Re: Trip Report: Nader's conference on Microsoft

[Mitch Stone <mstone@vc.net>]

  In reply to Cem Kaner's message sent 12/1/97 10:52 PM:
  
  >(1)	Network Effects
  >
  >If you're the only person in the world with a telephone then it's not very
  >useful. You can't call anyone. As more people get phones, the value of each
  >phone increases. This is the "network effect."
  >
  >The network effect creates a powerful push toward a standard. Think of the
  >VHS versus Beta competition. Some movies came in beta, some in VHS, some in
  >both. The total selection of movies in stores was depressed by the fact that
  >stores had to keep double inventory (beta and VHS). When consumers figured
  >out (however they figured it out) that VHS was going to be the winning
  >format, they flocked to VHS and abandoned beta. This phenomenon is called
  >"tipping" (like, tipping the scales). The result was that lots more movies
  >were available on VCR and so even fewer people bought beta. Result: beta is
  >history.
  
  Thanks for posting this fine analysis.
  
  I'm no economist, but it seems to me that a similar argument for "network 
  effects" and "tipping" (and hence a "natural monopoly") can be made for 
  any industry. If Ford held a 90% market share, it is certainly the case 
  that network efficiencies would emerge (all auto mechanics could 
  concentrate on become expert in repairing Fords, after-market parts could 
  be standardized, etc.). The difference appears to be mainly that Ford, 
  operating in a diminishing returns industry, cannot readily achieve such 
  an outcome, and players in the software industry can. Perhaps this 
  accounts for why most of us would cringe at the prospect of an automobile 
  industry monopoly, but seem to accept one in software. Doesn't work for 
  me, but it seems to make sense to the majority of consumers.
  
  The main confusion here (at the risk of insulting those who don't 
  consider themselves confused), is over the question of "standards:" what 
  they are, who sets them, and who owns/controls them after they become 
  standards. Here I think we have a tendency to accept as a standard 
  anything which is bought in majority quantities (e.g., set by the 
  marketplace). That's a fine and reasonable definition up to a point, but 
  it does not address the last two issues, which I think are even more 
  critical.
  
  This is where the Beta/VHS analogy to the computer industry hits the 
  wall. Who set the video tape standards, for example? Both, as it happens, 
  were invented by Sony, with the later refined and popularized by JVC. But 
  take a close look at a VHS cassette or VCR today. Where are the copyright 
  notices? Where is the evidence that JVC or Sony own this standard? Has it 
  ever been changed, and by whom? In short, once releasing it the 
  marketplace, the inventors held no sway over its future, and the VHS 
  standard emerged as essentially a public-domain specification.
  
  It is incidentally worth noting that VHS is a standard only in one 
  segment of the video market: Betacam is the standard for studio work, and 
  the 8mm and S-VHS formats are important in the consumer market. So 
  despite the power of "tipping" effects, the relative openness in the 
  handling of the tape format standards allowed new standards that serve 
  niche market to emerge. What would have been the outcome in the video 
  market if JVC has shown the same inclination toward complete control the 
  dominant tape standard exhibited by Microsoft in OS software? Much more 
  of a monoculture marketplace then we have today, certainly.
  
  Another point worth noting is that video tape standards are essentially 
  invisible to the consumer. Yes, one format may be technically superior to 
  another, but these differences are mainly in the margins. Most consumers 
  would be hard pressed to distinguish between the functions of a tape 
  machine or the quality of the screen image produced by Beta, VHS or 
  another format. As far as the consumer is concerned, the dominant 
  standard is an arbitrary thing. 
  
  The same can hardly be said for computer software and OS's; they define 
  the entire functionality of the device, from personality to reliability. 
  We would expect the variety of consumer preferences expressed here be 
  much more like cars than VCRs. Ironically, we are well on our way to 
  achieving _less_ variety in the computer market than in the video tape 
  market.
  
  How can this be? The fact is that the software markets have gone well 
  beyond "tipping" effects, and on to "shoving." Standards are being 
  enforced on the markets arbitrarily, mainly by dint of the determination 
  of the leader to protect its position by suppressing competition. If 
  anything, the video tape analogy lends support to this point, not the 
  conventional view that it proves that "one standard must prevail."
  
  Sorry for being so windy, but this particular issue really gets me wound 
  up. If I could consign two things to oblivion, it would be leaf blowers 
  and the Beta/VHS analogy.
  
     Mitch Stone
  +---
     Editor, Boycott Microsoft ** http://www.vcnet.com/bms 
  
     To doubt everything or to believe everything are two equally 
     convenient solutions; both dispense with the necessity of reflection.
                                    -- Jules Henri Poincare