Waging a Standards War:

What to Do Once You’ve Won

Jeremy Bolton
14 February 2002

Competitive Strategies for Network Economies

MGT523
Professor Shor
Outline
• Once you’ve won
– Staying on your guard
– Commoditizing complementary products
– Competing with your own installed base
– Protecting your position
– Staying ahead
• Rear-guard Actions
– Adapters and interconnections
– Survival pricing
– Legal approaches
• Lessons
– Case study
 Part I
Once You’ve Won
 Staying on your guard
“Only the paranoid survive” – Andy Grove, Intel

• Being first usually means making technical compromises

– Apple Newton vs. Palm Pilot (vs. Windows Pocket PC?)
– French Minitel vs. Internet (American cultural imperialism)
– TDMA vs. CDMA
– OnStar vs. Wingcast
• Strategic implication: have a roadmap or migration path
– “Microsoft is the master with its “embrace and extend”
philosophy of anticipating or imitating improvements and
incorporating them into its flagship products1”: Windows95,
Internet Explorer, MSN Messenger
– Intel: 386, 486, Pentium, MMX, Pentium II, III, 4
1
Shapiro, Carl and Varian, Hal R., Information Rules: A Strategic Guide to the Network Economy, 1999, Harvard Business School Press, Boston, MA; p 278.
 Commoditizing complementary products
“Produce product, capture emerging market, be bought by Microsoft2”

• Pay attention to products produced by your complementors, not

just your own products
– Retain market leadership position, but…
– Encourage a vibrant market for complements
• Avoid the temptation to meddle, unless:
– Adjacent products add value to your customers
– You can offer competition that keeps prices low
• Microsoft and Intuit/PowerPoint/Hotmail/etc.

2
Shapiro, Carl and Varian, Hal R., Information Rules: A Strategic Guide to the Network Economy, 1999, Harvard Business School Press, Boston, MA; p 279.
 Competing with your own installed base
“The stiffest competition faced by Steinway comes from used Steinways3”

• Once your product reaches the saturation point, you can:

– Drive innovation like Intel
• Develop apps that require faster processors
• Develop/encourage complements that require hardware
upgrades
– Discount your product
• Keep lowering your price until the hold-outs buy it
• Known as the “durable-goods monopoly” problem put forth
by Ronald Coase over 25 years ago
• Problem is that information and software are very durable
• Solution: rent instead of sell (Microsoft’s .NET initiatives)
3
Shapiro, Carl and Varian, Hal R., Information Rules: A Strategic Guide to the Network Economy, 1999, Harvard Business School Press, Boston, MA; p 280.
 Protecting your position
“This is where antitrust limits come in most sharply4”

• Defensive tactics designed to secure your position

– Offer attractive deals to critical players
• Nintendo and its developers and distributors
• FTD and its discounts to exclusive florists
• Microsoft and its OEMs
– Avoid post-contractual hold-up
• Refer to notes from MGT322

4
Shapiro, Carl and Varian, Hal R., Information Rules: A Strategic Guide to the Network Economy, 1999, Harvard Business School Press, Boston, MA; p 281.
Staying ahead
“We don’t do research, we buy research” – John Chambers, Cisco

• Patents or copyright protection are not necessary in order to

maintain a competitive advantage
• If you know more about “what’s next” than others do, you can use
this to your advantage
– IBM, in opening up the PC, did not recognize the OS as the
key asset
– But Cisco did: all its efforts (and money) are spent on
identifying companies that are developing the next generation
of products
– Ensemble: Lucent vs. Cisco
 Part II
Rear-guard Actions
 Adapters and interconnections
“If you fall behind, target a niche or interconnect with a larger network5”

• Adapters: make your product work with someone else's

– Atari did not have the IPRs to make a Nintendo cartridge
adapter for its machines
– Memory card adapters
– Apple machines that could read DOS/Windows, but does this
undermine the confidence of Apple’s niche in the market?
• Interconnections
– Try to connect your network with a larger one
– Telecommunications Act of 1996 was designed to give CLECs
access to ILEC networks

5
Shapiro, Carl and Varian, Hal R., Information Rules: A Strategic Guide to the Network Economy, 1999, Harvard Business School Press, Boston, MA; p 286.
 Survival pricing
“Survival pricing doesn’t work; it just signals weakness6”

• The marginal cost of producing an information good is close to

zero, so you can cut your prices drastically and continue to cover
incremental costs
• So, if you find yourself losing in a network industry, it is tempting
to cut prices to stimulate sales
• Avoid the temptation; it is a sign of weakness and will not work
Encyclopedia Britannica vs. Microsoft Encarta
– Simply Money vs. Microsoft Money and Quicken
– Borland vs. Lotus 1-2-3 and Microsoft Excel
• Survival pricing is not the same as penetration pricing
• Bottom line: avoid survival pricing

6
Shapiro, Carl and Varian, Hal R., Information Rules: A Strategic Guide to the Network Economy, 1999, Harvard Business School Press, Boston, MA; p 288.
 Legal approaches
“If all else fails, sue7”

• The landmark Kodak case opened the door to antitrust lawsuits in

this form
• Many companies have taken to this strategy
– Sun
– AOL Time Warner
• But, it should be a last resort
– Protect yourself early on by recognizing key assets
– Wage a standards war!

7
Shapiro, Carl and Varian, Hal R., Information Rules: A Strategic Guide to the Network Economy, 1999, Harvard Business School Press, Boston, MA; p 288.
 Part III
Lessons
 Review of Chapter 9
1. Understand what type of standards war you are waging8
2. Strength in the standards game is determined by ownership of seven
critical assets8:
1. Control of an installed base
2. Intellectual property rights (IPR)
3. Ability to innovate
4. First-mover advantages
5. Manufacturing abilities
6. Presence in complementary products
7. Brand name and reputation
3. Preemption is a critical tactic during a standards war8
4. Expectations management is also crucial to building positive feedback8
5. When you’ve won your war, don’t rest easy*8
6. If you fall behind, avoid survival pricing*8
*
Covered in this document
Shapiro, Carl and Varian, Hal R., Information Rules: A Strategic Guide to the Network Economy, 1999, Harvard Business School Press, Boston, MA; pp 295-296.
8
OnStar vs. Wingcast
OnStar Wingcast
Type of standards war Rival revolution Rival revolution

Control of installed base Yes: 1M+ No, but…

IPRs Unclear Yes

Ability to innovate Yes Yes

First-mover advantage Yes No

Manufacturing abilities Yes Yes

Complementary products ? ?

Brand name/reputation Yes No

OnStar vs. Wingcast
OnStar Wingcast
Preemption Yes No

Expectations mgt Yes No

Resting easy? No N/A

Survival pricing? Too soon N/A

PREDICTION: DUOPOLY