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.

Caveat manager

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.

Looking ahead

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.

 

References

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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.

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7. Dunn, b.k. and kemerer, c. Class Warfare: A Re-Examination of Video Game Console Competitions. university of Pittsburgh working paper, may 2012; http://www.pitt.edu/~ckemerer/research.htm

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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. 2011), 188–207.

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. 2013), 921–942.

13. stone, b. Want to copy itunes music? go ahead, apple says. New York Times (jan. 6, 2009); http:/ www.nytimes.com/2009/01/07/technology/ companies/ 07apple.html

14. stross, c.; http://www.antipope.org/charlie/blog- static/2012/04/ understanding-amazons-strategy.html

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Chris F. Kemerer ( [e-mail]) 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 ( [e-mail]) is an assistant professor of information systems at the university of texas at san antonio, san antonio, tx. Michael D. Smith ( [e-mail]) 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.