What is a standard? Websters defines standard as "something
that is established by authority, custom or general consent as
a model or example to be followed." Our society has standards
for quality, communications, weights and measures, ethics and
much more. This paper will concentrate on compatibility standards
in the high-technology arena.
Standards are important because they enable technologies and even
industries to progress faster than they would on their own. If
IBM had not set the PC standard, the development of computers,
hardware and software, would not have progressed as fast as it
has. Even with these benefits companies are very cautious in their
approach to standards. There has been much hype recently about
the need to change the established standards board model to one
that follows the Internet model of setting standards on the fly.
This paper will argue that basic considerations in setting standards
have not changed as much as people say. Although standards boards
have been instrumental in many ways throughout the years, many
product and industry standards are settles by market forces. The
issues of standard setting in the classic example of a standards
war, VHS versus Betamax, are still the same issues confronting
today's standards decisions.
The case of the VCR war is one of the most famous standards war
of all time. In the late 70s, the video cassette recording technology
was becoming a reality and people were waiting to see which standard
would emerge in the marketplace. Although the technology behind
Betamax and VHS was similar to one another, they could not play
one another's tapes. Sony was the first to launch its Betamax
standard in 1975 and JVC followed with VHS in 1976. Betamax with
its clearer resolution was clearly the superior technology. Given
this technological advantage as well as Sony's well established
reputation, distribution channels and deep pockets, one would
have thought Sony would emerge the clear winner. However, by 1978
it was clear that VHS was the market standard, and by 1987 95%
of all VCRs in the world used the VHS format. So what happened?
Sony took a traditional approach to launching new products: they
tried to defend their market position. Betamax was a proprietary
technology and Sony believed they could do it alone. They took
pride in the development of the new product and wanted to recoup
their investment in development through high margins. They wanted
to make most of their first to market advantage. However, their
strategy did not work since the high introductory cost prevented
Sony from building a critical consumer base. Technical superiority
lost out to lower cost and the availability of compatible video
tapes.
Although some of JVC's strategy was traditional, they won this
important contest playing by unconventional rules. First, they
gave away their proprietary technology by licensing VHS specifications
to competitors and thus making this an open standard. One way
to look at this move is to say JVC welcomed competition. What
it really did for JVC was help meet the manufacturing capacity
that they could not provide on their own due to their small size.
Second, unlike Sony, they kept their prices as low as possible.
Although their margins were small, they were counting on growing
their market. They realized early on that they could earn greater
profits from a larger market with low margins than Sony's approach
to higher margins from a smaller market. These decisions led JVC
to build a large installed base more quickly than Sony's Betamax.
However, they did not stop here.
JVC continued to push their VHS standard by leading the market
development efforts. They lead technological developments for
the VHS standard and worked to build complementary assets by manufacturing
video tapes. Their leadership in VHS built their credibility as
a consumer products manufacturer.
The larger the network of users adopting a standard, the more valuable belonging to the standard becomes. The key here is to build this base as quickly as possible. In order to accomplish this, companies must address the issues of availability (capacity to meet demand), price of goods, and competitive situation. In JVC's case, they also worked to educate the market about the new product.
A large contributor to the PC standard winning over Apple was the availability of software, just as VHS videotapes in video rental stores finally convinced Sony of their defeat. Companies must not only be concerned with the main technology that is fighting to be the standard, but it must also build complementary goods to work on that standard.
It is important to gain the acceptance of an entire market, including users and others impacted by the standard. In this case, users wanted 2 hour play time on their tapes and JVC was prompt to respond. They also worked with other manufacturers to gain industry acceptance.
Market acceptance takes time and resources that many companies cannot achieve alone. JVC acknowledged their weakness in meeting capacity through manufacturing and brought in Japanese partners who could help manufacture their standard product. Sony sought to launch Betamax all on their own.
Winning a standards war is not about making immediate profits. In fact, many companies anticipate a long investment period. JVC insisted on low prices and forewent high margins because they wanted to grow their installed base.
Companies used to win standards war based on technological superiority.
Today, availability and compatibility determine the winner. With
such a shift, closed proprietary standards can no longer be effective.
Open standards with moderate licensing fees can spread a standard
much more quickly.
History will not repeat itself in the introduction and adaptation of the newest video technology, DVD. DVD, with its superior quality pictures and capacity to hold up to 4.7 gigabytes of data, hopes to be the next VHS. Anticipating its release, the manufacturers involved in DVD came together one year ago and agreed to a common operating standard to purposely avoid another VHS versus Betamax battle. Their motives for collaboration were selfish. DVD faces great opposition from the Hollywood community who is concerned with the copyright issues of films and videos. In this case the issue is market acceptance.
JAVA, a programming language for the Internet developed by Sun Microsystems, is on its way to becoming the most important Internet software standard in the world. What developed as a software for Internet developers is becoming a computing platform on which to build software applications. What did Sun do right? They built a tool that is compatible throughout the industry, created a powerful web of alliances which included Microsoft and Lotus, and practically gave the programming language away thereby making it an open standard. Even with all this hype about JAVA, Sun has yet to make much money from the modest licensing fees and programming tools. Looking back on Sun's strategy, they did not have any choice but to give the program away. Anything close to another Microsoft monopoly would have stalled industry support for JAVA. Today, Sun has the critical base of users to declare victory in this standards war.
Just nine months ago there were over 30 web browsers to choose from. Today, the browser war has come down to a dual between Microsoft Internet Explorer and Netscape Navigator. This is considered a standards war not because one browser has to become the industry standard, but more so because the browser that dominates will in many ways dictate the standards of the web. The Netscape Navigator has already this theory in the history of the web's development by building the web's de-facto standards with HTML, plug-ins, scripts and graphics. Netscape's standards have become web standards. This standards war is about building a large installed base quickly and maintaining the lead. Both Netcape and Microsoft have given away their products in hopes of being the standard maker for the web.
There are currently two standards for groupware, an open intranet
standard and the proprietary Lotus Notes standard. Which one will
emerge as the dominant standards? This contest's main issue deals
with open versus proprietary standards. Intranets offer most of
the same functions as Lotus Notes, but because it is an open standard
development costs are low and there is no cost for licensing the
product. Large corporations with security concerns have opted
for the closed Notes system. However, as security technology for
intranet improves the benefits of Lotus Notes may go away.
Are you an early adopter when it comes to high technology purchases?
Or do you usually wait until standards are set and then purchase
the product that leads in the market? What would you have done
if you were in the market for VCRs during the VHS/Betamax war?
Many of us take our VCR for granted but I recently spoke to Steve
Hawes of UC Berkeley's media department who remembers the issues
he faced as a home consumer and decision maker for Berkeley. According
to Steve, people were waiting for a while until they could see
the shakeout. Once JVC licensed their technology to others, many
people saw this as a sign that VHS would become the standard.
In his role at the media lab, Steve had to consider the needs
of the school. Videotapes were mainly used for instruction in
class and copies of tapes were made to exchange information. Compatibility
was the main driver in this decision and therefore, VHS was the
chosen standard at Berkeley. It was not until last year that Berkeley
purchased a Betamax machine. As a home consumer price was the
main factor. VHS systems and its complementary goods were priced
significantly lower than Betamax systems.
In general, current processes in setting standards are determined by market movements. This is both good and bad for the consumer. The bad news is that the best technology doesn't necessarily become the adopted standard. The good news is that new standards usually offer added benefit for consumers, such as lower price and wider range of complementary goods since companies need to form alliances to succeed. In this way traditional economics still hold true, "competition is good for consumers."
Grindly, Peter. Standards Strategy and Policy. Oxford University Press, 1995.
Hamilton, Andrea. "Time to toss out the VCR? DVD is here - but there's not much to play." Technology Home Viewing. November 8, 1996. P. 48.
Lambert, Peter and Carol Wilson. "Standards Quandary: Speed Vs. Science." Interactive Week. November 18, 1996.
Schlender, Brent. "Sun's JAVA: The threat to Microsoft is real Sun." Time. November 11, 1996. Pg. 165.
Singh, Amarendra. "Browsers at the Crossroads." PC Magazine. October 22, 1996. Vol. 15; No. 18; Pg. 100.