Coalition building dynamics in video format wars.

Author:Calcei, Didier
Position::Report
 
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Companies such as Sony, JVC, Matsushita and Toshiba are closely linked through a series of relationships that are both cooperative and competitive, described as 'coopetition' (Nalebuff & Brandenburger 1996). Moreover, the relationship between these companies is reinforced by a need for standardization. Although standardization may involve voluntary cooperation between players concerned with fulfilling consumer expectations, increasing competitiveness, or maintaining interoperability, standardization processes are also the result of standards wars (Shapiro & Varian 1999). It is not uncommon for apparently contradictory rationales to motivate standardization processes. Standardization results not only from voluntary cooperation between some parties in the standardization process, but also from intense competition between them.

Mixed coalitions of rival firms from various business sectors form, constituting business ecosystems (Moore 1993, 1996; Iansiti & Levien 2004). These business ecosystems are characterized by cooperation and competition between their members. In these alliances between competitors (alliances which make up specific coalitions) the underlying idea is to avoid a greater threat, i.e., that other business ecosystems emerge.

While most standardization efforts have focused on understanding the economic basis for standards (Arthur 1994; Shapiro & Varian 1999; Suarez 2004) and standards implementation processes (Greenstein 1992; Weiss 1993; Lyytinen & King 2006), few have examined coalition building dynamics and the way players enter and exit. Theoretical (Foray 1994; Axelrod et al. 1995; Lukach et al. 2007) and empirical [e.g., Funk (2009) mobile phone industry; Cortese et al. (2009) IFRS in mining industries; Leiponen (2008) wireless telecommunications; Chiesa et al. (2002) multimedia sector] studies have examined the role played by coalitions in a standard's success. This paper follows along these lines and proposes to examine coalition dynamics in the video storage format industry. We analyze the reasons why players in one or more sectors of industry join and withdraw from coalitions. This will help understand why some coalitions succeed and others fail to impose their standards.

The video storage format industry is a particularly fertile field for analyzing standards in that the impact of various factors characterizing the standardization process can be studied. Furthermore, this changing industry makes it possible to analyze players' strategic choices during various technological competitions paying particular attention to coalition building.

This paper is organized as follows. In the section 'Theoretical perspectives' we demonstrate the importance of strategic alliances in business ecosystem wars. Our methodology is described in 'Method'. In the section 'Coalition dynamics in video storage format ecosystems' we study coalition dynamics in video storage format business ecosystems examining how players enter and exit coalitions. We discuss our results in 'Results, discussion, and implications' and present our conclusions in 'Conclusion'.

THEORETICAL PERSPECTIVES

In this section we present our theoretical and conceptual framework, highlighting alliance building motivations in standardization processes, particularly regarding direct competitors and complementary goods suppliers. Business ecosystems, where various relationships rise and fall, are formed in these alliances.

Business ecosystems

Our study's starting point is the notion of business ecosystems (Moore 1993, 1996; Lado et al. 1997; Bengtsson & Kock 1999; Iansiti & Levien 2004; Chesbrough 2007). A business ecosystem is a 'heterogeneous coalition of companies from different sectors forming a community based on strategic interest or values networked around a leader capable of imposing or communicating its marketing vision or technological standard' (Torres-Blay 2000). This coalition of diverse companies will focalize around a leader or a group of leaders stimulating business ecosystem stakeholder dynamics in order to dominate the market. In addition to competition between business ecosystems, there is also competition within business ecosystems to determine the leader(s) (Iansiti & Levien 2004; Gueguen 2008). This intraecosystem competition means that there is simultaneously competition and cooperation between firms. While they have a collective interest in their ecosystem's success, they also have an individual interest in dominating their rivals. Particularly where the business ecosystem is formed around a standard, companies cooperate to develop a common standard but compete with products involving that standard.

The companies forming a business ecosystem include direct competitors and complementary goods and services suppliers using that standard. Since these companies' convergent interest is the standard's success, they will form different types of alliances: between direct rivals to impose a joint standard or with complementary goods suppliers to obtain an exclusive deal. Fostering collaborative relationships between both vertical and horizontal partners to achieve symbiotic synergy is a key factor for success. Competition and cooperation strategies increasingly intermix attenuating their contradictory nature as they co-evolve concurrently along multidimensional strategic sequences. This situation with firms simultaneously competing and cooperating is known as 'coopetition' (Nalebuff & Brandenburger 1996; Lado et al. 1997; Bengtsson & Kock 1999, 2000; Dagnino & Padula 2002; M'Chirgui 2005).

Business ecosystem membership is not necessarily exclusive and can be partial. This is the case for complementary goods suppliers and companies using the standard that might belong to several business ecosystems. One reason for business ecosystem membership is that companies must meet a number of different needs stemming from a number of different clients. For example, a manufacturer of smart mobile terminals uses several operating systems according to specific client requirements. In the case of smart mobile terminals, the relationships between the Linux and Symbian or Palm and Linux business ecosystems are relatively close with major players participating in both business ecosystems (Gueguen 2008). Uncertainty regarding a business ecosystem's successful competition with other business ecosystems is another reason for multiple ecosystem membership. To avoid early commitment, some companies prefer to take part in several business ecosystems or leave one ecosystem for another one. Complementary product suppliers may offer different versions of their products to different business ecosystems.

Strategic alliances and standardization

Standardization strategy literature has examined the role of various factors in a standard's success: increasing returns and particularly network effects (Katz & Shapiro 1986; Shurmer 1993; Choi 1994; Choi & Thum 1998), establishing an installed base (Farrell & Saloner 1985; Farrell et al. 2003), developing a market for complementary goods (Schilling 1998, 2002), and penetration pricing (Seifert & Vare 2008, 2009). One of the arguments put forward by these studies is that the standard's value increases with network size reaching critical mass. Although several strategic actions are proposed and discussed, the role of strategic alliances (Weiss & Sirbu 1990; Axelrod et al. 1995; Vanhaverbeke & Noorderhaven 2001; Warner 2003), where cooperative relationships are established between competitors and other firms to develop and impose a standard (Bengtsson & Kock 2000; M'Chirgui 2005), remains decisive and has aroused interest from several analysts. This research is based on network effects (Farrell & Saloner 1985; Katz & Shapiro 1986), R&D investment cooperation/competition (Dasgupta 1986; D'Aspremont & Jacquemin 1988), and endogenous coalition building (Aumann & Dreze 1975; Bloch 1996; Yi 1997; Goyal & Joshi 2003; Joshi 2008). The decision to establish a standardization agreement (Economides 1996; Choi & Thum 1998; Cabral et al. 1999), various types of strategic alliances (Warner 2003; Seifert & Vare 2008, 2009), alliance structure (Van Wegberg 2004), participating firm size and power (Weiss & Sirbu 1990), size and presence of rivals in an alliance (Axelrod et al. 1995), alliance block development (Vanhaverbeke & Noorderhaven 2001), and blocking alliance creation (Warner 2003) have all been studied.

Strategic alliances represent appropriate means for building and locking-in a market (1). Moreover, for the last three decades, the number of standardization agreements has consistently increased (Warner 2003). Furthermore, alliance block membership significantly influences performance and can be an efficient way of determining the emergence of new standards, new concepts and new operating modes in industries (Cowan & Jonard 2009).

As a result, standards wars regularly turn into wars between coalitions (Vanhaverbeke & Noorderhaven 2001). These coalitions unite various companies around a standard: whether they are companies developing the standard, firms developing complementary goods or services, or distributor networks, they all have a common interest in the standard's victory. The business ecosystem concept is relevant in that the players making up these alliance blocks are heterogeneous: they come from different sectors supporting horizontal, vertical, and transverse relationships in a dynamic perspective (Hearn & Pace 2006).

Within the business ecosystem framework, this paper's goal is to analyze how companies from various industries enter and exit coalitions. This will enable us to better understand why certain coalitions succeed and others fail to impose their standards.

METHOD

In this paper, we examine three standards wars waged in video storage formats: the VHS/Betamax war, DVD implementation by the DVD Forum, and the Blu-ray/HD-DVD war. While the VHS/Betamax war and the case of the DVD Forum have already...

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