Standard Battles in Media Industry - Essay Example

Three important considerations in the setting and adoption of standards are the ideas of interoperability, economic development, and innovation. Technological innovation occurs on a wide scale and often products that are developed have the potential to complement each other. In fact, many (if not most) times, future development takes place in response to pioneering ones. In a market where products often have to operate in conjunction with others, it is often necessary that standards be set to facilitate this kind of collaboration. This is known as interoperability, and is important for the developer as well as the consumer. As the necessity for interoperability results from widespread innovation, it also facilitates such innovation (Digital TV over Broadband, 1). Yet in today's high-technological industry, these innovators and developers are faced with challenges when adoptions of standards become imminent. The rigors of standard adoption procedures, including the very real possibility of standard wars, can place these companies in positions that force drastic action. Because of the ability of standards to affect welfare and economic development, even governmental bodies sometimes see the need to become involved in setting standard. It is therefore often the case that technology companies move in and out of technological arenas based on outcomes of these standard-establishing battles. Consumers and manufacturers take keen interest in the interoperability of technological components that perform similar or complementary functions. It is, for example, very important that appliances plug into electric socket and that pencils fit into sharpeners. This is one of the benefits of standards, and it offers a significantly large incentive for the acquisition of a product. Likewise, manufacturers pay close attention to standards when conducting research and development, as the existence of these standards often guides the direction of development and sets parameters in which such innovation can take place. Standards are capable of removing much of the risk involved in research and development, as a certain amount of certainty is conferred upon a project in the knowledge that it cannot be rejected on such grounds that are held by the standard to which it adheres. When companies are certain of a market for their products, they are likely to be confident in producing new and variable products. Also, security in the market allows for the dedication of time and concern to such ventures as improvement of technology and reduction of expense (van Tassel, 2001). The interaction of consumers, manufacturers, standard-setting committees and sometimes the government is responsible for the ultimate adoption of standards, and several models for such action exist. Adoption of standards under de facto condition involves sponsorship by these technology companies, and it is these that are mainly determining of the fate or direction of the companies. However, adoption through industry consensus is possible and may also affect the companies' future. Especially in the case of de facto standards, several models exist for adoption proceedings, and examples for each exist empirically in the actions of several real companies around the world (Stango, 2004). Technological innovation has, as mentioned earlier, much to do with the establishment of standards. Since standards can determine the direction (or even survival) of technology companies, it can be seen then that innovation is a very important part of the life of any such company. Backward-compatible software gave RCA the edge in the CBS v RCA bid for the adoption of their version of the colored television set as the network standard in the United States. RCA was the official distributor of the standard black-and-white television sets in the country, but alongside the incumbent, the CBS network had been developing a mechanical colored television (Shapiro & Varian, 1999). RCA was much slower in its development of an electronic colored television set. After the two systems were tested in 1950 and CBS's was functional while RCA's was underdeveloped, the standard was awarded to CBS by the FCC. Yet this Federal organization was not to have the final word. In the final analysis, the previous black-and-white standard had a large part to play in the adoption of a new standard-and according to this already established standard, the FCC had made the wrong choice. The CBS mechanical television proved able to carry only programs that were created in color for the machine, yet in 1953 23 million black-and-white television sets existed in the United States (Shapiro & Varian, p. 1999). At that time, too, networks still made and carried mostly black-and-white programming. In fact, by 1965 only 4000 hours of color was offered by NBC, while CBS and ABC showed 600 and 800 respectively (1999, p. 11). Added to this was the fact that RCA continued to work hard on research and development of its product, equipping it with the ability to uphold the previous black-and-white standard while displaying color whenever the opportunity arose. The previous standard still showed itself strong, and this leverage won an overturn of the FCC's decision to grant the new color television standard to CBS (1999). RCA used the standard to secure its place as the developer and distributor of the major media platform of the next generation, while CBS was forced out of the technology-developing businesses. The war between Apple and IBM throughout the 1980's and into the 1990's has also been largely concerned with technology and the standard that should gain dominance. Innovation has been defined as "the ability to make proprietary decisions into the future" (Shapiro & Varian, 1999). Technology companies must look ahead and anticipate the next step in the growth of their technology. Standards are adopted for reasons connected with their ability to offer flexibility and variety to both consumers and manufacturers. When a firm produces a product that rivals that of another firm in its ability to offer more options in the creation of complementary products, the market for that innovation will grow as consumers interested in using the complementary products must also purchase the innovative product. The story as it pertains to Apple and IBM depicts an interesting view of this situation. Although IBM-based personal computers are now dominant (so that IBM would now be considered the incumbent in a computer standards battle), in the late 1970's it was Apple that might have been considered the incumbent, as their 8-bit computers presented the dominant technological standard of the time (West, 2002). However, superior technology with the introduction of the 16-bit IBM computer quickly obliterated Apple's dominance. This leads to the idea that standards are influenced not just by the number of persons who consumer products that represent a certain standard, but also by welfare concerns and the idea of the product's benefit to individuals and to society. This benefit can be measured in terms of the product's superiority to its competition, and this was proven to be so at the end of the 1970's decade when IBM's new PC outclassed and outsold Apple computers. Yet the ability of the establishment of a standard to change the course of a technology company becomes evident in the tenacity with which Apple fights back-still through the use of innovation. Recognizing the possibility of IBM"s controlling the market, winning the standard battle, and forcing its secession, Apple redoubled its efforts. Because the widespread use of IBM computers (especially by businesses) effaced the success of Apple, this prompted a certain amount of evolution in the company as seen through its new product. IBM had evolved to become the leading computer manufacturer as a result of widespread adoption of its standard by consumers. In order to remain in the standard rivalry through staying current with the technology available through its competitor, Apple was forced to return to the drawing board and produced its own 16-bit computer, a suitable platform from which to compete with IBM. In fact, this time the Apple Macintosh represented superior technology and has been considered by economists the better choice of standard in an efficient market (West, 2002). Of significant influence in standard setting has been the control of technology companies over an installed base. This is defined as a significant portion of users who have already committed to a product by purchasing and/or otherwise partaking of its consumption (Stango, 2004; Shapiro & Varian, 1999). The network externalities, or direct and indirect benefits that consumers gain by opting for one variation of similar technology, have profound implications on the adoption of standards and the future of firms that seek to set these standards through their attempts at innovation (Shapiro & Varian, 1999; Koski, 2004). The technology company that already has an installed base of users, known as the incumbent company, is often at an advantage over its rival(s) when standards are at issue (2004; Kay, 2006). What often occurs in such cases is that the abundance of persons already owning the equipment of one sort tips the balance in favour of that equipment through the direct or indirect benefits accrued to others through its usage (Stango, 2004; Kay, 2006). A very prominent example of this is the current base support that IBM computers now enjoy in the hardware market. Because so many persons possess IBM computers (PC's), indirect benefits accrue in the market as software developers find it more profitable to develop products that complement that system. The proliferation of interesting, entertaining, and variable software in turn makes PC's more attractive to consumers, causing them to choose that system rather than other (for example, those offered by Apple) often even in spite of inferior quality (West, 2005). The importance of standard can be seen in the outcome of the IBM and Apple war at stage. Prior to this, neither IBM nor Apple could have been said to have established (or achieved) a strict standard, though each was competing ferociously for the opportunity to do this. In the market, standards can be set through official bodies or through consensus granted by the behavior of the consumers. IBM's strategy was to license its software to other software manufactures and build an advantage through the availability of complementary products on the market. This created an indirect network effect, through which extra benefits were conferred upon the buyer of an IBM computer as much more software titles existed on its platform than that of Apple (Stango, 2004; West, 2005). This led to the creation of a standard in favor of IBM computers by the sheer number of people who did buy them. The implications of this established base for the technology company often results in the dominance of the one and ranges from diverted focus to complete obliteration of the other. In this case, IBM has become the giants of the computer world, since the beginning of its standards battle with Apple. It has, in fact, arguably become the standard. Though its number-one competitor still exists, this existence has been fought for largely though capitulation. While the IBM system is the leading one bought by consumers, Apple's response to this has been to change its strategy: Rather than remain isolated and locked into its own standard, it has now evolved its system toward compatibility with PC's. It is possible now to view data created on PC's on an Apple computer, and it also carries similar software as the company has had to work diligently to conform to the standard (West, 2005). The question of the installed base can also be extended to the battle between HD-DVD and Blu-ray. DVD-players are already a fixture in many homes, and HDTV has an installed base that is growing rapidly. Though it appears that the industry appreciates the technology offered by Blu-ray-more capacity for storage and better features (Bell, 2005)-the difficulties associated with switching from one established standard to the next might here become relevant as well. This reason is probably behind Blu-ray's decision to add Dolby Digital Plus and Meridian Lossless Packaging (MLP) to its formats for audio (Palenchar, 2005). This strategy enables compatibility with many of the media's established formats and gives the technology a surer footing for adoption. Other types of advantages used for the procurement of victories in standard battles as well as those gained through utilization of standards have led to the evolution of many other technology companies. The advantages of Microsoft's dominance in the software world have possibly made it difficult for other providers of internet browsers to survive in the industry. Netscape's offer of an alternative to Microsoft's Internet Explorer (IE) came about largely within the mid-1990's. Netscape was able to develop a browser that worked well within the Windows framework, and frankly dominated the market in the early years, but issues regarding standards began to materialize when Microsoft released a much improved version of its browser Internet Explorer 4.0. The standards began to diverge in the late 1990's, and this became apparent when web pages began to present labels advising consumers about the browser that best supports the scripts on the given page. The standard for web browsers, if established, would dominate the market for companies that produced search engines. The browser is the gateway to the internet, and the company controlling the standard for the browser, in effect, controls (to a large extent) the way it will be used by customers. This fed Netscape's determination to remain in the standards war. However, a much bigger contributor to the change in Netscape's beginning 90% dominance was the already established dominance of the Microsoft operating-system dominance (Wikipedia). Because Windows was the standard, the Internet Explorer browser could be made available to almost every consumer upon the purchase of their computer through bundling of the browser with the Windows package. Even Apple computers use the Windows operating system, so since virtually all computers came with Windows standard, Netscape stood a very small chance of dominating the market-even though the offered the browser freely though downloads. Ironically, it would most likely be necessary to use the IE browser to download Netscape Navigator (later Netscape Communicator). Through this example, it can clearly be seen that Microsoft's Windows operating system as a standard was utilized in the promotion of another (now-standard) technology, and this led to the downfall of Netscape as a technology company that offered a viable browser in the standard war. Netscape became a casualty of the browser wars, as it was purchased by America Online in 1998 and IE, benefiting from Microsoft's authorship, became the dominant player in the market with 96% of the usage. The exploitation of the Windows standard by Microsoft was a specific tactic used by that company, and that demonstrates the ways in which standards can be used in order to further the goals of one company and foil those of another. It is worthy of note that no real innovation for IE has occurred since 2001 (Wikipedia). This lack of innovation can be seen as the most recent flaw in Microsoft's browser-war strategy. The open source movement has led to many innovative additions to the old Netscape browser and the reporting and fixing of "bugs" in the system. The newest web browser to come on the scene has been Mozilla Firefox, which evolved out of the Netscape movement. In the year Netscape was acquired by America Online, it made its source code available to the public so that open sourcing of the browser was in effect. This facilitated (and still facilitates) the continued updating of the browser by technologically inclined minds all around the world. The latest in the browser wars is now that Internet Explorer has lost over 6% of its user base, while Firefox user-ship had more than doubled in the year between May 2004 and April 2005 (Marson, 2005). This gives credence to the idea that innovation is a powerful tool in winning standard battles. Firefox used this tool in rekindling a standard battle that Microsoft might have conquered had it not become complacent. The use of the internet to increase the effects of word-of-mouth advertising has helped launch the Firefox browser. Such media as weblogs keep enthusiasts and experts in touch with each other to help fix problems and introduce extra features. This type of linking is also evident in the open source movement. In fact, so significant is the portion of the market that has been won over by Firefox that it has been included in the list of compatible browsers by the new DivX high definition media player. This also demonstrates that the final word on the browser wars has yet to be said (DivX, 2006). Apple Computers has remained in the fight through innovation as well as through an installed base that has remained loyal and patient while Apple conformed to the Windows OS standard. Innovation has caused the company now to have a large market share in MP3 players with its IPOD. In addition, Apple represents yet another die-hard Microsoft competitor that has also entered the browser war with its new Safari browser. Although its market share has peaked only at 3.19 percent, this is an increase of 1.81% over the past year (McLean, 2006). This new browser allows full access to the web and also full mobile browsing. It widely supports industry standards (HTML, XHTML) and a host of features such as Flash plug-ins (2006). By being a part of the re-opening of the browser wars, and remaining current by providing more of what people enjoy, Apple has managed to remain in the industry and is experiencing increases in its market share. Though their adoption can come about through amicable decisions and member consensus of governing bodies, market standards are often powerful results of company campaigns and subsequent market decisions. These standards can have a profound effect on the life and health of technology companies. Those that win standard battles are often left in a strong position of leadership, which accrues to the company monetary and strategic benefits. These winning companies gain a strong position from which to launch future campaigns for the evolution of the current standard, while companies that lose are often forced to conform to the standard. However, tenacity and innovation has also proven to have positive effects on the positions of technological firms in the industry. Continuing research and development and a commitment to gaining feedback from the public has resurrected the market share of more than one near-defeated technology firm. Works Cited Bell, I. (2005). "HD DVD and Blu-ray to both win." Digital Trends. Accessed 2 May 2006. Available: http://news.digitaltrends.com/article6899.html DivX (2006). The official site of DivX video. Accessed 2 May 2006. Available: http://community.divx.com/labs/cid=4 Koski, H. (2004). Survey on competing in network industries: firm strategies, market outcomes, and policy implications." Journal of Industry, Competition, and Trade. 5-31. Kay, John. "Only one winner in the battle of Blu-ray." 27 March 2006. 26 April 2006. www.johnkay.com Marson, I. (2005). "Firefox: the alternative history." Toolkits' Enterprise Opensource. Accessed 2 May 2006. Available: http://insight.zdnet.co.uk/software/0,39020463,39208866,00.htm Palenchar, J. (2005). "Blu-ray boosting Dolby and MLP." TWICE. Accessed 2 May 2006. Available: http://www.twice.com/article/CA600410.htmlverticalid=820& industry=Home+Audio&industryid=23100&pubdate=05/09/2005 Shapiro, Carl & Hal R. Varian. (1999). "The Art of Standard Wars." California Management Review. Berkeley. Vol 1(2), 8-32. Stango, Victor. (2004). "The Economics of Standard Wars." Review of Network Economics. Vol. 3(1). van Tassel, Joel. 2001. "A Matter of Standards." Digital TV over Broadband: Harvesting Bandwidth. Focal Press, West, Joel. (2005). 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