Winning the Hardware-Software Game

Transcription

1 Winning the Hardware-Software Game Using Game Theory to Optimize the Pace of New Technology Adoption Ruth D. Fisher PRENTICE Upper Saddle River, NJ Boston Indianapolis San Francisco New York Toronto Montreal London Munich Paris Madrid Capetown Sydney Tokyo Singapore Mexico City

2 Preface xi Acknowledgments xv About the Author xvii CHAPTI-.R 0 Introduction xix 0.1 Game Theory and the Chicken-and-Egg Problem xxii 0.2 Organization of the Book xxv Network Effects Definition and Sources of Network Effects Switching Costs Compatibility/ Network Effects and the Hardware-Software Game 15 Technology Adoption Lifecycles Production and Consumption Lifecycles Lifecycles of Network Effects Technology Replacement Lifecycles Critical Mass Technology Adoption Lifecycles and the Hardware Software Game 39 Technology System Users User Demand for New Technology Hardware Installed Base 44 vii

3 viii Contents The Stock of Content Available Price of New Technology Hardware and Content Numerical Example of Demand for New Technology Hardware User Demand for New Technology Content Installed Base 61 (3.2.2 The Stock of Content Available Numerical Example of Demand for New Technology Content Summary of User Demand for New Systems Hardware and Content 66 CllAPTl-R 4 Technology System Suppliers Provision of Hardware Provision of Content 82 The Hardware-Software Game Introduction to Game Theory Definition of the Hardware-Software Game Assumptions about Market Dynamics Technology Value and Market Size Sensitivity to Price Strength of Network Effects for Hardware Strength of Network Effects for Software Degree of Content Complementarity Overview of the Game Simulation Categories and Scenarios Profit Frontiers by Category of Network Effects Hardware Manufacturers'Profits Software Providers'Profits Impact of Speed of Adoption on Profitability Sensitivity of Profits to Changes in Market Drivers General Implications Overall Profit Potential Profits and Market Environment Timing of Profits Network Effects Dynamics Value Extraction 149

4 ix Addressing the Chicken-and-Egg Problem Statement of the Problem General Responses to the Chicken-and-Egg Problem Engineer New Systems for Maximum Likelihood of Adoption Create Expectations of New System Adoption Establish a Good Reputation Decrease Relative Value of Old Systems Increase Relative Value of New Systems Switching Costs Summary of General Responses Scenario-Specific Responses to the Chicken-and-Egg Problem Market Size User Sensitivity to Price Direct Network Effects Indirect Network Effects Summary of Scenario-Specific Responses 186 CHAPII:R 7 Summary, Applications, and Extensions Key Points from the Analysis Tools for Applying the Model Assessing Relative Sizes and Sources of New System Values Better Understanding User Demand for New System Hardware Better Understanding Optimal Allocations of Content Extensions of the Analysis Estimates of Network Effect Elasticities Network System Routes to Market 196 Model of the Hardware-Software Game 199 A. 1 Definition of Key Terms 199 A. 1.1 Technology User Dynamics 199 A. 1.2 Technology Content Dynamics 199 A.2 User Demand Functions 200 A.2.1 User Demand for New Technology Hardware 200 A.2.2 User Demand for New Technology Content 202

5 A.3 Provision of Hardware 203 A.4 Provision of Content 205 A.5 Three-Period Model 207 A.5.1 Derivation of the Hardware Manufacturer's Problem 207 A.5.2 Derivation of the Content Provider's Problem 213 A.5.3 Equilibrium 214 Al'PKNDIX B Further Information 217 B.I Adoption of VHS versus Betamax 217 B.2 Adoption of Next-Generation DVD 218 B.3 Adoption of HDTV 218 B.4 Adoption of Consumer Durables 220 B.5 Networks and Network Effects 220 B.6 Lock-in and Path Dependence 222 B.7 Standardization and Compatibility 223 B.8 Innovation and Adoption of New Technologies 223 B.9 Product Lifecycles 225 B.10 Critical Mass 225 B. 11 First-Mover Advantages in Adoption of New Technologies 226 B.12 Social Networks and Technology Adoption 227 References 229 Index 233