Standards

1. Standards Hal R. Varian SIMS

2. 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 SIMS

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 SIMS

4. 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 SIMS

5. 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 SIMS

6. 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] SIMS

7. 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 SIMS

8. 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# SIMS

9. Battle of sexes Ms Column Mr. Row Two pure strategy equilibria + mixed strategy SIMS

10. Follow the leader • Dominant firm sets standard, others follow • Microsoft SMB and Samba • Microsoft document formats and decoders SIMS

11. 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? SIMS

12. Classification of Wars SIMS

13. Rival evolution VCRs (Sony/Betamax v VHS) Video games Rival revolutions IRC v IM Evolution v. Revolution Windows 98 v. BeOS Examples SIMS

14. AM stereo Auto industry invested, radio didn’t 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 Recent Standards Wars SIMS

15. 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 Standards Wars, cont’d. SIMS

16. 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 • DVD+RW: written over, like big floppy • New standards war: Blu-Ray and HD DVD SIMS

17. Key Assets • Control over an installed base • Intellectual property rights • Ability to innovate • First-mover advantages • Manufacturing • Strength in complements • Reputation and brand name SIMS

18. 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! SIMS

19. Once You’ve Won • Stay on guard • Minitel’s loss to WWW • Offer a migration path (Apple/Intel) • Commoditize complementary products • Intel and DRAM • Competing against your own installed base • Intel and Moore’s law • Durable goods monopoly SIMS

20. Once You’ve Won, cont’d. • Attract important complementors • Leverage installed base • Expand network geographically • Expand network vertically • Stay a leader • Develop proprietary extensions SIMS

21. 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 SIMS

22. Microsoft v. Netscape • Rival evolutions • Low switching costs • Small network externalites • Strategies • Preemption • Penetration pricing • Expectations management • Alliances SIMS

23. 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 -> RAND • What if there is misrepresentation? • FTC-Dell case SIMS

24. Policy issues • FTC subsequent complaints • Rambus failure to disclose in JDEC meeting • Sun-Kingston case • Stronger disclosure rules = chilling effect? Or weaker rules=chilling effect? SIMS

25. 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 SIMS

26. Lessons, continued • When you’ve won the war, don’t rest easy • If you fall behind, avoid survival pricing SIMS