To shape tech standards, expert suggests cooperating with competitors

During the 1970s and ’80s, people who watched movies at home had to choose between two incompatible formats: Betamax, invented by Sony, and VHS, created by JVC. Although many considered VHS technologically inferior, it won out in the end, partly because it allied with a larger network of film and television companies.

Those types of format wars still go on today. Think iPhone versus Android or Nintendo versus PlayStation. But the tech industry has learned a lesson: It’s important to set compatibility standards that benefit a range of companies in an ecosystem, not just the patent holders of a technology.

In new research, Ramkumar Ranganathan, associate professor of management at Texas McCombs, explores how tech companies can shape emerging standards to their advantage. They do it, he finds, by simultaneously cooperating and competing with other companies on the committees that collectively set standards.

“Each firm is trying to look out for itself, but at the same time, trying to coordinate and shape the rules,” Ranganathan says.

Wireless internet wars

With John Chen of Baylor University and Anindya Ghosh of Tilburg University in The Netherlands, Ranganathan examined a more recent format war: standards for wireless internet, in which Wi-Fi largely beat out WiMAX.

The researchers used machine learning to analyze records of the Institute of Electrical and Electronics Engineers‘ standard-setting committees for both technologies. The records, from 1996 to 2011, included more than 40,000 technical documents and 18,000 comments.

Both technologies relied on expansive ecosystems of partner companies to make things work: computer makers, router manufacturers, and makers of chipsets for data transmission, not to mention, companies already in the telecom space.

To develop standards, IEEE’s committees convened companies throughout these ecosystems. Many participants tried to shape the standards to incorporate their own work and align closely with their own products. They had two kinds of resources for shaping standards: preexisting patents that could influence the outcomes and partnerships with other players.

“If you are positioned in part of the architecture which has a high potential for others to connect to, then you know you’re going to get proposals accepted,” Ranganathan says.

“Alternately, if you try to shape peripherally, in the less-contested areas of the ecosystem, you’re going to have a better chance of shaping.”

Patents vs. partnerships

Analyzing how standards evolved for both Wi-Fi and WiMAX, the researchers found several lessons on how they emerge and how companies can influence them.

Core technologies matter. Having many patents can help a company’s technological work be accepted as a foundation for other companies to build upon.

Technologies need partners. Having many patents but few existing partnerships can be a double-edged sword. Other companies may hesitate to partner, worrying the patent-rich company will try to poach the value they’re creating.

Partnerships require the right technologies. Preexisting relationships can create their own problems, if a company’s core technology doesn’t align with its partners’ plans and products. “We find there are limits to influence,” Ranganathan says.

Potential partners matter. Companies that aren’t hamstrung by existing partnerships may do better at shaping the core technology. They can develop future complementary partners who would also benefit from new standards.

“Firms that have the potential to drive future partnerships are more likely to get their proposed rules accepted,” says Ranganathan.

The overall lesson is one of interdependence, he says. The days are past when a single company could dictate a technological standard. To succeed, it must offer something to companies throughout an ecosystem.

“No matter what happens in the standards committee, ultimately firms need to develop products and services compliant with the standard,” Ranganathan says. “And there is no control over that process. A standards committee can only come out with a spec. It cannot force anybody to develop a product based on it.”

“Shaping Ecosystem Rules: Complementarities, Interdependencies, and Firms’ Success in Coordinating Ecosystems Via Standard-Setting” is published in Organization Science.