Chapter 8 - Continued

1
Chapter 8 - Continued
Economics of Information

• Joe Pendergrass

2
Alliances Can Spark Positive Feedback
Market share
Battle Zone
Time
3
Assembling Alliances

• Who to consider?
• Customers
• Suppliers
• Rivals
• Complements

What will it take to attract them? When to
align?
Caveat Do not give up control of competitive
advantage. Example Java
4
Aligning with Pivotal Customers

• Give pivotal customers special deals to join
  an alliance. Example Microsoft and Wall
  Street Journal
• Do not offer deals so good that they preclude
  other key alliances.
• Solution provide pivotal customers temporary
  benefits.

5
Who Should Bear the Risk of Failure?

• Align risk of failure with responsibility.
• Lower bankruptcy/distress costs by shifting
  risk to the party able to bear the cost.
• Attempt to shift risk to government or
  monopoly. Example Smart cards in Europe

6
When Are Alliances Unnecessary?

• Alliances can be sidestepped if positive feedback
  can be ignited by
• Current market position
• Technical capabilities
• Control over intellectual property rights
• Example - Nintendo

7
Interconnection Among Allies

• Opens networks to other networks
• Allows fixed costs of infrastructure to be
  spread over larger customer base
• Introduces new challenges in determining proper
  pricing
• Example Postal Services

8
Avoiding a Standards War

• Cooperation to increase joint profits
• Standards game strong player vs. weak player
• Game of chicken
• Sometimes, a standards war is inevitable
  consumers value variety, price competition from
  standardized product standard would erode
  products, high confidence

Cooperate
Fight
5,5
Cooperate
2,10
Fight
10,2
0,0
9
Example Alliances

• Microsoft and Netscape
• Xerox and Ethernet
• Adope Postscript
• Microsoft ActiveX

• Threats to managing open standards
• No clear sponsor
• Who will invest to keep the standard alive
  (Tragedy of the Commons)

10
Food for Thought

• Do you really need allies to compete
  effectively in the network market? (Microsoft,
  Sun, Dell)
• How does finding how your standard will affect
  the market help in recognizing natural allies?
  (modem industry)
• How different is the effect of standards on a
  networked market as compared to the traditional
  market?
• Challenges in managing alliances sheer quantity
  of alliances, inter-relationships between
  alliances
• http//www.orgnet.com/netindustry.html
• Regulatory issues