In the winner-takes-all world of high technology, setting the technology standard is the route to dominant market share – and vice versa.
In the winner-takes-all world of high technology, setting the technology standard is the route to dominant market share – and vice versa. But how can you set a standard? Éric Viardot provides six principles.
High technology is a winner-takes-all industry. In 2004 Microsoft controlled 93.5 per cent of the global desktop OS market. Linux had just 4.5 per cent and Apple a mere two per cent. Similarly, Intel controls 82.8 per cent of the worldwide market for PC processors, leaving most of the rest to AMD which holds 15.6 per cent while Taiwan’s Via Technologies and Transmeta account for the remainder. And Apple’s iPod has 82 per cent market share among hard drive portable music players. There are many other examples of firms with dominant market shares for a high technology category of product. Once they have achieved such a position, their products become a standard (though it can, in true chicken and egg fashion, also be argued that it is because they have managed to make their product a standard that they have been rewarded by the market).
The dominance of a technology standard usually appears during the growth phase of the product life cycle, when a technology starts to reach its peak and new competitors want to offer solutions or products to a growing number of customers. For instance, in the on-line service industry, after initially pursuing non-standard strategies, late entrants such as Microsoft and AT&T, followed the standards set in foundation technologies first adopted by Prodigy and AOL.
Contrary to what a lot of technologists think, the best technology does not always manage to become the de facto standard. Indeed, there is a long list of firms that developed a superior technology but which failed to establish their technology as a standard. In the field of PCs alone, Apple, IBM, and Next lost the battle against the so-called Wintel alliance. Today, Microsoft is fighting hard with Nokia to impose its operating software as the standard of the new generation web-friendly phone.
Traditional theory states that industries are inclined to diminishing returns as firms compete for scarce resources. However, according to the law of increasing returns, returns from marginal investments go up rather than down. As some firms continue investing, their profitability grows and, eventually, one or two dominate the market because the others are unable to match their level of investment.
Archetypal examples of increasing returns are utilities. The law of increasing returns also plays a large role in today’s high-technology and knowledgebased industries.
Actually, experience shows that in growth markets where two or more incompatible technologies compete, any modification, even a small one, in the original situation may help one technology secure a lead big enough eventually to lock in the market and become the industry standard. Consequently, competing technologies are locked out even if the dominant technology is clearly inferior.
A classic example of a market locking in an inferior technology is the QWERTY format for typewriter (and now computer) keyboards. The QWERTY format was originally developed in the 1860s to slow down typing speed by separating keys whose letters frequently appeared next to each other in words. This design helped reduce the inclination of type bars to collide and jam when keys were struck rapidly – a persistent problem on the first generation of typewriters.
The technical problem of having the type-bar jam was fixed in the 1890s, and new keyboard formats were developed for faster typing. However, they were a flop on the market because the first touch typists had been trained on QWERTY keyboards and did not want to change even for better keyboards. By the 1910s, the QWERTY keyboard was locked in as the standard and remains so.
The QWERTY technology leadership happened by chance. But such a position can be reached deliberately. Based on literature and experience, there are six different and complementary ways for a firm to stimulate the creation of a standard.
1. Provide an open architecture
Keeping a proprietary technology exclusive is essential but extremely difficult. Some firms have managed to build powerful patent and/or copyright walls around their original technology coupled with aggressive legal enforcement to prevent copying by potential competitors, such as Xerox did with its proprietary dry-toner xerographic technology or Intel with its X86 and Pentium microprocessor series.
However, thanks to the use of reverse engineering techniques, in many industries patents can be quickly circumvented. As a rule, patents ordinarily delay but do not stop competition. They may even push efficient competitors to invent in-house technology that may be better – as in the photocopier business where Xerox’s competitors developed their own liquid-toner xerographic technology.