ers need not wait on the sidelines for
fear of being stranded by choosing the
wrong standard; it reduces the need
for price competition and subsidies
to try to create a single winning standard; and it may even generate revenue
through the sale of devices or software
that perform the conversion. Moreover, users may benefit from being part
of a larger network and generally having more opportunity to consume the
new product. 12
Our research in the market for flash
memory shows that a variety of formats coexist in a winners-take-some
outcome, rather than the traditional
winner-takes-all outcome. 12 We find
the existing network effects in flash
memory use are moderated by the
adoption of digital converters; specifically, digital converters provide
a measurable reduction in the price
premium of leading flash-card formats relative to that of formats with
smaller market shares. These market
dynamics imply that the provision of
conversion technology increases the
ability of new entrants to survive the
standards competition, as converters
tend to neutralize the impact of network effects. Our further analysis shows
that market concentration in the flash
memory market decreases as converters
become more widely available, implying that adoption of converters fosters
a more competitive market.
A variety of new and emerging
products may fit this model; for example, there is intense competition
in the e-book market among Amazon’s Kindle, Apple’s iPad, Barnes
and Noble’s Nook, and others. 6 Given
the digital nature of the content it
seems probable that a winners-take-some result will emerge, with the
ability for potential consumers to
consume e-book content on multiple
platforms, rather than a classic winner-takes-all outcome. This winners-take-some outcome is made possible
by, in part, the fact that the cost for
vendors of stocking multiple formats
is much lower for digital goods than
it was in, say, the Beta and VHS videocassette tape era, when significant
quantities of physical inventory had
to be kept in each supported format.
With digitization and cheap, perfect
copying a single master digital copy
in each format is sufficient.
Predicting the future is, of course, a
tricky business. While we expect to see
the winner-takes-all phenomena replaced by the winners-take-some phenomena in many markets for digital
goods, we also expect exceptions to
emerge. What signs should a manager look for as advance warning that
the market being pursued is unlikely
to proceed to a winners-take-some
outcome? We imagine three important conditions: First, especially early
on, traditional market power may
still prevail, with big vendors with
deep pockets and strong distribution
links in the marketplace choosing to
follow the old rules and survive for
an initial period of time. Eventually,
though, as more examples of winners-take-some outcomes emerge, fewer
technology vendors will take the risk.
In addition, vendors that elect to try
to follow the traditional path will be
subject to increasing governmental
antitrust oversight, as has been the
case with many IT firms, including
Google, Intel, and Microsoft.
A second exception may occur
when a few collaborators in a consortium emerge to share in the financial
returns, but also work to keep out
others so as to keep sharing to a minimum. This is another market-power
exception, but with an oligopoly instead of a monopoly outcome. These
results are likely to be an initial transition point for market leaders that increasingly perceive the risks of a go-it-alone strategy.
Finally, we may still see winner-takes-all outcomes when governments
dictate or otherwise greatly reward
them. In some circumstances it may
be appropriate, as when there are significant social and private costs of
nonstandardization (such as HDTV
and telecommunication standards) or
when scale makes conversion a relatively expensive option. However, other circumstances will see less benign
government intervention as when,
say, regulators, under the influence of
organizations with market power, or
through a “fighting the last war” analysis of winner-takes-all markets, issue
regulations that favor single winners.
Managers are well advised to closely
monitor emerging government policies in this regard.
The movement toward greater digitization will bring about an overall better
marketplace for vendors and consumers alike, marked by quicker technology innovation, fewer consumer “
dead-weight” losses due to technological
stranding, more product choices, less
vendor risk, and more interoperability.
Managers should prepare to seize the
related opportunities rather than fight
the last war.
1. brynjolfsson, e. and kemerer, c. network externalities
in microcomputer software: an econometric analysis
of the spreadsheet market. Management Science 42,
12 (Dec. 1996), 1627–1647.
2. cleary, P.j. the apple cat and the fanboy mouse:
unlocking the apple iPhone. North Carolina Journal of
Law & Technology 9, 2 (spring 2008), 295–322.
3. cusumano, m. the puzzle of apple. Commun. ACM 51,
9 (sept. 2008), 22–24.
4. cusumano, m.a., mylonadis, y., and rosenbloom, r.s.
strategic maneuvering and mass-market dynamics:
the triumph of vhs over beta. Business History
Review 66, 1 (spring 1992), 51–94.
5. Dranove, D. and gandal, n. the DvD vs. DIvx standard
war: empirical evidence of network effects and
preannouncement effects. Journal of Economics and
Management Strategy 12, 3 (fall 2003), 363–386.
6. Dunn, b.k. and kemerer, c. Barnes & Noble: Managing
the eBook Revolution. university of Pittsburgh
teaching case, aug. 2012.
7. Dunn, b.k. and kemerer, c. Class Warfare: A Re-Examination of Video Game Console Competitions.
university of Pittsburgh working paper, may 2012;
8. eisenmann, t., Parker, g., and van alstyne, m.
strategies for two-sided markets. Harvard Business
Review 84, 10 (oct. 2006), 92–101.
9. farrell, j. and katz, m.l. Innovation, rent extraction,
and integration in systems markets. Journal of
Industrial Economics 48, 4 (Dec. 2000), 413–432.
10. gladwell, m. The Tipping Point: How Little Things Can
Make a Big Difference. back bay books, little, brown
and company, boston, 2000.
11. liu, c., gal-or, e., kemerer, c., and smith, m.
compatibility and proprietary standards: the impact
of conversion technologies in It markets with network
effects. Information Systems Research 22, 1 (mar.
12. liu, c., kemerer, c., slaughter, s., and smith, m.
standards competition in the presence of digital
conversion technology: an empirical analysis of the
flash memory card market. MIS Quarterly 36, 3 (sept.
13. stone, b. Want to copy itunes music? go ahead,
apple says. New York Times (jan. 6, 2009); http:/
14. stross, c.; http://www.antipope.org/charlie/blog-
15. varian, h. and shapiro, c. Information Rules: A
Strategic Guide to the Network Economy. harvard
business review Press, cambridge, ma, 1998.
Chris F. Kemerer ( email@example.com) is the
David m. roderick Professor of Information systems
at the university of Pittsburgh and adjunct professor
at the school of computer science at carnegie mellon
university, Pittsburgh, Pa.
Charles Zhechao Liu ( firstname.lastname@example.org) is an
assistant professor of information systems at the
university of texas at san antonio, san antonio, tx.
Michael D. Smith ( email@example.com) is a professor
of information technology and marketing and co-director
of the Initiative for Digital entertainment analytics at
carnegie mellon university’s heinz college, Pittsburgh, Pa.