Hi There,
Welcome to another issue of Tap to Unlock, a newsletter where I write about economics, products, & strategy. In this issue, I talk about standards war.
What is a Standard
When talking about standards, the definition of a standard is often not completely clear, and there are various distinctions of standards.
Nevertheless, a standard usually stands for a common definition of a format or an operation, as such giving a benefit to the standard’s users, who can rely on the defined specification.
A standard can be de facto or de jure, meaning it is being followed by convenience or because it is enforced by law, and open or proprietary, meaning it is freely usable and documented, or closed.
“The wonderful thing about standards is that there are so many of them to choose from.” - Grace Hopper
What starts Standards War
Standards wars occur primarily because of the nature of the economics at play in industries having strong network effects.
The network effect states that the value of a product or service increases as more users use that product or service and vice versa. Hence the value of the product is a function of the number of people that use that product or service.
Consequently, network effects amplify the dominant product or service's market share, leading to the winner take all. And standards wars may be the only option for many companies that wish to dominate a market.
Standards wars can be initiated in many ways and can be intentional or unintentional.
Intentional standards wars occur when companies or consortia perceive a competitive threat and preemptively engage in a battle to secure their position or influence.
Unintentional standards wars can occur when rival companies have good intentions and join standards bodies to collaborate. Still, disagreement becomes the catalyst for a standards war.
Some notable Standards War
MP3 vs. Ogg Vorbis vs. WMA 🎵
The MP3 standard was developed at the Fraunhofer Institute for Integrated Circuits (IIS) in Germany. Preparing work was finished in 1989, and the first software player was released in 1995. And charged fees for the usage of the patents covering the MP3 technology.
In the '90s, no efficient audio compression algorithm existed. So, the Fraunhofer Society had the first-mover advantage. With the growing use of the Internet and personal computers, users adopted the audio compression standard quickly and created collections of music stored in the MP3 format.
Initially, MP3's level of innovation was extremely high, and there was no comparable way of compressing audio at that ratio and quality. But the stagnation in growth and innovation left room for competing standards to develop.
In 1998, Vorbis began the development of the audio codec (short for Compressor-Decompressor). The project was founded by Christopher Montgomery and developed as a typical Open-Source project, finishing major development with version 1.0 in 2002.
Audio compressed with Vorbis is stored in the format OGG. So precisely, the audio file is called Ogg Vorbis but is often referred to as "OGG."
Microsoft also launched its proprietary audio format, Windows Media Audio (WMA). In the beginning, WMA was aimed to compete with MP3 and to avoid licensing fees for using MP3 standard in Windows. Microsoft later pushed the WMA standard to be used as a standard audio codec for music on the Windows PC by integrating WMA with the Video Codec WMV in the Windows Media Framework.
Conclusion
Given the superior quality, early innovation, and lock-in was enough for MP3 to set an enormous lead. Neither standard was able to challenge that lead. A survey in 2004 by cnet showed that 72% of music files on hard drives were MP3 files.
Lock-in
Neither standard is in some way compatible with each other. That means that converting from one to another will always degrade sound quality.
This incompatibility between the standards lead to lock-in of users who have existing music collections encoded in one format.
Adobe PDF 📄
A race to become a de facto standard for documents.
Adobe made the PDF specification free of charge in 1993, with the vision of making PDF the de-facto format for documents. To realize that vision, it was essential to enable the consumption of PDFs in a standardized manner.
Being experts at PDF, Adobe was always poised to create the best PDF creation and manipulation application: Adobe Acrobat. Acrobat is targeted at content creators, who would then distribute PDFs for others to consume.
Hence, we are looking at a typical two-sided business. In two-sided businesses charging only one side is generally the most optimal method for achieving large scale adoption. So, in short, one side is subsidized, and the other is not.
And the side that is subsidized is the one that has a stronger attractant or creates more value. (For example- Google does not charge you to search, but charges advertisers)
But Adobe first tried to sell both PDF readers and writers. And faced the chicken and the egg problem right away. No one wanted to buy readers when there was no content to read. And, no one wanted to purchase writers when no one had readers.
Adobe broke the deadlock by giving PDF readers away for free. And this strategy worked. Adobe got a great head start. For more link.
Seeing Adobe's success, Microsoft launched its own format XPS in 2006. This was Microsoft's answer to the PDF file format. Microsoft decided to bundle XPS viewer with Office 2007 and Windows Vista and provide features like export to PDF and export to XPS. (Internet Explorer playbook)
In June of 2006, Adobe issued a statement that it has been unable to agree on licensing conditions with Microsoft regarding the inclusion of PDF support in a future version of Office.
Adobe threatened to take legal action if Microsoft builds its own new XPS format into Vista (thus reducing the need to save as PDF) or adds Save as PDF functions to Office (thus removing the need for Adobe's Acrobat software).
Microsoft caved in and pulled them all out.
Conclusion
Since PDFs had already been around for more than a decade and everyone was already using them, XPS viewer never took off. However, the XPS format did live on for a long time. Windows 7, Windows 8, and Windows 10 are all shipped with a dedicated XPS viewer.
In the April 2018 Update (Build 1803) for Windows 10, Microsoft officially retired the XPS format and removed XPS Viewer. Hence instead of competing with Adobe, Microsoft decided to partner with them.
Microsoft integrated Adobe's PDF services directly into Office 365, allowing users to convert documents into PDFs while preserving font choices, formatting, and layouts.
Wintel and Apple
Wintel is Microsoft Windows and Intel's partnership producing personal computers using Intel x86-compatible processors running Microsoft Windows. The word Wintel is a portmanteau of Windows and Intel. (Wikipedia)
Since the early 1980s, the microcomputer market was quite fragmented. It left the room for a lot of smaller de factor industry standards like the S-100 bus, the Apple II, and Microsoft BASIC in read-only memory (ROM). Also, PC users did not want to assemble their computers as a kit. They preferred to purchase a pre-assembled product.
Thus Intel and Microsoft partnered together and became suppliers to many OEMs (original equipment manufacturers) and competed with Apple.
At that time Apple was a vertically integrated company. It produced its own hardware and software.
So Apple was being attacked on two fronts. One on the hardware (Intel) and second on the software (Microsoft).
As soon as IBM announced the new 16-bit personal computer release, it was viewed as a serious business machine with the industry leader's strong backing.
Apple responded three years later in 1984 with the release of the Macintosh. The new computer leap-frogged the IBM in terms interface. The quality of the interface was not matched on an IBM machine for almost 11 years.
But by the time Macintosh was introduced, Wintel computers already had a large installed base. Around 1990, Macintosh's share had dropped to 7.4% and by 2000 to only 2.8% percent. Apple finally adopted Intel processors.
Moreover, Macintosh was not backward compatible with Apple II and could not take advantage of its large install base. Whereas Microsoft ensured backward compatibility for the majority of the software. For example, Windows XP, released in 2001, supported the 1983 version of MultiPlan.
Conclusion
To remain profitable in the market, Apple followed the approach of a differentiated premium product that commanded a premium price. They didn’t focus on the market share or how many computers they sell.
Apple’s current market share in desktop space is around 17%. (Source: Link)
Outcomes
Possible outcomes in case of standard wars
Winner takes all
If network effects are important then the standard may tip the market completely in its favor. For e.g. the mass adoption of VHS forced Betamax completely outside the VCR market.
If it is expensive to switch between standards then this "Lock-in" can provide huge competitive advantages. Like in case of MP3, converting from one to another will always degrade sound quality.
Minority persists
In some markets a standard that loses out can still persist for a long time as a significant minority. For e.g. Apple's computing platform has survived as a minority player for over 25 years.
Equilibrium
Some standards wars can result in several standards splitting the market evenly. For e.g. Sony, Nintendo and Microsoft in the US Game Console market.
Standard: 1 & Company: 0
A company may win the industry support for its own standard but may still lose if its competitors support the standard with even better overall value. For example Java became a standard but its inventor Sun Microsystems does not dominate in any technology arena today.
Fight to death
Sometimes there are vicious battles among competing standards in which one standard fights until complete defeat. The Direct Current (DC) and AC (Alternating Current)