The document summarizes the challenges of forming new industries based on their complexity and whether they require a critical mass of users or complementary products. It presents a typology that classifies industries into four categories - simple products, simple networked products, complex systems, and complex networked systems. Each category faces different challenges in their formation based on factors like technological complexity, need for standards, and role of government support. The document uses examples like computers, internet, mobile phones to illustrate the differences in how industries formed in each category.

1. Creating New Industries:
Different Industries,
Different Challenges of Formation
Jeffrey Funk
Associate Professor
Division of Engineering & Technology
Management
National University of Singapore
Mail: etmfjl@nus.edu.sg
These slides summarize ideas that are described in a paper (Complexity, Critical Mass, and Industry Formation:
A Comparison of Selected Industries, Industry and Innovation, 2010) and a chapter in a forthcoming book from
Stanford University Press (Technology Change and the Rise of New Industries)

2. New Industries
• Can be thought of as a set of products or services
– based on new concepts and/or architectures
– supplied by new collection of firms
– and of a significant amount of sales e.g., >$5 billion)
• According to Joseph Schumpeter,
– waves of new technologies have created new industries
– along with opportunities and wealth for new firms as the new
technologies destroyed existing technologies and their
incumbent suppliers
– this process is often called “creative destruction”

3. Timing of Industry Formation
• For all industries, industry formation requires
– products that are economically feasible and thus offer a
superior value proposition to an increasing number of users*
– firms to recognize the potential for this superior value
proposition and introduce the products
• But for other industries, there are additional challenges
of industry formation
– industries that involve complex products and/services
– industries that require a critical mass of users or
complementary products for growth to continue
Other chapters in “Technology Change and the Rise of New Industries” (and other slides)
address this issue

4. Outline
• Typology of Industry Formation
– degree of complexity
– whether a critical mass of users or complementary products is
needed for growth to continue
• Simple Products
• Simple Networked Products
• Complex Systems
• Complex Network Systems
• Conclusions

5. Typology of Industry Formation
Simple Network Products Complex Network Systems
Digital Video Disc (DVD) Radio (AM, FM) Broadcasting Systems
Music Players (Phonograph, Television (Black & White, Color,
Yes Cassette Tape, Compact Disc) Digital) Broadcasting Systems
Facsimile Fixed-Line Telephone Systems
Personal Computer (PC) Mobile Phone (Analog, Digital) Systems
Critical Mass PC Internet, Mobile Internet
of users or
Complementary
Products Simple Products Complex Systems
was Required
Refrigerator Washing Machine Electric Power Automated
Dryer Air Conditioner Automobile Algorithmic Trading
No Vacuum Cleaner Sewing Machine Mainframe Online Universities
Video Cassette Digital Watch Computers Biotechnology
Recorder (VCR) Nuclear Power Semiconductors
Pocket calculator Digital Camera Airline/Aircraft
Low High
Relative Complexity at Time of Creation

6. Complexity (1)
• The complexity of an industry can be measured in terms
of the number of
– subsystems
– processes, and/or
– lines of software code in the products or services offered in the
industry
• Complex systems usually require more
– technical, regulatory, and administrative decisions to be made
– organizations (including government agencies) and often
larger ones to be involved with these decisions
– resources for their development and operation (e.g., R&D,
land, frequency spectrum) than do less complex systems

7. Complexity (2)
• Therefore, the following are more important for
industries based on complex than simple systems
– government support for R&D
– government purchases
– government regulations and licenses with respect to limited
resources (e.g., frequency spectrum or land including regulated
monopolies)
– new forms of organizations (including vertical disintegrated
ones) and
– agreements among firms on standards and methods of value
capture

8. Critical Mass (1)
• Whether a critical mass of users or complementary
products are needed for growth depends on whether
– a product by itself has value to users and/or
– there are immediate and large benefits to users from an
expansion in number of them or complementary products
• Some products require a critical mass of users for
growth to occur
– users only obtain value if there are multiple users and if those
multiple users jointly use the products
– Examples include telephones, facsimiles, video conferencing,
short message services (SMS), Internet mail, dating sites, and
social networking sites

9. Critical Mass (2)
• Other products require critical mass of complementary
products
– immediate and large benefits to users from expansion in
complementary products
• Examples include music/video players, video games,
computers, radio/TV broadcasting, PC/mobile Internet
• One reason for large benefits - users demand wide
variety of music, video, programs, computer software
• Need for critical mass increases
– importance of firms finding agreements on standards and on
methods of value capture and creating alliances that support
these agreements

10. Outline
• Typology of Industry Formation
– degree of complexity
– whether a critical mass of users or complementary products is
needed for growth to continue
• Simple Products
• Simple Networked Products
• Complex Systems
• Complex Network Systems
• Conclusions

11. Simple Products
• Simple products
– had low complexity
– didn’t require a critical mass of users/complementary products
• Timing of formation depended on when
– products offered a superior value proposition to users
– firms recognized the potential for this superior value
proposition and introduced the products
• Because such new products are often expensive,
– first users were ones with high incomes
– and thus, products representing new industries have diffused
faster in U.S., Europe, and Japan than in other countries

12. Outline
• Typology of Industry Formation
– degree of complexity
– whether a critical mass of users or complementary products is
needed for growth to continue
• Simple Products
• Simple Networked Products
• Complex Systems
• Complex Network Systems
• Conclusions

13. Simple Networked Products (1)
• The difference between simple network-products and
simple products is in whether
– a critical mass of either users or complementary products is
needed for growth to occur
– and this depends on whether product by itself has value to users
and/or whether there are immediate and large benefits to users
from expansion in number of users/complementary products
• Local area networks (LANs) and fax machines required
critical mass of users
– because multiple users were needed for users to obtain value
– critical masses of users emerged inside firms and later
emergence of standards facilitated communication between
firms and in the case of fax machines, between consumers

14. Simple Networked Products (2)
• The other products shown in upper left hand quadrant
– required critical mass of complementary products to emerge for
growth to occur
– users have demanded variety of music, movie (e.g., DVDs),
and computing software before they adopted new hardware
– positive feedback between number of users and variety of
software
• Some firms have supplied both hardware and software
(i.e., vertical integration)
• Other firms have created alliances in order to set
standards and offer compatible hardware and software

15. Has it Become More Difficult to Create
Critical Mass? (1)
• Several new music formats - digital audio tape (DAT),
digital compact cassettes (DCC), mini-discs – failed and
legal on-line music services have grown slowly
• For first three
– their performance advantages over CDs were small
– music companies did not strongly support them
– DAT was not backward compatible with cassette tapes albeit
DCC was
– “switching costs” for CDs perhaps too large for DCC to diffuse
• For on-line music, sales lagged until Apple put together a
new scope of activities and revenue sharing model

16. Has it Become …..Critical Mass? (2)
• PC industry was also temporarily immune to “creative
destruction”
• Large switching costs and Microsoft’s control of
“standard” interfaces slowed introduction of new
computers/OS/microprocessors
• It has only been increasing compatibility between Wintel
and Apple computers and new discontinuities that have
reduced power of Microsoft and Intel
– Many orders of magnitude improvements in ICs are making
compatibility and new discontinuities such as PDAs, tablet
computers, and cloud computing possible

17. These Examples Highlight Differences
Between Simple and Simple Network Products
• With simple products (e.g., hand-held tape players, digital
cameras)
– it is primarily recognizing when a new product representing a
new industry might become economically feasible
– and having technical capabilities to introduce product
• With simple network products such as PDAs (Palm),
tablet computers, and MP3 players (Apple)
– capabilities associated with creating standards and alliances are
also important

18. Outline
• Typology of Industry Formation
– Degree of complexity
– Whether a critical mass of users or complementary products is
needed for growth to continue
• Simple Products
• Simple Networked Products
• Complex Systems
• Complex Network Systems
• Conclusions

19. Complex Systems (1)
• Complex systems have a large number of
– subsystems, processes, or lines of software code in products or
services offered in the industry
• This complexity leads to need for
– large amounts of R&D
– new regulations with respect to limited resources (e.g., land and frequency
spectrum)
– price-insensitive customers
• Some governments (e.g., U.S. one) have funded R&D,
implemented regulations (or deregulation) and been the
necessary price-insensitive customers more than have
other governments

20. Government Agencies in U.S.
• Were major funders of R&D for
– aircraft, computers, nuclear power, semiconductors, and bio-
technology
• Were major (price insensitive) customers for
– aircraft, airlines (postal services), computers, nuclear power,
semiconductors, and bio-technology
• Also implemented favorable regulations for
– many of these industries
– one example is for limited resources (e.g., land for electric
power distribution and regulated monopolies)
• These are major reasons for early formation of these
industries in the U.S.

21. More Specific Examples
• Biotechnology (late 1970s)
– first emerged in U.S. due to strong universities, a venture
capital market, and favorable regulatory system that
protected intellectual property and that enabled universities
to benefit from federally-funded research
• Automated algorithmic trading (in 1990s)
– first emerged in U.S. due to strong universities (i.e., finance
departments), venture capital market, and favorable
regulatory system (or lack of regulations)
• Online universities (in 2000s)
– first emerged in U.S. partly due to existence of government
subsidized loans for private universities (i.e., policy)

22. But none of these Industries Required Critical Mass
of Users/Complementary Products
• Some complex systems used in combination with
existing products/services
– automobiles used existing roads, fuel sources, repair shops
– mainframe computers initially used punch cards
– nuclear power stations used existing steam turbines and
transmission lines
– semiconductors used in existing electrical systems
• Some initially introduced as stand-alone systems
– mainframe computers, electric power (for street lighting)
– in stand-alone systems, integrated supplier provides all
hardware and software and thus there are only supply-based
economies of scale

23. But such Network Effects or Switching Costs
May Emerge……
• Network effects did later emerge for mainframe
computers as vertical disintegration occurred, which
enabled different firms to provide computer,
peripherals, and application software
• Network effects also emerged for automobiles in the
form of gasoline and service stations
– will these network effects make it difficult for electric or
hydrogen vehicles to diffuse?
– many automobile users may expect battery recharging
stations or hydrogen refueling stations to be available

24. Outline
• Typology of Industry Formation
– Degree of complexity
– Whether a critical mass of users or complementary products is
needed for growth to continue
• Simple Products
• Simple Networked Products
• Complex Systems
• Complex Network Systems
• Conclusions

25. Complex Network Systems (1)
• Combines the challenges of
– complex systems
– creating a critical mass of users or complementary products
• Complex systems often require
– large amounts of R&D, new regulations with respect to land
and frequency spectrum, or price insensitive customers
• Creating a critical mass of users often requires
– firms to agree on standards and methods of value capture and
create alliances to support these agreements

26. Complex Network Systems (2)
• Governments have needed to
– facilitate agreements on standards
– manage limited resources of land or frequency spectrum
– but encourage competition
• Examples include
– Radio (AM, FM) and Television (Black & White, Color,
digital) Broadcasting Systems
– Fixed-Line and Mobile Phone (Analog, Digital) Systems
– PC Internet and Mobile Internet

27. Complex Network Systems (3)
• Recently
– Agreements on standards have become easier
– While choices of standards have increased dramatically
– This seeming contradiction comes from greater firm formation,
more standard setting agencies, and other institutional changes
• But this was not always the case
• And agreements on standards do not always come
easy……

28. Example of PC Internet in U.S. (1)
• Federal government funded development in universities
• Universities developed and implemented open standards
• Early deregulation of telecom industry and firms’ early
implementation of PCs and LANs
– contributed to interlinking between government-funded, commercial, and
corporate networks
• Easy dissemination of browsers over inter-linked networks in
early 1990s and lifting of restrictions on commercial activities in
mid-1990s
– triggered an explosion in Internet activity, or in this presentation’s words,
the formation of the Internet industry
For more details, see: Mowery, D. & Simcoe, T 2002, Is the Internet a US invention? – an economic and technological
history of computer networking, Research Policy, vol. 31, pp. 1369-1387

29. Example of PC Internet (2)
• Europe (outside of Scandinavia and UK) and Japan were slower
to fund implementation of Internet infrastructure and when they
did
– they focused on proprietary technologies that were supported by their
“national champions”
• Their universities were also slower to implement information
technologies
– their governments funded less university research and were slow to
liberalize their telecommunications industries
• This allowed other countries
– like Korea, Singapore, and Hong Kong to experience faster diffusion of
Internet services than did Japan and many European countries

30. Example of Mobile Phones
• Scandinavia (followed by U.S. and UK) experienced
earlier growth than did other countries
– government-sponsored entities created open standards,
licensed service providers, allowed competitive sale of phones
• Their service providers also
– set lower prices than did other countries
• On other hand, most Western European countries had
earlier growth in digital phones than did U.S.
– they chose single standard and began licensing new entrants in
the late 1980s long before U.S.
For more details, see: Funk J and Methe D. 2001. Market and Committee Based Mechanisms in the Creation and
Diffusion of Global Industry Standards: the case of mobile communications, Research Policy 30 (4): 535-708

31. Example of Mobile Internet (1)
• Mobile Internet has seen completely different process of
formation than did the PC Internet
– firms and not universities initially created the mobile Internet
• Japanese service providers created a critical mass of users in
1999 and 2000 with
– phones that displayed content in a consistent manner (i.e., using standards)
– entertainment content that was supported by a micro-payment system
– inexpensive Internet mail
– site access via the input of a URL
• The Japanese service providers were able to do these things
partly because they still dictated phone specifications to
manufacturers
For more details, see: Funk, J. 2012. Multiple Standards and Critical Masses, and the Formation of New Industries:
The case of the Japanese mobile Internet, European Journal of Innovation Management 15(1): 4-26

32. Example of Mobile Internet (2)
• Western firms had trouble creating critical mass of users
due to
– lack of agreement on standards
– lack of inexpensive Internet mail
– little revenue sharing with content providers by service
providers
• Phone manufacturers failed to agree on standards in
WAP (Wireless Automation Protocol) Forum primarily
because
– large ones such as Nokia did not want open standards to
emerge
– and lead to market for phones that is similar to PCs

33. Example of Mobile Internet (3)
• Service providers did not want Internet mail to
cannibalize SMS revenues and make them a “pipe” as in
PC Internet
• These problems were finally solved by
– improvements in ICs and displays
– that made it possible for new entrants such as Apple and
Google to introduce phones that can access PC content on a
phone
– this eliminated the necessity of creating a critical mass of
mobile Internet content, users and phones

34. Conclusions
• For all industries, industry formation requires
– products that are economically feasible and thus offer a
superior value proposition to users
– firms to recognize the potential for this superior value
proposition and introduce the products
• But for other industries, there are additional challenges
for industry formation
– industries that involve complex products and/services
– industries that require a critical mass of users or
complementary products for growth to continue

35. These Additional Challenges Include
• Simple Network Products
– agreements on standards and methods of value capture and
alliances to support these agreements
• Complex Systems
– Governments fund R&D, be a price insensitive customer, and
implement appropriate regulations (or deregulation) for scarce
resources such as land or frequency spectrum
• Complex Network Systems
– Combines challenges of network and complex systems
– Governments must often: 1) facilitate agreements on
standards; 2) manage limited resources of land or frequency
spectrum; and 3) encourage competition