Dynamics of ‘Standards Wars’
Generally associated with the ‘information age’, standards wars are strategic battles between incompatible technologies. Although not explicit to the modern technology era, standards wars have frequented the history books of the previous century. Battles between Microsoft (Windows) and Apple (Macintosh), Matsushita (VHS) and Sony (Betamax) or Edison (AC) and Westington House (DC) are well documented standards wars of the past century.
Covered in this article
The following article focuses on the dynamics of the strategy war for key platform stakeholders (consumers, suppliers and the platform leaders/wannabes). We consider the switching costs of incompatible standards and the benefits of a backward integration market entry strategy. We also look at how network affects shape the dynamics of a standard war – whether it be through direct or indirect network affects. Finally, we discuss the role the sponsor plays in promoting the standard and how that compares to an unsponsored standard war.
Technology dimension
The dynamics of a standards war is differentiated when we consider the switching costs associated with changing between competing standards. When a standard is introduced that is compatible with an existing standard, we call it an ‘Evolution’ strategy. The owner of the platform is relying on superior performance and backwards integration to drive adoption. Evolution strategies benefit from lower switching costs whilst ncurring the development costs of being interoperable with the legacy standard.
When a standard is introduced that is not compatible with the existing strategy, we call it a ‘Revolution’ strategy. The standard owner must present compelling value propositions to offset the switching costs associated with changing platforms.
Shapiro and Varian
If you and your competitor introduce standards that are backward compatible with the older standard, but incompatible with each other we call this ‘Rival Evolutions’. If your competitor introduces a standard that is compatible with the older standard and you have introduced a standard that is not compatible with the older standard, we call this ‘Evolution vs Revolution’. The mirror scenario is called ‘Revolution vs Evolution’. Finally, if both you and your competitor introduce standards that are not compatible with the previous standard, we call this ‘Rival Revolutions’.
Network affects
The outcome of a Standards Wars is influenced by the network affects of adoption a single standard. In the case where adopting a single standard results in benefits from most parties involved, the positive feedback loop is referred to as ‘Strong Network effects’. It is this force that organically drives momentum around the adoption of a single standard.
Direct network effects: Social Networks such as Facebook would be a good example of a standard that has strong network effect. As the amount of friends, photos and comments increase – so too does the value you associate with the service. As such, your commitment to a given standard is directly proportional to the value you derive from it.
A direct network effect occurs when your participation or commitment to a standard positively impacts others on the same standard. For instance, if you purchase a mobile phone you are positively impacting others who are part of the mobile phone network because they can now call you. Similarly, if you join a social network such as Facebook – the value your friends derive from the standard is increased as a direct result of your commitment to the standard.
Indirect network effects: Strong network effects are particularly common in environments where users can interact with each other. As such, social networks, mobile phones and file sharing services generally exhibit direct network effects.
However, there are many more examples where a users commitment to a standard benefits other users of the standard in an indirect manner. For instance, if you purchase an electric car you would not have directly impacted other owners of electric cars. However, on a macro level – by purchasing an electric car you are increasing the installation base of electric car owners which leads to a greater economies of scale for the provision of electricity to car which results in an improved electricity charging infrastructure for cars which in turn benefits all owners of electric cars.
Edison vs Westington House: A good example of a Standards War that was driven by indirect network affects was Edison vs Westington House in the battle of alternating current vs direct current. Both standards existed side by side for years. As they both had various advantages over each other, they were used to serve different markets and use cases. There were no direct network affects associated with using either AC or DC. However, there were strong indirect network affects that ultimately drove the success of AC. For instance, as an AC generator begins to server a larger user base, its economies of scale increase and per user costs decrease. Further to this, as the user base of AC current increased, there was a greater demand for AC devices which led to greater innovation, greater selection and generally lower prices.
Sponsored or unsponsored?
The dynamics of a standards war can further be understood by looking at the sponsor of the standards – if one exists. Sponsored standards can only be used by the intellectual property owner of the standard. The Apple Macintosh Operating System is an example of a standard that is controlled by Apple.
Unsponsored standards on the other hand can be used by anyone. They are generally technical specifications that enable manufacturers or developers to create interoperable devices. Those who choose to build interoperable devices or applications for the standard benefit by being part of a larger ecosystem. Whether directly or indirectly, increasing the number of developers or manufacturers for a unsponsored standard has clear network effects.
What’s particularly interesting about the sponsored and unsponsored standards are the economic and strategic forces that drive their adoption. Unsponsored standards are generally the simpler of the two as its adoption is driven by demand-side decisions by consumers. From a macro perspective, if control lies with the consumer then the adoption of a standard relies on consumer expectations and their ability to co-ordinate their efforts.
In relation to sponsored standards the dynamics are slightly more complex. Not only does the adoption of a sponsored standard rely on demand-side decisions of consumers but also on the strategic tactics that they implement. These tactics could manifest themselves as price cuts to affect the demand curve, strategic partnerships to increase the user base or marketing strategies to undermine competing platforms.