Lessons from the standards wars

in ‘White Papers’, Reports, Articles

Introduction

Standards wars, driven by nationalism and corporate xenophobia, have made industries and broken companies. They are conducted at the expense of everyone involved , from those who start them right through to the consumer. Yet we seem incapable of learning from the past in order to prevent wars of the future. Mistakes made so many times are in danger of being repeated in new technologies such as the mobile communication s industry, where the fierce fight for acceptance of a common standard continues and the resulting uncertainty dogs commerce and consumer alike.

Excellence is no guarantee of success

The GSM’ mobile phone standard, set in motion in Europe in [982, is commonly held to be the best mobile communications standard available today. Yet it has run into objections even with those who originally committed to it. The international acceptance of GSM was mismanaged from inception and it may yet fail to become the global industry standard. The European founders of the feature-rich’ GSM enthusiastically introduced their standard as ‘the wave of the future for the whole world’ but neglected to take into account the significant costs for industry and consumers of moving away from analogue and building new digit al systems. GSM is not fully backwards compatible,’ most new subscribers need to replace their analogue handsets and the investment implications for industry are considerable. These are problems that could be overcome and yet four years after achieving ANSI certification, the future of GSM is still uncertain. Its sponsors assumed wrongly that if they held GSM aloft as a high quality standard it would sell itself and become just that.

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In the US, standards for Personal Communications Services’ (PCS) were developed by a joint technical committee (JTC) on wireless access, formed in November 1992. Members were drawn from a wide group of scientists and engineers with representatives from providers of telecommunications materials, products, systems, distribution services and professional services in the US and throughout the world. The JTC set out to minimise the number of analogue and digital standards in PCS air interfaces and, from the original sixteen proposals received, seven (including a version of GSM) were adopted by ANSI. Although several countries including most of Europe and Asia have accepted GSM as the industry standard, GSM has yet to be widely accepted in the US – it faces stiff competition not only from other digital phone standards such as COMA and TOMA, but also from the PCS analogue standards which are still prevalent. The heavy investments made in the existing analogue technology by US market leaders have made them slow to switch to a digital standard. The result is that the GSM standard could be usurped before it has gained the wide acceptance it could have achieved four years ago. Figure 1 below shows that the competition, particularly from other digital standards, is fierce and the prospect of GSM becoming the sole industry standard looks unlikely. A Coopers & Lybrand study predicts that GSM will gain only a 30% share of US PCS subscribers and an 8% share of US wireless subscribers by 2003.

How standards evolve

Common standards are of paramount importance; the age of mass production could not have begun until the world agreed on standards for the dimensions of nuts and bolts. Government sponsored organisations such as the International Standards Organisation and national equivalents like ANSI and the British Standards Institute (BSI) have the power to accredit industry sponsored committees with the authority to develop standards which are ‘ non-proprietary’ or ‘open’ and tend to be beneficial for all. But agreeing a standard is not always enough to make a standard the standard for an industry. When standards are still evolving and companies are competing to set a new industry standard, many factors other than the development of new technology influence the outcome. Marketing policies, licensing agreements, backwards compatibility, flexibility and business sense are all significant. This is illustrated in the process of how and why the new standard for the PC industry has consolidated around the ‘Wintel’ platform of Microsoft Windows and Intel chips. Wintel has become the industry standard not so much because of its superiority, (quite the reverse, the Macintosh windows interface is even now regarded by some as being superior to the Microsoft alternative) but rather because of the inability to adapt of its main rival, Apple. ‘Windows 95’ can do most things a Mac can and whilst a Mac can also do anything a PC can, it uses a closed, proprietary system which discourages the development of hardware and software products to complement it.

Apple’s strategy got hopelessly mired in this no-win situation. The closed system and refusal to licence software eventually prevented Apple from becoming a mainstream business system, while the open architecture used by its competitors has allowed many vendors to develop software and hardware for Wintel computers. Consequently, the Wintel PC market is growing at a rate of more than 30% a year because of the efforts of Microsoft, Intel and others who are spending billions of dollars to advance the standard worldwide. By contrast, the Mac market share is dropping year on year and Apple’s brand value has fallen by half since early 1993 7 • Apple took the best technology, sole- supplier route and lost. Microsoft took the ‘good enough’ technology and the marketing muscle route, and won.

Tactics: more important than technology?

From a standards point of view, no industry can rival the software industry for the complexity of its interlocking parts. Microsoft, the world’s richest software company, takes nearly half of the world’s total PC software revenue. The vast majority of the world’s personal computers run on Microsoft software from the moment they are switched on. Although Microsoft does devote considerable resources to improving its technologies, its very successful flagship product, the operating system ‘Windows 95’ has been criticised as awkward and unstable when compared to operating systems from competitors such as Apple and lBM ‘ … this is an edifice built of baling wire, chewing gum and prayer ‘”. Perhaps a significant reason behind Microsoft’s success is the knowledge that a winning product does not have to be a technologically perfect product – it is more important to establish a foothold, create a de facto standard and seize market share.

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If superior technology was the only answer, everyone would interface their MIDI 10 on Apple computers, use GSM digital mobile phones, own Betamax VCRs and probably belong to the Betaphile Club. “However superior the product, if it is not backward-compatible (i.e. usable with commonly available accessories such as tapes, discs, handsets) it is of no use to the consumer. After all, the tyre and car manufacturing industries co-exist because there are common standards for wheel sizes.

Timing: Getting over the hump

Technology standards can also be thwarted by poor timing and a failure by companies to move quickly enough in a market. Today, the DVD is being hailed as the realisation of true convergence, the first genuine multimedia, multi-purpose technology suited to both entertainment and computer uses. Several manufacturers were able to cooperate long enough to develop the technology, but their ability to pull in the same direction, and at the same pace, seems to have dissipated too soon to ensure DVD’ s success in the market.

The initials DVD originally stood for digital video disc, then for digital versatile disc, and now stand for nothing at all as manufacturers disagree on what the initials should represent. To the naked eye, a DVD disc is virtually indistinguishable from a compact disc; the difference is what you can’t see: digital technology provides the storage capacity to handle full-length feature films at superior quality, along with full multimedia features. The most exciting things about DVD are its capacity, inter-operability and backward compatibility.

The first DVDs, issued only recently, can hold up to twenty-six times more data than can ~e stored on a single CD and they can be used with televisions”, computers or music players. The picture quality is crystal -clear, with roughly twice the resolution offered by video cassettes. And the interactivity provided by DVD is being improved upon all the time. Viewers can watch movies and choose the language they wish to hear; they can ed it out the scenes they find objectionable; they can access actors’ biographies with a click of a button. It is even possible to choose from multiple story lines or different endings.

DVD’s launch was held back by protracted infighting among its proponents, a consortium of electronic and media giants formed to develop the technology and set the standard. The consortium (including Hitachi, Mitsubishi, Pioneer, Thomson Multimedia, Time Warner, Sony, Toshiba, Philips, Victor of Japan and Matsushita) is estimated to have collectively spent more than $ 1 billion on developing the technology and is counting on DVD not only to re-energise the ailing consumer electronics market worldwide, but also to boost the sagging movie rental and sales business and, ultimately, the music industry as well.

But the developers remain split over how to licence the patent rights. Newly released DVD movie titles a re currently available in only seven US cities.” DVD movies cost $20 to $25 each, but relatively few titles are available. And DVD players are relatively highly priced, at $500 to $1,000, although prices are expected to drop rapid Iy.”

DVD has the potential to boost the lethargic consumer electronics market and eventually replace the CD, Laserdisc and VHS in all their applications ; the question is, will it? Even now that DVD has been launched, it face s all the challenges of a crowded marketplace,_consumer expectations, copyright-conscious corporations and international politics. Manufacturers such as Philips, Sony and Toshiba have recently started to produce DVD decks and computers equipped with DVD-ROM but the launch of DVD-RAM I.’ is on hold while copyright and encryption issues are wrangled over. Perhaps even more worrying is the failure of four out of the big six movie studios (Wait Disney, Universal Studios, Paramount Pictures and Fox Film) to commit to the DVD format. Their reason is ostensibly fear of piracy, which is being addressed through encryption technology among other precautions taken by the developers..

Of more significance is the fact that, to date, only a few thousand DVD players have been sold, so the holdout studios are not yet missing out on many sales and thus see no urgency to commit. To date, only Time Warner (Warner Home Video) and Columbia TriStar have put their titles o n DVD; video rental companies are not yet sure enough of the market to start stock ing their rentals shelves with DVDs so consumers are forced to buy rather than rent DVD movies.

The limited supply and distribution means the future of DVD is very much hanging in the balance. Hesitation has cost the film industry before: entertainment companies (fearing piracy and erosion of the traditional theatre business) fought the makers of VCRs for years before relenting in the early 1980s. It consequently took eight years before VCR sales reached double digit penetration into US households and an entire generation of movies never reached full sales potential. It is worth remembering that video sales and rentals now account for $7bn of the $12bn the movie industry generates domestically in the US.

Industry analysts view this ‘wait and see’ approach as self-de feating. Now is the time to take advantage of this unusual convergence of marketing forces. [f film companies ‘do not invest now, there will be no demand for DVD se t-top players and manufacturers wi ll simply re -tool their facilities and instead concentrate wholly on making DVD drives for computers where buyers historically demand the latest upgrades. And once DVD is owned by the computer industry its mass market image will be lost forever. If the bi g Hollywood studios continue to s it on the fence and DVD manufacturers cannot resolve their differences, the future of DVD, even with all its technological wizardry, could be limited to the less than- spectacular role of a better and faster compact disc.

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DVD does have many ad vantages that might propel it in the marketplace in spite of the foot dragging of its developers and the Hollywood studios: its familiar CD look, the fact that modern consumers are far more comfortable with technology and, most importantly, its backward compatibility. And as personal computers and televisions move closer together, it seems that DVD has the potential to become the platform that could bring interactivity to the digital TV of the future. The question is whether these advantages will be enough , We need only look at the Betamax, the laserdisc, Sony’s mini-disc or digital audio tape to see how previous attempts at high quality audio visual home equipment have died on the vine because of timing and marketing issues.

‘Tough guy’ tactics can work in the short term

Where corporate giants have sufficient power, they may use market domination tactics to set their own standards. When this happen s, the consumer and the industry as a whole lose out. The restriction on consumers’ freedom of choice and the deadening effect on would-be competitors can slow development and cause an industry to stagnate.

In the late 1980s, Rupert Murdoch took advantage of hi s ability to move faster than the opposition and launched hi s Sky satellite television station before the official government sponsored satellite project, British Satellite Broadcasting (BSB). The outcome of Murdoch’s move was that in 1990 Sky Television merged with and took control of BSB altogether. Murdoch’s new company, British Sky Broadcasting (BSkyB) set the technological encryption standard for the industry. The BSkyB example shows that forcing acceptance of a standard can be very profitable in the short term ; but the position is not perpetually sustainable.

Given time, the competition will always find another way. BSkyB is an analogue system and the vastly superior digital, including digital terrestrial, looms on the near horizon. To retain dominance, Murdoch will have to switch to digital- an expensive decision and one with no watertight guarantees over the future monopoly of this new standard .

New ways to fight an old war

There is evidence that today’s software giants are beginning to find new ways of fighting standards wars, necessitated by the complexity of their products. The Internet, which itself came into being when open and free standards were created to allow different types of computer networks to talk with one another, is the site of an ongoing standards war between Microsoft ‘s ActiveX and Sun’s JavaBeans, two rival ‘languages’ each serving the same basic function. ” The feud over customers locked JavaBeans and ActiveX into stalemate, with a large proportion of the software infrastructure of the Internet and corporate intranets at stake.

It seems that Sun and Microsoft may now have recognised that there is little room in today ‘s business world for proprietary standards and have seen that by voluntarily opening their standard s they have the power to change the dynamics of their industry in a positive way. We have seen how Microsoft, previously famous for not giving away any of its application programme interfaces (APls), reversed its attitude in the battle for the Wintel standard and now preaches the cross platform gospel.

The stalemate reached on the Internet between ActiveX and JavaBeans is a problem which Sun chairman, Scott McNealy, put succinctly: ‘it is like trying to own the English language, you compete by wha t you do with the language.’ Events took an interesting turn when Sun began giving its product away, and licensed its technology to most of the world ‘s computer industry, including Microsoft, who responded by voicing support for open standards and turning part ownership of the ActiveX framework over to an independent third party. Microsoft also now gives away its browsers for free: after all this adds value to Windows and other Microsoft products whilst undermining tile business of rivals.

Microsoft faces a curious dilemma. It has grown rich and powerful by making its products the standard initially by capturing a rel ati vely sma ll piece of the action (the operating system) but on the dominam IBM PC platform and in the fastest growing hardware sector – microcomputers. The next step is that users find it eas ier to use the same software as every other user. In these days of fra ntic inter-company communicat ion, companies not using the majority-used product face competiti ve di sadvantage. Microsoft trade on thi s and have spread from a single dominant product to adjacem products – operating system to windows interface. inte,face to word processing, word processin g to office suite. office suite to groupware, groupware to communications, etc and turn the adjacent product into a dominant one through ease of interface between the two. Microsoft becomes the de facto standard in more and more areas. Head on competition is impossible, so others retreat or take up niche positions (as the Internet was) and create innovative alternatives. Yet as soon as these alternatives gain popularity, along comes Uncle Bill with the sideways shuffle to clean up ye t another slice of software life.

Before long, Microsoft must become the only software company in the world – users will vote for thi s with their feet. At thi s point, no matter what its qualities and charms, we wil l have the nrst global monopoly on our hands, with all the attendant implications for performance, innovat ion and cost. Microsoft’s fate is either to be broken up like AT&T (American Telephone and Telegraph Co)” or to be th e UN’s first internationalised company. The alternative is to give away its de facto standards as IBM did in effect with the PC – and allow anyone to make the software. Either way, Microsoft’s relentless growth .must eventually lead to its dispersal. Is there a better way~

The high costs of assuming a standard

Where standards apply industry-wide, they often determine the adoption of one particular technology over another. We have seen that in today’s fast moving business environment, the superiority of one product over another does not guarantee it becoming the standard. Standards wars are expensi ve, not only to the busi nesses that wage them but also to consumers who are caught in the middle, uncertain as to which product to pick. The consumer who backs the loser can be left with an obsolete and costly mistake as was demonstrated by the home video market standard war.

The protagonists in this ca,e were Sony Corporation’s Betamax and JVCfMatushita’s VHS. In mid-1975 Sony (the innovator) were leading a field of diverse contenders – they had the only VCR ready for market and capable of performing at the required level. Betamax was commonly held to have the edge over VHS as far as quality of picture resolution and recording technique were concerned. Sony’s lead position looked unassa ilable: However, the technical complexity of the product and the size and global nature of the market meam if Sony was to capi tali se on its position, strategic ac tion needed to be taken quickly to form an alliance of companies to SUPPOIt the Betamax format – which they failed to do. Sony seriously underestimated the value of marketing, misjudged the speed at which the market would grow, underesti mated the ri val product and strategy and were slow to move into the European and the home tape-rental market. In their reluctance to licence their product to other companies for distribution under their labels and their failure to anticipate rivals JVC/Matsushita being quick to move into the home video market with comparable products, lower prices, better features and superior distribution, Sony Jost out. ]t is easy to forget that the Betamax was once a status symbol to be proud of, a kind of Porsche of the early ’80s. Armistead Maupin’s gay San Franciscan realtor even used his as bait to lure young men home: … ‘This is who I am,’ he said sotto voce. ‘You should come over one night. I have a Betamax. ‘

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In January 1988 Sony admitted the war was effectively over, with the announcement that they would begin marketing a VHS recorder later that year, although Betamax did become the professional studio standard. ]n reality, however, the battle was over by the early 1980s, when the video rental businesses had to choose between the two formats. Figures 4 and 5 show how sales of VCRs and numbers of VCR owning househoJds increased once the outcome of the battle for standard became predictable.

Home Betamax owners were the real losers in this war, stuck with expensive, soon-to-become-obsolete equipment. No figures are available, but it is certain that the long battle for the industry standard also cost Sony dearly and took a toll on JVCIMatsushita and the rest of the industry as weJI. The standards war was futile. Contrast this story with a quite different and, perhaps less familiar one.

The beauty of open standards

The standardisatio n of electronic music in 1983 with the implementation of the musical instrument digital interface (MIDI) had an enormous impact on consumers and on industry. The MIDI standard teJls a story that everyone should know but no-one seems to be aware of. Of course, there are differences between the VCR standard and MIDI, the most obvious being that a VCR is a tangible thing, whereas MmI is a method rather than an object. Perhaps best described as a communications protocol that allows electronic musical instruments to interact with each other, we cannot go into a shop and ask ‘where do you keep your MIDIs’ as you would if you were buying a VCR. The MmI standard has single-handedly activated the electronic instrument industry. Its effects are still reverberating around the music industry as a whole – you may not have heard of MIDI, but you probably listened to its results at the weekend,

A quick glance at the Internet is all you need to see for yourself how important M]DI has become today. One site even hails” MIDI as ‘the language of gods’ , This incredibly powerful tool is easy to use. It allowed even the novice user to create music, so the technological barrier between the electronic music industry and a vast new market of consumersl producers was lowered. MIDI rapidly cha nged the world fo r composers and teachers alike, aJlowing musicians to be more creative on stage and in the recording studio and enabling composers to write music that no human couJd ever perform. For the first time a musician could hoo’k up syn thesisers, electronic drums, and organs to a single keyboard and connect the whole system to a Pc.

The futility of standards wars can be demonstrated by observing their effect on industry, From the outset the M]DI standard had an eJectrifying effect not only on the way commercial music was produced but also on the performance of electronic musical in strument manufacturers such as Roland, Yamaha and Akai.

Consider the following: in 1986, Americans bought 2.6 mi II ion electronic keyboards – twice the number sold in 1985 and more than five times the 1984 total. They bought 350,000 synthesizers in 1986, compared with 220,000 in 1985. As the costs of the computer power needed to make electronic systems work continued to drop , the cost of eJectronic in struments became ever cheaper. The Yamaha DX7 portable keyboard, for example, was introduced to the US market in 1983 at a price of $2,000, By October J987, $400 would buy a Yamaha synthesizer with improvements over the 1983 model.

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In October 1987, an articJe in Business Week stated that since the MIDI standard was introduced, ‘sal es of computer hardware and software based on MIDI have shot up to about $500 million, and the market is expec ted to double within the next three years’.

MIDI also benefited associated industries such as the music industry. Figure 6 demonstrates how worldwide record ed-music sales grew after 1985 once the standard had taken hold.

The MIDI story shows how all in an industry can work together to create a unitary standard helping businesses and the indu stry as a whole to flouri sh, promoting increased competition, leading to faster development and a bigger potential marketplace. MIDI was developed jointly by the American-based MIDI Manufac turers Association and the Japan MIDI Stand ards Committee for e lectronic musica l instruments. Whe ther there is an unsung visionary responsible for getting these parties together to develop the standard, we have not been able to find out.

Common standard s may be viewed as a form of guarantee for consumers who ga in through greater product compatibi lity, access ibility and avail ability, from quality benchmarks and more competitive prices. We have al so seen how standards wars stunt sales, slow growth, breed uncertainty and di scourage potenti al competitors while consumers and man ufacturers alike si t on the fence awaiting the outcome.

Anyone who wi shes to can manufacture a computer keyboard with keys arranged Qwerty-style. No royalties or licence fees are payable as these standards have been set by governments, international organisations, by industry consortia, or have emerged: they are open . Open standards act as catalysts fo r economic development, dri ving down costs, promoting inter-operability, healthy competition and innovation, in addition to preve nting any ‘ trick moves’ by vendors.

However, Qwerty illustrates the danger of a standard which is open and cannot be developed . The Dvorak keyboard , patented in 1932, is ten to fifteen per cent faster to use. The increased typing prod uctivity of the Dvorak layout was proven by experiments carried out by the US Navy during the second World Wm’. But Qwerty is so totally dominant that the world is stuck with un necessary countless billions of hours of extra fi nger movement. MIDI got it right again – developable and backwardcompatible .

Conclusions

In any standard s war, the outcome depends not upon the quality of the product but upon tactics and chance; victory can be seized simply by being in the right place at the right time, by hav ing the foresight and confidence to predict the future of a market, or by exploiting market dominant muscle in a restricted market. Corporate battles for supremacy of standards are ineffec tual , wasteful and unprofita ble – what is needed are more MIDI type open standards to drive indu stri es into the new millennium.

For the mome nt, the future of GSM remains uncertain . We will never know what would have happened if Apple had embraced the Winte l standard and turned the nume rous technological developments in the Wintel world into opportunities in stead of threats. DVD.looks set to take off and , despite all the hype, web gurus predict that neither Java nor ActiveX will become broadly accepted in 1997 .” Microsoft’s future continues to look awesome – until Bill Gates hands his organi sation over to ANSI – or to the UN!

So, what is the way forward for digital cellular phone standards? All the evidence suggests that the US phone companies are limbering up for a standards war. The current skirmishes for custom and market share may very well develop into a full-scale war. If this happens, the industry will stagnate until the battle is resolved. Of course, one of the larger providers may yet corner the standard but thi s scenario can only represen t a temporary triumph. The owner would, most like ly, dominate the market and make abnormal profi ts for a few years until the competition catch up and overtake. While companies in the same industry are working against each other and cannot agree, the re can be no clear way forward, development is stunted and the success of anyone company will be short-lived. While all this goes on the consumers can only lose out.

The answer from these standards lessons is clear. The US phone companies need to ‘do a MIDI’. They must agree a common, scaleable, backwards and forwards compatible standard with themselves and the rest of the world ‘s major corporates.

Ed Straw
Olwen Rees

June 1997

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