would therefore instantly be achieved. The second approach does not explicitly ‘model individual choice but generalizes from individual utility to the dynamic development ofthe market shares. This in turn depends - aside from exogenous parameters’ only on the ‘market shares, thereby leading to dynamic systems such as the differential equation replicator model discussed in the follow- ing sections. ‘While both approaches have important advantages, the first one (game theory) seems to be most useful to model settings in which individual adopters’ choices have a strong effect on the development of tie system. In particular, the model would be preferable when itis reasonable to assume that one actor would use her choice as a strategic tool to influence the development ofthe industry and particularly the future choices of other adopters. An example would bee the technology adoption decision of a large firm that strengthens the user base of this technology considerably. Another example is the official endorsement ofa technology by an official body, government agency or standard setting authority. On the other hand, if adopters are mostly individual actors or small groups with very limited individual influence on other actors' choices, the direct interdependence becomes less important. For these settings the major point of interests rather the dynamic development ofthe network that results from properties of the replicator equation. For the Current focus on the ICT sector, this latter setting seems a more appropriate model: even emerging sectors do quickty distib- ute over the internet; individual corporations have only very limited influence on the system from the demand side,” though this might have been very different inthe early days ofthe ICT. ie tends to preserve the inital distribution asthe probably of choosing certain eo and hus of increasing the numberof ball f this color nthe ‘in by one i equal to the cuten proportion of bal ofthis olor. 7 such ab par ofthe accor uty tat doesnot depend onthe sizeof the chosen technology's network; he intinse™ preferences yea station where the network elect rests onthe level of the entire network, noton the level of individual actors contributions However on che supply side, network effets favor lager competitors.22 1. Hetrichj Technological Forecasting & Social Change 81 (2014) 308-320 To illustrate the choice functions used for the model and the specific examples given below: in Example 2, new users choose any of the two technologies with a probability equal to its current usage share. For current shares of 90% to 10%, the next user will have a probability of 9/10 to opt forthe first technology. This does of course tend to conserve the current usage shares implying that this technology choice function ‘would not be considered to represent a true network external- ity In the other example, Example 1, the absolute usage grows proportional to the current share. That is, for current user bases ‘of 90 and 10 users, respectively (shares again 90% and 10%), ‘we get a future user distribution of 90 +09 x 90 = 171 and 10 + O11 x 10 = 11 users (shares 94% and 6%). An illustrative interpretation would be that users could nat only decide which technology to adopt but also whether or not to adopt one of the available options at the current time at all — a decision the users, ‘would (in this case) depend on the present usage shares (Fig, 1). 3.2, The basic model The current paper follows the approach of “generalized particularly [9]. Consider a standard choice process in a sector with a i competing incompatible standards (or technologies) Let the system be initialized at time t = 0 ‘with w initial users (so to say the initial installed base of the technologies), let further X; be the vector of sector shares of the standards (x; © [0, 1] being the elements). The formal model is siven by the development equation of the usage shares (Artinur et a. [10}, Ea. 2)) With each period one new user chooses her technology. according to a function v(X) representing the network externality exerted by the current usage shares, and fs is a random shock. With the addition of one further user, the current usage shares are reduced by her future usage share acs Arthur et al’s central theorem is that provided the ranlom shock fis small enough compared to v, and the set of stable fixed points V of the system is not empty’? then the process X; converges towards V and reaches a point in an environment « around (every point in) V within finite time for arbitrarily small «. The proof is given in [9]. For a two- dimensional system with v(X,) = 3X? — 2X¢, w = 2, and (05) X= (28) te dynamics develop as shown in Fig 2, Ifthe setting is reduced to one where all elements of Vare unit vectors and that has one additional unstable fixed point X*, itis convenient to proceed by defining a measure of the already achieved lock as fa — We=X'll vi a) 7 3 The condition my Is sufcient to aser hat. 4% —x"? ot @ where d is the dimension of the system (and of course all its vectors X, v, X*) and || || denotes the Euclidean norm. If the system is symmetric, and thus all elements of X* equal and” is the normalized Herfindahl-Index.'' The measure does further not depend on neither the actual existence of said fixed points nor even the knowledge of the dynamics of the system. From the development of the measure of lock-in (Fi) itself, an analysis of the dynamic behavior of the system, a rough estimation of present network externalities and a forecast of lock-ins can be made, 3.3. One sector replicator model Considering a simple non-stochastic!” 2-standard competi- tion model based on the system by Arthur et al [9] discussed. above yields a simple replicator model, described by a recurrence equation or differential equation of the shares x.:i = 1, 2 built around the network externality function v(x.) as the crucial ‘element, Assume for convenience the simple case!” ate) at 20 (tere, Exton) ® ey where v(x (0) i the expected value of the growth (rate) of the user base of the first standard. In terms of replicator dynamics, ‘(()) may be interpreted as the evolutionary fitness ofthe first standard with 0 < v(-) <1. 7 The Heindahndex uses the square rot ofthe Euan norm othe ect HI Ii = 5 af while the normale Herindahinder are ~The above defied more general meesre in tum esoives in thse fo Ege Ey205 +E hich sequal 2 lm "2 Thats the ochastic term fis negleced ® Dicey following the recurrence equation system in [9] would instead veld the recurrence equation suo (hey) eget However the dynamics folowing this are shia otha ofthe above eile fsuaton except forthe aspect thatthe relive change of this recurence Feplctor mode! deresesintine since anyone use hooses a ech este compared 0 a growing number w + of esablshed users. While ths onvenient to decompose the discrete choice dynamics i oes not match the ‘development of also tecoeny choice in ime, Consider a an state ‘example the exponential grow of the inemet as fr instance given ad ‘scsi [30 ths growth dyamis has lowed down afer the es ofthe ew economy" afer 2000 For detaled and up ode dt, (4) "To give amore detailed account a the logic behind eis epieator model {follows the common replicator model a aa (Finess—AverageFieness with the average fitness beng computed as ¥,— 21384) (ein fitness w) welghted wit the respective standaed’s usage share (0) Hf the individual ess larger than the average ines, the share increases, ts salle the usage sare ofthe standard fl1. Heinrich Technologie Forecasting & Social Change 81 (2014) 308-320 mm ve Fig. 1. Two dimensional development function ofthe usage share of nea the two coupled technologies (the current usage shares of the two technologies in heir. Sectors atthe axis in the base plan, the choice probably or future usage share a the vertical axis) ‘The respective shares of the other standard x2(t) are fully determined by x(1) at any time x2(t) = 1 — x(t) as the system is2-dmensional andthe shares must add upto The ‘esting fixed points replicator stem are ven bya! = 0 their stability may be assessed by evaluating the (possibly non-constant) eigenvalues. The current example yield local eigenvalues (dependent on the position of the fixed point in phase space = ¥(0) = 1) of Nat) = Probability X; Usage Fig. 2. 2-Dimensional urn system vX) ae Negative eigenvalues Re() < 0 indicate contractive dy- namics (thus stable fixed points), Re(A) > 0 indicates expansive dynamics (thus unstable), and Re(\) = 0 indicate ‘marginal stability 33.1. Example 1 For instance, an externality (or in this case fitness) function v(x;(¢)) = x(t) yields a replicator model PAO (Qa (0) (O=D = 34 (07-24 07 at X, Usage 2, starting with equal shares (the unstable fixed point inthe back right, moving towards front left; ‘he two dimensions of Xin te base plane, vertical axis denats ¥(X),logarchmic scaleey 1. Heinrich) Technological Forecasting & Social Change 81 (2014) 308-320 which has three fixed points, x33(0) = 0, xi2(0) = 1 (both ‘monopolization), and x;.(t) = 0.5 (equal shares), the first two of which are stable while the third is not.'® 3.3.2. Example 2 Another example, v(xy(t)) = a (Crt = 1.'° yields a sys- tem for which every point in phase space isa fixed point and, all fixed points are marginally stable, 18 3.4, Two sector replicator model The example discussed in the one sector case above may straightforwardly be applied to a system with two tied sectors A and B both with two competing standards, the usage shares being xq and 1 — xq in sector A and xy and 1 — xy in sector B respectively. The standards are assumed to be pairwise compat- ible, ie, standard 1 in sector A is compatible to standard 1 in sector B, and standard 2 in sector Ais compatible to standard 2 in sector B. The model is symmetric with respect to the sectors, 3.4.1. Example 1 Returning to Example 1 above and adapting the example to 12-sector case with combined network externality functions v (serving as fitness variables in the replicator model) wa ~(8)(B °) (2) 40 6 (125 )06.1)(15,) = trae vaae o 1) (8) <9 6 wei (8,)(6 2) awn and applying the replicator given in Eq. (3) yields the replicator ‘model dey ena) +) V1—Xq) TM + 2Ma)AG + X— DR 8 agate + yt) = H+ Om + Oe dt a There are two types of equilibria: First the monopolization of both sectors by compatible technologies, either x4 = 1 x$=1 or x)= 1 x= 1, and second the sharing of the two sectors by the two cross-sector alliances (ie. the tied technologies) such that the network externalities evoked by the two alliances in the two sectors tie each other exactly) xq = 1 — xi!” The system's dynamics are illustrated in Fig. 3 for the first sector; the second sector behaves symmetric to the first one (mirrored at xq = ax Lethe variables xq and xe switched). The compatible monopolization equilibria prove to be stable (as also indicated by Fig. 3) with two identical '© The local eigenvalues (te. for every possible state of the system given by 20) inthis model are given by Not) = Gt (0) — Gy) — 1 "= This isthe original Eggenbergr- Pea proces [20], as fom the nerwork externality function v(x) above follows that 4 — x (t= (0)= "7 Tnciding the special case of incompatible monopolizations 1 negative eigenvalues"* A, 2 = —1 for both of these cases, The elements ofthe set of tipping equilibria xi = 1 — xj, however, are all non-hyperbolic'® and have always a positive dominant eigenvalue A; = 2xi — 2(x3)* which is positive (indicating ‘nstability) forall values O < xq < 1, For x4 = 0 (thus x3 = 1), and x4 = 1 (thus x3 = 0), both eigenvalues become zero; still, no valid trajectories (in valid phase space 0 < xs <1, (0.< xp < 1) move towards this fixed point 3.4.2. Example 2 The same approach may be taken for Example 2 above. Let the network externality (fitness) function for sector A be CS,)(0 0%) and correspondingly symmetric for sector B (with the positions of xy and xp switched in the equation). The resulting replicator system is ey tox.) Q¥e—1) = 1) Fe = XACT ~Xa)(te 1) = 12K + 2s He —xg)t 2 Fa ay( 1x9) —1) = (1=2ey)¥G 1 QW (9) Equilibria are x4 = 0,14 = 1 (monopolization), and x3 = 05 (sharing) in sector A and x = 0,x5 = 1 (monopoization), and x = 05 (sharing) in sector B; all combinations of the sector-equilibria are valid fixed points, though only the compatible monopolization fxed points (xj = 0, xi = 0 and Xi = 1.x} = 1) are stable." The dynamics of the system are illustrated in Fig. 4 Ineffect, this result confirms that with the tying of sectors, the monopolizing trend resulting from network effects prevails — and may sometimes be only established by such inter-sectoral ties asin Example 2’ compared to Example 2 Te eigenvalues ae defined to fll equation 0 =deti—Az) with J denoting the system's Jacobian matsix RR ag a) nd being the identity matrix ofthe same degree "since one ofthe eigenvalues i always 20 for these equilibria. This due to the fact that these equiva ace infinitely dense on the line x= 1 — xe and hence there are no pose of negative dynamin ths dlirection, In other directions, however, there are dynamics following the ‘other eigenvalue. (which Indieates instability) moving away fom the ula (ee Pig 3) The eigenvalues are computed as Aya = Dicdeyte 21+ [BDH DD For fixed points with ane sector shared (xj = 05) and one sector locke in ‘he fixed points ate nonchypebolie and marginally stable, both sectors shared and incompatible monopolation (x, xg = 0) ae repulsors (unstable) This may, however, depend on the interpretation of the necwork exteralty function. The 2-sector extension of Example 2 could also Feasonable be made using a factor instead of Just In the network externally funtion, This would have Fetained the single sectr-result ofthe tense phase space beng composed of marginally sable fixed points.1. Heinrich) Technologie Forecasting & Soil Change 81 (2014) 308-320 nS xy oF Fig. 3. Replicator model with two ted industry sectors (Example 1') The graph shows the dynamics ofthe usage shares in one ofthe sectors (4) depending on the carent usage shares AAs Figs. 3 and 4 show, this dynamic is stronger the more the industry structure (the relation of the usage shares) differs between the two sectors — for instance, the most rapid change (&) is tained where one seco is equally shared while the other is monopolized. It is obvious that this phenomenon ‘opens possibilities for strategic behavior in “standard wars" (private firms competing for the industry standard). This analysis does, of course, rest on the assumption of pairwise (and only pairwise) cross-sectoral compatibility of standards For other configurations of compatibility berween the two sectors, different results are possibly; sector-sharing attractors ‘may arise. The following sections wil, however, explain why a pairwise compatibility is quite likely and may even be expected toarise asa self-organization effect. 35. Selforganized tying of industry sectors Consider the following technology choice mechanism: there is a small constant number of sectors mt = 1, ..M; (a large {quantity of) agents a = 1, ...Amay adopt one of the competing, incompatible standards ky, = 1, ...A in each sector m. Let further Si be the sets of agents using standard k in sector m. (ie. for an agent a who is part ofthis set a= S,,), and denote the size of the respective sets as #5 _ and the usage share of Standard kin sector m 2 Xin = gee Al agents decide stochastically when to enter a new sector and to choose one of the standards (with the same constant probability at each timestep until there are no more sectors left for which they do not yet have adopted a standard). An agent a, considers any other agent a that uses the same standard in (atleast) one of the sectors, : 3K: d, = Sy = Sym her neighbor, indicated by ‘ay = 1 (otherwise oj, = 0). In order to decide which standard {jf choose in sector j, they evaluate both the total number of 7 An Mustrative example is the crucial factor ofthe competion for video tape standards as discussed by Lee etal 15) They report that thavh most ‘asters were primary interested in making thelr own recordings. the dominance of VHS over its competitors especially Betamax) Inthe market for prerecorded tapes evenualy tured fortune in favor of VHS. users (a global network externality) ofthe available standards um and the usage shares in their local neighborhood (of size n) =D aura, with wu= {5 14 5 Sim Menwata FF? 0 otherwise (Ge. a local network externality) and choose standard k with probability 1) x (x =n) 1) = (%imdoat « =") TE Gat) « nara 7) (29) where 7 is an arbitrarily small value designed to prevent the factors from becoming zero”; for most situations (ie, when not needed) the effect of 7s negligible Pm = Xime * Xtra, Returning to the examples from the ICT sector discussed above, this mechanism is a plausible representation, arguably ‘much more plausible than the replicator models considered. above. Especially for communication infrastructure, users will ake great care to match their peer group's usage profile of technical standards. In order to maintain a convenient communication, they will need to adhere to the same ‘communication devices both in hardware and in software. These may require a number of further technical specifica ‘ions of their infrastructure in order to work properly. In effect, agents in modern ICT networks will likely end up using, the same standards from computer hardware chipsets and networking technology, to operating systems, to file formats. and specific application software like word processors, web browsers, and instant messengers. This may even extend to the usage of social networking platforms, 3 in which case, eg if there ate not yet any agents in ths sector, al probabilities forall X standards would be 20 There are certainly “gateway technologies” as described by David and funn {24 that intend to translate between incompatible standards; this ‘may, however not work pttety, especialy for proprietary standards and ‘may also be purposefully “sabotagee” by competitors fearing for thei smatke share,ne 1 Hetvichj Technological Forecasting & Social Chay (2014) 309-320 xe Fig Replicator model with wo ted industry sectors (Example 2).The graph shows the dynamics ofthe usage shares in bth the sectors and Sp. As agents tend to adopt standards, their peer group has also mostly chosen, itis obvious that the system develops neighborhood structures with similar profiles in the usage of standards across sectors. Consequently, itis also likely that the sector's industry structures develop similarly with the local neighborhoods being inclined to make the same choices in different sectors and therefore reproducing the same patterns in each of the sectors, The part played by the global network externality in turn leads to a slow but steady ‘monopolization, Of course, this mechanism is much more complex compared to the above replicator models as a result of its agent-based approach. Industry structure, neighborhood, structure, and monopolization may thus co-evolve. An analyt- ‘cal evaluation of the ensuing dynamics is much more difficult however, using a corresponding agent-based simulation model, the development of the system may conveniently be analyzed including versions with different numbers of sectors. This will be the focus ofthe following section, 3.6. A simulation study of tied sectors The model simulated in the current section follows the specification given in Section 3.5. Specifically, the simulation runs presented here vary the number of sectors M between 1?° and 6 to study the effect of the number of sectors. The initial ‘number of agents is 8 x M2? With each iteration, 8 agents are added to the system; the simulation runs 64 iterations. The ‘number of standards per sector Kis 4.” All simulations are run, 5 times to allow an assessment of the robustness of the simulation results, % For anly one sector the dynamic of cours, ferent since there sno Jocal network eet, turn Bg (11) becomes a Tis is to avoid side effect of sectors inialy being without agents 2 “To give the remaining parameters ofthe sulin 6s to 0.0001 and. asonly the choice patterns ae tobe studied, the probaly of an agent to eater an new sector wih each iteration (only required to be constant in the description above) is seo 1 (certainy) The simulation i programmed ‘nthe programming language Python: the source code i avaiable fom the sthor ofthe current paper. ‘The simulation program monitors the normalized Herfindahl index Hino of al the sectors of a simulation run. in cases with ‘more than one sector, the stochastic bias between the sectors is also recorded.® Fig. 5 shows the normalized Herfindahl index of the sectors forall six settings (with a total number of 1, 2,3,4,5, and 6 sectors) at the end of the simulation runs (after 64 iterations), including both the averages (xs) of all sectors through all 5 runs with this setting and the range of the sample results (bars). The plot indicates that the monopo- lization tends to be stronger the larger the number of sectors that could possibly be tied. However, the variance is considerable, This is underlined by Fig. 6 which shows the development of the industry structure (normalized Herfindabl index) in time. Fig. 7, showing the development of the bias between the sectors in time, indicates that the industry structures probably play a significant part in this process. They quickly fall apart at the initial stages of the simulation, most likely one standard comes to dominate one of the sectors; subsequently with the local network externality effect, this dominance spreads to other sectors, thereby harmonizing the industry structure between the sectors again" Finally, Fig. 8 shows the distribution of the entire sample with respect to inter-sectoral bias and industry structure after 64 iterations. An indirect relation of the two variables i likely as the figure indicates: the more the industry structures correlate, the less strong is the monopolization." in this case the normalized Herfndahl index is Mena co the above considered measie of locke“, asthe system symmetric ® The biasiscompated by computing the dstribacon ofthe usage nthe sectors nthe estbuton of hose sobs of agents nthe same eto that do ao se Specie sandal in anther sector The emparsn done by considering the an instructive example may be the development of Apple/Mac during ‘the 1990s: the flirt sigifieatysmprove tel software and thus Keep ‘up withthe rapd development of MS Windows during the same time est ‘Apple much oftheir industry shar. (Fo a etalled analysis, see (21]) Fig.6, Development ofthe normalized Herindal index fr simulation runs with 1, 2.3.45, and 6 sectors in time (averages) most widely used web browser of the world as shown in Fig. 9, Ofcourse, itis difficult to evaluate how many sectors. are linked in this way in the real world and which links are particularly strong. For the current example it might be assumed that Google's dominance in the web search engine sector (see Table 1) and its catching up in the ‘mobile phone operating system sector™ play a crucial part. On the other hand, Microsoft slowly but almost steadily decreasing market share in a number of sectors (including. web browsers and PC operating systems; see Table 1) probably also has an impact on that development. This is underlined by Table 2 showing that the development of non-Microsoft products in the web browser sector is correlated and likely linked through compatibility to the saine non-Microsoft products in other sectors, probably those of PC and mobile phone operating systems. Finally, an early indicator of Microsoft now apparently imminent loss of its dominating position might have been the fact that Microsoft products were never able to dominate the server operating system and http server sectors (see Table 1) ‘though they did achieve the position of being the second largest ‘competitor in both of these industries — most likely supported by their dominating position in the PC operating system and, web browser sectors. Having made this most illustrative point the current section will proceed by dliscussing the sources ofthe data and add some more detailed considerations. Usage data on PC operating systems and web browsers (ie, client side data) used in the following considerations is obtained from the Wikimedia [42]; data on server operating systems and web server software (ie. server side), this time ineluding data on individual countries, is taken from Netcraft [43]; search engine usage data is provided by Net Applica- tions [44], Wikimedia collects data from logging every 100th hitp request to their servers in which the user agent string of the client browser (including information about the [9 2008 as shown in Table 1, Google's Android Smartphone operating system has been aminor competitor More recent data from the same source [HS] shows that Android s now the secon largest competitor an quickly catching up tothe marker leader, Applene 1. Hetrichj Technological Forecasting & Social Change 81 (2014) 308-320 02s 1 4, pine 5 ¢ |: : eo g 01 3 8 : wae go 8 o 3 Bop * © 005 a . @ oor tb aye io 0304030340 Time ~ ° Fig. 7. Deeopment oe intersect stochastic is sms uns 00 swith 12.3.4 5, and 6 sectors in time (average) web browser and operating systems type and version”®) is recorded. The Netcraft SSL survey evaluates the web server's responses to requests sent to them including data from the SSL encryption certificate. This provides information on both the software used and the country the operator ofthe server hhas obtained the encryption certificate in (in most cases the country the server is located in).”° Finally, Net Applications’ ‘market share analysis project netmarketshare.com evaluated the http referrer information of all http requests to their network and filters it for search engine related referrers.”” The Wikimedia Foundation's data on client side software usage is a rare opportunity to study how software usage might approximately be distributed (though the sample is certainly biased compared to the average internet user) It shows a huge domination of the market by Microsoft products, a picture that is very different forthe server side as indicated in the Netcraft SSL survey (see Table 1). In order to fensure comparability with the server-side data from the [Netcraft SSL survey 2009 (no newer data available), Wikimedia data from early 2009 is given in Table 1, Further, later monthly data from Wikimedia is used to obtain the correlation co- efficients given in Table 2. Finally Figs.9 and 10 use recent daily raw logs made available to the author by Wikimedia. % Tis information may be changed by the respective user with a certain ellor. The current consideration shall make the assumption thatthe prest ‘ajony ofthe users are no motivated to undergo these elo (in en tal the recorded user agent strings reflect he tue software usage) Iti aso very likely thatthe intemet users Wiiting, Wikimeda's servers are not epresentative forthe overall ncernet commas, particularly with a bias towards users ftom developed countries and higher edited ses, Ths ‘ay or may not translate into other patterns of software usage. greater ‘inclination to ry more experimental o less widely ose software, % ince case ofthe Nerf SL survey it shou be noted that tis dataset {snot necessarily representative fr al counties, since lies on the server list scanned by Netcraft and uses the county codes from SSL certificates to ‘emily the server’ position, The inclination to use SSL may be diferent from countey to country 3s well as between the usergroups of diferent "7 Browsers following weblink wil usually provide the target website with the information where the nk originated by sending that a the D=p referer. The information is probably celiable but likely biased cowards an audience that is more interested i Net Appiaions’ products, English Speaking professionals working with ICT market share statistics. Better and Jess based datas tothe knowiedge ofthe curene author not avalabie 01 02 03 04 05 06 07 08 08 1 “Measure of Loci-In (Normalized Herfindahl Index) 28ers * auctor x 4Secors « SSeeuno eSecor + 8. Plot of the inter Herfindahl inex after 4 oral stochastic bas against che normalized ons (complete sample} ‘Table 2 shows the correlation coefficients between the ‘web browser and operating system usage as indicated by the Wikimedia Foundation’s monthly data (2009-2010)? As these are absolute values sensitive to seasonal changes in internet usage, they should be correlated if the software sage for web browsers and operating systems was indepen- dent. As some browsers are only available for some operating systems, some outliers are to be expected. The data, however, is different, Microsoft products (Windows and the Internet Explorer) ate highly, almost perfectly, correlated: further there isa high correlation between Windows and the Mozilla Firefox browser. To other browsers, there is no correlation at all even though these browsers (except for Safari) are reportedly also primarily used on Windows platforms. This structure and the remaining correlations between different indicate that there are indeed tied user groups in the case of Windows, IE and possibly Firefox users”; for the other types of software, itis not possible to tell given the level of aggregation and the small industry shares of these systems. ‘Table 3 shows the correlation coefficients for data of the set of 23 countries with the most http-servers worldwide {those countries from which more than 2500 servers were included in Netcraft's 2009 SSL survey) The http-server and the server operating system sector are apparently linked. ‘These considerations may of course only serve as superficial indicators of a strong influence of the tying of standards or products across sectors. On the one hand, the existence of oligopoly structures in all of the discussed sectors is evident. There is evidence for links between productsin certain sectors — ‘most obviously in the case of Microsoft's various software 5 Significance tests were done using the Cistibution and = oy (r being the corcelaton cefficent, nthe number of observations). “= ‘Til later picture might be diferent when considering more detailed ata. Linux users are reportedly also often strong suppartes of the Firefox “© significance tess were dane using the tastrbution a above1. Heinrich) Technological Forecasting & Soil Change 81 (2014) 308-320 ne 05; Usage Share oa| Spo amork smo «ROI? 7/9012 Time Fig 9, Developmencofthe usage shares of sb browsers july 20100 une 2072, ata fom the Wadia Project. products. Further, it has been shown that Microsoft is losing. its dominating position in at least some of these sectors — particularly to the competitor Google ~ which could be a result of the failure to gain the upper hand in other sectors, as well while they enjoyed a dominating position in PC related sectors. In order to obtain stronger evidence for the presence of structures and mechanisms as predicted by the theoretical model above, it would be necessary to evaluate the particular tying relationships as well as the number of tied sectors (the impact of which is considerable as shown in. the simulation in Section 3.6 above). It would then be possible to predict certain likely developments for future changes in market shares as well as dominance of specific sectors by certain standards 5, Conclusion ‘There are several characteristic traits of the ICT sector. The three most important factors are mast likely (1) the rapid development of the industry (and in turn also the standard, setting processes), (2) the prevalence of network effects and Jock-ins, and (3) the complex nature of interconnections between ICT standards as well as their effects on lock-ins and, industry structure, Relying on the theory of generalized urn schemes and methods of evolutionary and agent-based model- ing, the current paper has sought to develop a theoretical model Table? Correlation coefficients between the usage of personal computer operating systems and web browser, monthly data fem 2] an signicantcorelaons Conidence lve: 9%) are presented in bol ‘Windows Apple/Mac GNU/Linux Other 08's Explorer Firefox 09 0750 ow chrome 001 06s as 092 sat 010068 a7 095 ‘opera 015 ost oss 094 Cher non-mobile- 03807700 086 pane browsers Mobile phone 019059 a 098 browsers 09) | o3| os| os| Spam Usage Share 03] o2| oa] oo! Troi oun TROI—«ROT—CTROAZ Time Fig. 10, Development ofthe usage shares of PC operating systems July 2010 Data fom the Wikimedia Project of interconnections between industry standards, specifically, the cross-sectoral tying of technologies. It was found that this, increases the robustness of lock-ins and may for certain cases turn the dynamics of the system at hand such that a trend towards asymmetric industry structures (and monopdlization) ensues, if it has not (caused by network effects) already been present before, Such a phenomenon has been identified both, with a replicator dynamic approach and with an agent-based. simulation, The importance of such patterns in the ICT sector ‘was confirmed empirically in Section 4, As such, ICT standards hhave usually been developed in an ad hoc manner developing. along the lines of the specifications of the firs products of this, category [29]. In turn, commercial vendors play an important part; the severity of “standard wars” fought over the dominance of such standards is not surprising. While this is occasionally seen as an indicator of a “healthy” competition, it may also ¢g0 along with abuse of market power and possibly problematic revisions of property laws [45] and the institutional and regulatory framework of the internet (46). Finally, lock-ins have undesirable consequences themselves as discussed briefly, inthe first part ofthe current paper. The industry dynamic that hhas to be assumed for the ICT (or for emerging sectors in general) as a consequence ofthe findings in this paper suggests, however, thatlock-ins are not in general avoidable, The dynamic development of the industry favors asymmetric market struc- ‘ures, Further, positive cost-reducing and efficiency-improving, effects of standardization co-evalve with lock-ins. A partly solution may, however, be found in open standards (as proposed by, for instance, West [47] and by open source communities in Table Correlation coefficients of the usage of server operating systems ane tp servers sector fr countries wit large numbers of http servers (> 1000 in the Netcraft 51 Survey (43), Windows GNU/Linx SUIS Apache ‘Windows 1.000 08a ooo — 0086 ‘GNU Linux noo = 09028 MGlls 00 0935, Apache 200320 “Eien Techlagcl Forecasting Social Change 81 (2014) 309-220 senerl) that may stil be subject to fock-ins, but largely avoid Undesirable strategic behavior (eg the extraction of monopoly Tents), generate certainty about the standard’s nature and possibly its future development for potential users, and allow alternative standards to be designed in a way compatible to the ‘pen industry standara References [1] RR_Netson, 5.6. 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Allgrove, Net neutrality: a user's guide, Comput. aw Secu Rep. 22 (6) (2006) 484-463, tp: lrg 10.1016) 200500 005. [M0] |. West. Seeking open infastuctre: Contrasting open standards open Source and open Innovation. Fst Monday 12 (6) (2007), ‘Torsten Heinrich i 2 postdoc atthe University of Bremen. He studied in Dresden and Madrid and gradusted in economies a the Dresden University, ff Tecnology. He received his PRD in economics from the University of Bremen, Hie serearch interests incide the economics of grown nd technological change, non-eulibium theoces, computer simulation and he economics of eigial gods