Chapter 8: Cooperation and Compatibility

1. Chapter 8: Cooperation and Compatibility

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

3. 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

4. Who wins and who loses from standards?

5. 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

6. 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

7. Incumbents • Standards can pose a grave threat to incumbents • Examples • RCA • Atari

8. 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

9. Innovators • Innovators collectively welcome standards • Standards can impact innovators in different ways, which can affect the standard-setting process • Example • Smart cards

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. Building Alliances • Keep in Mind Your Competitive Strategy • Time-to-Market • Manufacturing Cost Advantage • Brand Name Advantage • Developing Improvements

17. 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

18. 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

19. Sender Sender’s Carrier Recipient's Carrier Recipient Interconnection: End-to-End

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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!

26. 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

27. 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

28. “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

29. 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

30. Championed Standards • Sun & Java • Sun competitors & complementors would like to see Java open, yet Sun has resisted this proposal.

31. Warning on Alliances • You must not only worry about forming alliances, but also on maintaining them • Examples: • Unix • HDTV

32. 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

33. 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

34. Questions ?