Topic 8: Strategic Use of Standards and lock-in

1. Topic 8: Strategic Use of Standards and lock-in • A. The new phenomenon • New concepts: compatibility & installed base • Stories, stories, stories • B. Understanding lock-in to an installed base • Strategic use of… • C. Understanding standards • Development of communities around… Standards and lock-in, M&S 463

2. A. Mix and match markets give rise to new paradigm • The emergence of consumer/business electronics & issues over dominant design for interconnection • Compete as a full-service firm • Compete as a component manufacturer • Stereo equipment, recording formats • The strategic manipulation of interconnection • Telephones hand-sets, fax machines • What frameworks understand these occurrences? • Lock-in to an installed base • Standardization of inter-operability Standards and lock-in, M&S 463

3. A. Phenomenon arising in M&M markets that motivate closer look • Splintering of key standards • Unix operating systems, 56K • Some formats “launch” while others stall • DVD, Laser disk, HDTV (?) • “Wrong” (?) standard shapes conduct/performance • QWERTY; DOS/Apple/Windows • Orphaning investment • CP/M, Beta, 8-track • Fight for control of installed base • Netscape, Java, Real Standards and lock-in, M&S 463

4. B. The new language of lock-in:Endemic to information goods • Different ways of generating installed base of users who all face similar switching cost • Mostly linking past behavior to present situation • Contractual commitments • Length of time, exit clauses • What else? • Durable purchases and investments • It is still there and still useful • Brand-specific investments or training • User habit or memory Standards and lock-in, M&S 463

5. B. More new language of lock-in:Endemic to information goods • Conversion of databases • Calendars, accounts receivables • Why is this so hard? • Specialized supplier with unique service • Lack of user choice • Search costs • Long processes w/technically complex goods • Loyalty programs & accumulated use • Frequent flier programs are the canonical examples • What else? Standards and lock-in, M&S 463

6. B. New language: managing installed base & compatibility • Installed base as a valuable asset • Selling complementary products/upgrades (cross-selling) • Selling access to those customers (e.g., to advertisers) • E.g., The portal approach (but just because people come to the site, doesn’t mean the eyeballs look at the ads) • Installed base as a constraint on strategy • De facto (Intel) or mandated (FCC)standard? • The optimal time to abandon the installed base? • Example: Windows3.1  Windows95, It cost a ton to embed the DOS window. Why did they bother??? Standards and lock-in, M&S 463

7. B. Starting installed base is hard • And hard to stop (due to lock-in), once started. • And valuable to seller  users should get price break early • During the early phases concerns about orphaning • The fear of locking into wrong focal point & losing it all • Example: 8-track tapes, beta titles • When more than one party needs lock-in  possible Chicken/egg dilemmas • Someone has to move first, but everyone is wary • Not valuable unless all parties “join same club” or coordinate on same point of lock-in • Example: 56K modem standards for first year (there were competing consortium) Standards and lock-in, M&S 463

8. B. McAfee Associates, prototype for the new business model • Solve chicken/egg problems using all means • By giving it away • Users voluntarily lock-in • There simply is not room for many duplicates • Advantages to being early, being known • Source of sustainable competitive advantage? Updates. • Charge for the upgrade (but not much) • Stay near/ahead of nearest competitor • Do not appear to exploit position of lock-in • Limits to the value-chain put limits on McAfee revenue Standards and lock-in, M&S 463

9. C. Standardization as an answer to chicken/egg • Establishing focal point when installed base is growing • What determines a focal point? Types of actions/events • Attention: E.g., Buzz at COMDEX • Celebrity/authority/history: E.g, The cult of Linus Torvald • Endorsement: E.g., ITU settling the 56K fight • Sponsorship: E.g., IBM/Microsoft inviting in complementors • Mandates: E.g., FCC endorsement of color TV standard • Why focal points sometimes work or fail • Getting everyone to coordinate against orphaning • Expectations may become self-fulfilling & self-reinforcing • Beware fleeting foundations. . . E.g., the death of CP/M, 8-track tape, the shallowness of Lotus 123 loyalty, etc… Standards and lock-in, M&S 463

10. C. Standardization as strategy • Standards fights b/w almost “equal” alternatives • Develop own network around standard & diminish other • E.g., 56k, ISP preferences v. consumer brand recognition • Use FUD to slow down rival’s focal point • Exaggerated importance of small events, earning reports, mkt share, ratings in magazines, & assessment of the “big mo” • Enormous firm energy spent on such activity. • It can set expectations: Ignore at your peril • Old v. new sometimes looks like chicken/egg problem • Coordinating move off old “inferior” norm, e.g., metric system? • But often has more to it, because migrating old installed base becomes central strategic focus for all firms (more below). • Need to understand role of ownership first Standards and lock-in, M&S 463

11. C. To own or not to own, that is the question • What is actually owned? • The discretion to change the standard • Right to see those changes before others do • Choosing proprietary standards as a commitment • To after-sale service – e.g., own revenue tied to it (The IBM model for large systems) • To guide development: Windows & APIs, developer tools • Choosing non-proprietary standards as a commitment • Not to manipulate the standard for selfish gain • To give all complementors same technical innovation easily • E.g., 3-COM, Ethernet adopted by an IEEE committee • Open source variant: for “communal” benefit (??) Standards and lock-in, M&S 463

12. C. Economic communities grow around standards. Why? • B/c market will support few standards/platforms • R&D by firms, by users is platform/standard-specific • Commercialization expenses are sunk assets, fear orphaning • Usually cheaper to make platform valuable for many users • The inexorable accumulation of a wide scope of features • Result: “Standard bundles” emerge & resist change • The platform is “compatible” across apps • A limitation: moving further from technical frontiers • E.g., The IBM system 370 adopted enough of the frontier to keep many old users from switching to new standards • E.g., The persistence of DOS’s useful & market life, even though the technical frontier had moved far beyond it Standards and lock-in, M&S 463

13. C. The birth of new communities • The supporters for the old will resist • Usually profitable to sell to late majority • Old community will try to expand scope for new use • Old standard supporters will try to migrate it to new use • New uses/users tends to support new platforms • a capability that escapes grasp/scope of old platform • Examples: VAX 11-780, the PC, the TCP/IP browser • Divided technical leadership encourages birth of new • many firms on the frontier  who’s in charge of next leap? • entry from unexpected areas • Example: The putsch against IBM 386 Standards and lock-in, M&S 463

14. C. The role of migration in developing communities • Easy migration enables orphaning of old • E.g., 78  33.3 & 45, bridges & players w/multiple speeds • Helpful but not sufficient: E.g., Why DVD but not Videodisk? • Strategy: Dominant firms resist migration • In anticipation will try to lock users into proprietary format • E.g., IBM and EBCDIC/ASCII • Standard stealing, if you can (e.g., Excel v Lotus 123) • How to grow a new community off the old • Leverage strength in one area, grow community later (IBM PC) • Entry into complements, grow the community later (Netscape) Standards and lock-in, M&S 463

15. C. Standard strategy recently • The long shadow of the IBM PC  Intel, MS & Cisco? • Competing: Technical frontier as strategic enabler • Add new capabilities • Render rivals’ capabilities obsolete • Extend proprietary features • Long run platform always in shadows (e.g., MS v. everyone) • Competing and cooperating at same time • Everyone needs interoperability, but how is it controlled? • Failed recent attempts at growing new communities • Fat clients/thin servers vs thin clients/fat servers & all that • Radical change, but no way to get from here to there. Standards and lock-in, M&S 463

16. C. Microsoft & Windows, prototype for the new model? • Develop unique assets that have value • Use trade secrets, IP & any other strategy to keep proprietary information about standards out of public domain • Accept public standards of value to users & try to layer on top • Nurture a community of complementors • Encourage w/developer tools & other support • Discourage complementors from other platforms • Achieve market share thresholds (30%, 60%) • Be a fast-second for assets of value to community • “Identify market leader, emulate the market leader, steal the vision, provide a migration path” • “Integrate, leverage and erode” Standards and lock-in, M&S 463

17. Why lock-in & standardization complicates analysis • Forecasting diffusion: Getting over the “chasm” linked to chicken/egg dilemmas • Videodisk, DVD, 56k • Migrating old users with old/new platform leaders • Forecasting industry evolution: Dominant design linked to installed base • Orphaning of installed base a concern: CP/M, • Strategies for Imitator/innovator: Imitate a component or an entire system? • Or capture value by develop assets that enable bargaining power? Standards and lock-in, M&S 463

18. Learning points • “Lock-in” has many dimensions • Installed base, coordination problems, orphaning, difficulty growing • Standardization as a basis for strategy • Coordination, chicken/egg, migration • The birth of communities around standards • The rise of standard bundles, fight for control • Most known examples mix several elements • Stories, stories, stories Standards and lock-in, M&S 463