Technological Advances Are Creating Markets That Support Multiple Digital Standards Instead of One Dominant Player

For consumers of electronic products, the risk of being “stranded” by choosing a losing, incompatible format—buying a Betamax video cassette player and seeing the VHS format attain market dominance, for example—is lessening, according to a new article coauthored by a University of Pittsburgh professor.

The article, “Strategies for Tomorrow’s ‘Winners-Take-Some’ Digital Goods Markets,” coauthored by Chris F. Kemerer, the David M. Roderick Professor of Information Systems in the University of Pittsburgh’s Joseph M. Katz Graduate School of Business and College of Business Administration, has been published in this month’s issue of Communications of the ACM (Association for Computing Machinery). It draws on research demonstrating that in many corners of the business world, competition among digital products is no longer ending with single clear winners—marking a move away from business environments distinguished by “standards wars” between similar but incompatible technologies.

Kemerer, along with coauthors Michael D. Smith, professor of information technology and marketing at Carnegie Mellon University, and Charles Z. Liu, assistant professor of information systems at the University of Texas, San Antonio, explain in the paper that the new business trend is creating a market for digital goods in which “winners take some” instead of “winner takes all.” Basic economic theory, the authors write, has traditionally predicted that markets for technologies will tip toward a single dominant standard, with competing technologies falling away. However, many technologies with multiple formats are now succeeding alongside one other.

The primary sources of this shift are digital converters—devices that accept multiple formats, thus resolving incompatibility issues. “The digital medium allows you to make conversions easily, yielding near-perfect copies,” Kemerer said. “Converters are the game changer.”

Kemerer and his colleagues cite the example of Amazon, which allows users to read Amazon’s Kindle book titles both on Amazon’s Kindle digital reader and on other portable devices, including iPads and iPhones. They also point to the market for flash memory cards—storage sources that can be used interchangeably between digital cameras, mobile phones, and audio players—as an example of how digital converters have changed the marketplace. The team reviewed the six leading flash memory formats on the market in an earlier study, published in MIS Quarterly in September 2012. Using statistical analyses based on more than 15,000 pieces of data collected on retail prices, unit sales, and Amazon.com sales information, the researchers concluded that the presence of digital converters has weakened standards wars.

In their new study, the researchers determine that the “winners-take-some” marketplace provides reasons for optimism among consumers, who are increasingly able to value product features, functionality, and design features over mere platform compatibility as they did during the Betamax-versus-VHS era. There are potential advantages for firm managers, too, if they can adapt to the changing environment. Instead of pouring money into encouraging customers to choose a particular technology, anticipating a jackpot payment when the standards war had been won, firm managers should cross-license their products to increase total market size.

“Managers should prepare to seize related opportunities rather than fight the last war,” the researchers conclude.