Chapter 8: Cooperation and Compatibility

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Chapter 8 Cooperation and Compatibility
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Cooperation Compatibility
Focus on openness strategies (discussed earlier)
which are fundamentally based on cooperation with
allies and compatibility of products and services
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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

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Who wins and who loses from standards?
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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

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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

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Incumbents

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

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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

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Innovators

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

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Formal Standard Setting

• Most standard setting takes place through formal
  standard setting processes
• Examples
• Underwriters Laboratory (UL)
• Institute of Electric and Electronic Engineers
  (IEEE)
• National Institute of Standards and Technology
  (NIST)
• However, these bodies have no enforcement
  authority

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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

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Tactics In Formal Standard Setting

• Determine your goal at the outset
• Quickly establish a standard incorporating your
  proprietary technology
• Dont 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

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Tactics In Formal Standard Setting

• Principles of strategic standard setting
• Dont automatically participate
• Outside alliances may allow you to move quicker
• Keep up your momentum
• If standard setting is slow, prosecute pending
  patent applications, continue RD, and prepare to
  manufacture
• Look for logrolling opportunities
• Possible side agreements with other companies

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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
• Dont count on vague promises of openness made
  early on
• Make sure that holders of key patents are
  explicit

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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

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Building Alliances

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

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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

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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

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Interconnection End-to-End
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Interconnection among Allies

• Most Groups
• The sender the senders carrier the recipient
  the recipients 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

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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

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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

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Game of Chicken

• Both sides prefer to set their own standard, but
  will accept the others technologies instead of
  waging war
• War may come, but the two sides are better off
  cutting a deal

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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

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Advise for War

• DONT be Proud
• stubborn players can erode or destroy the gains
  from trade
• Stay on Guard
• You dont 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!

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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

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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

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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

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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 its demise

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Championed Standards

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

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Warning on Alliances

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

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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

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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

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Questions

• ?