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standards strategy and policy cases and stories: 7 open computer system <ul><li>Yasushi HARA </li></ul>

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Contents <ul><li>introduction </li></ul><ul><li>decline of one-firm partnership </li></ul><ul><li>standards and computers </li></ul><ul><li>network externalities </li></ul><ul><ul><li>definition of open systems </li></ul></ul><ul><ul><li>traditional lock-in strategies </li></ul></ul><ul><li>Establishing open standards </li></ul><ul><ul><li>open vs. proprietary standards </li></ul></ul><ul><ul><li>strategic analysis </li></ul></ul><ul><li>Competiton between open systems </li></ul><ul><ul><li>continuation strategies </li></ul></ul><ul><ul><li>shifting alliances </li></ul></ul><ul><ul><li>super-compatibility strategies </li></ul></ul><ul><ul><li>Conclusion </li></ul></ul>

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introduction <ul><li>From Legacy system to open system </li></ul><ul><ul><li>conditional change: lowering unit cost of microprocessor, increased the pressure of low cost software and new entrants. </li></ul></ul><ul><ul><li>ex.) IBM: main frame system to PC, and to solution provider </li></ul></ul><ul><ul><li>Vertically Integrated vs. Hoizontal Coorporation </li></ul></ul><ul><ul><li>Structural Change </li></ul></ul><ul><ul><ul><li>ph a se 1 : propreiatary system vs. open system </li></ul></ul></ul><ul><ul><ul><li>phase 2 : competition within open systems </li></ul></ul></ul><ul><ul><ul><li>( phase 3 : disclosure within open systems ) </li></ul></ul></ul>

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Decline of one-firm leadership <ul><li>Invasion via IBM [as centerlized computing machine/mainframe] in1950s. </li></ul><ul><li>DEC, IBM HP and Apple, Inc [as personal computer] in 1970s . </li></ul><ul><li>Appearance of IBM compatible PCs dominated the market in 1980s. </li></ul><ul><ul><li>“ Open standard architecture has enabled the market’s rapid growth”, but has also meant that IBM’s margins and share have gradually fallen. </li></ul></ul>

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Decline of one-firm leadership

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Decline of one-firm leadership Source: http://www.servicestop100.org/it-services-companies-top-100.php Top Companies in the IT Services Industry (2009) # IT Service Company Services Revenue mln US$ Services Revenue growth Total Revenues mln US$ Services Revenue share 1 IBM 39,264 9% 103,630 38% 2 HP 27,745 45% 117,837 24% 3 Fujitsu 27,102 20% 53,313 51% 4 CSC 16,680 -1% 16,680 100% 5 Accenture 15,985 9% 22,784 70% 6 Northrop Grumman 12,454 6% 33,887 37% 7 Hitachi 12,318 21% 113,525 11% 8 Capgemini 11,154 -5% 12,123 92% 9 NTT Data Corporation 10,498 29% 12,368 85% 10 NEC 9,103 24% 47,538 19% 11 Ericsson 8,951 -6% 26,524 34% 12 BT Global Services 8,375 -18% 31,019 27% 13 Atos Origin 7,827 -9% 7,827 100% 14 T-Systems 7,660 -11% 15,325 50% 15 Siemens 7,590 -8% 107,396 7% 16 Lockheed Martin 7,338 32% 42,731 17% 17 Nokia Siemens Networks 7,103 9% 21,309 33% 18 SAIC 6,983 13% 9,975 70% 19 Microsoft 6,463 16% 61,900 10% 20 ACS 6,342 6% 6,342 100%

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Source: http://www.softwaretop100.org/top-10-it-companies-2010 Source: http://www.softwaretop100.org/global-software-top-100-edition-2010 Top 10 IT “hardware” companies 2010 # Company Revenues 2009 1 HP 116.245 2 Samsung 75.531 3 IBM 74.933 4 Microsoft 61.159 5 Nokia 59.042 6 Dell 53.585 7 Fujitsu 50.662 8 Foxconn 44.573 9 Toshiba 40.057 10 Cisco 36.633 Top 25 IT “software compaies” # Company Software Revenues mln US$ Software Revenue growth Total Revenues mln US$ Software Revenue share 1 Microsoft > 49,090 -1% 61,159 80% 2 IBM > 21,396 -3% 95,758 22% 3 Oracle > 18,582 6% 22,734 82% 4 SAP > 11,368 -2% 15,373 74% 5 Ericsson > 7,595 5% 29,014 26% 6 Nintendo > 6,799 -6% 17,762 38% 7 HP > 6,183 -15% 116,245 5% 8 Symantec > 5,565 -2% 5,992 93% 9 Nokia Siemens Networks > 4,529 -15% 18,114 25% 10 Activision Blizzard > 4,279 -7% 4,279 100% 11 CA > 4,012 2% 4,318 93% 12 EMC > 3,960 -6% 14,026 28% 13 Electronic Arts > 3,728 -13% 3,728 100% 14 Adobe > 2,796 -17% 2,987 94% 15 Cisco > 2,137 8% 36,633 6% 16 SunGard > 1,996 -1% 5,508 36% 17 Sony > 1,914 -27% 79,441 2% 18 BMC > 1,758 11% 1,888 93% 19 Alcatel-Lucent > 1,635 12% 21,835 8% 20 Konami > 1,594 -24% 2,887 55% 21 Hitachi > 1,589 -7% 99,818 2% 22 Dassault > 1,584 -1% 1,803 88% 23 Infor > 1,575 -5% 2,100 75% 24 Sage > 1,557 4% 2,336 67% 25 Autodesk > 1,557 -21% 1,764 88%

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Technological Change and the new industry <ul><li>Ex ante : “mainframe” </li></ul><ul><ul><li>Formanizing vertical intgration from R&D to sales, I nternalization of production process,hardware and software. </li></ul></ul><ul><ul><ul><li>Software and Hardware are hardly to partitioning . </li></ul></ul></ul><ul><ul><ul><li>Ex. IBM, Fujitsu, NEC, DEC, HP </li></ul></ul></ul><ul><ul><ul><li>Unit price is so high and actual numbers sold were low. </li></ul></ul></ul><ul><li>In limbo : “unbundling” </li></ul><ul><ul><li>in 1969, software was priced separately, an independent software company appeared. </li></ul></ul>

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Technological Change and the new industry <ul><li>Ex post : “personal computer” </li></ul><ul><ul><li>Picking up each modules for every structure, appearance of ‘multi-layerd’ computer industry structure . Horizontal competition between suppliers at different levels of production. </li></ul></ul><ul><ul><ul><li>“ Compatibility”: Software and Hardware are now “unbundled”, operation system is now functionalized in several platform. </li></ul></ul></ul><ul><ul><ul><li>Implementation of “server-client” system. </li></ul></ul></ul><ul><ul><ul><ul><li>“ de-facto” standard : Win + Intel in DOS/V (IBM compatible) personal computer system. </li></ul></ul></ul></ul><ul><ul><ul><li>Ex. IBM, Sun, HP for computer platforms. Microsoft and Lotus for applications, Microsoft and Unix for Operating systems. </li></ul></ul></ul><ul><ul><ul><li>High-volume, low-margin production. </li></ul></ul></ul><ul><ul><ul><ul><li>The central stage of competition were software. </li></ul></ul></ul></ul>

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Standards and Computers : 3.1 Network Externalities <ul><li>Compatibility makes “network effects” </li></ul><ul><ul><li>1.) allowing portability of software across computers from different manufacturers </li></ul></ul><ul><ul><ul><li>Increasing 3 rd party software / and reducing switching cost. </li></ul></ul></ul><ul><ul><li>2.) connectivity of different equipment in networks. </li></ul></ul><ul><ul><ul><li>Creates new markets for communication systems and data transfers. </li></ul></ul></ul><ul><li>Standards is considered via “the architecture of hardware” and “operating system software” </li></ul><ul><li>And there are “lock-in” strategies, hence new entrants hard to replace concurrent standards, needs “avenue of entry” (what iPhone/iPad done???) </li></ul>

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3.2 Definitions of open systems <ul><li>Communication protocol </li></ul><ul><ul><li>“ de-jure” OSI references model and “de-facto” TCP/IP model </li></ul></ul><ul><li>Three groups of standards </li></ul><ul><ul><li>De jure open standards: Voluntary, only guidelines </li></ul></ul><ul><ul><ul><li>By national and international standards bodies. </li></ul></ul></ul><ul><ul><li>De facto open standards: with more detailed architecture. </li></ul></ul><ul><ul><ul><li>By industry groups (X/Open, OSF and UI) </li></ul></ul></ul><ul><ul><li>Proprietary solutions: highly detailed architecture defined via one firm </li></ul></ul><ul><ul><ul><li>By individual manufacturers and software producers </li></ul></ul></ul>

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3.3 Traditional “lock-in” strategies <ul><li>Case of IBM mainframes </li></ul><ul><ul><li>Hard to change [upgrade path], need to lock in with “legacy” system due to compatibility of software and hardware. </li></ul></ul><ul><ul><li>Economics of scale in development and production, lower unit costs and high margins </li></ul></ul>

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4. Establishing Open Standards : open vs. proprietary standards <ul><li>Open standard via X/Open group vs. proprietary standard via SAA from IBM. </li></ul><ul><ul><li>“ Unix operating system was chosen as the basis for the standard partly on technological grounds.” for Open Standard. </li></ul></ul><ul><ul><li>Unix Share growth : 8% in 1989, 20% in 1991. / 34% of technical installations and 14% of business installations. </li></ul></ul>

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4.2 Strategic Analysis <ul><li>Successful “open” standards strategy </li></ul><ul><ul><li>To build up a significant installed base before the opposition, and establish credibility </li></ul></ul><ul><ul><ul><li>In the case of Unix: firstly developed in 1969, and had been under development for 20 years. </li></ul></ul></ul><ul><ul><li>Caught up the “early adapters” </li></ul></ul><ul><ul><li>Keep its own credibility. </li></ul></ul><ul><ul><li>Find new markets than existing base (where IBM dominates). </li></ul></ul><ul><ul><li>Economies of scales exists in software than hardware, favoring open standards to ensure large software markets. </li></ul></ul>

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5. Competition between “open systems” : 5.1 continuation strategies <ul><li>Manufacturers had to focus on the problem of “maintaining product differentiations”. </li></ul><ul><ul><li>Responds in three ways: </li></ul></ul><ul><ul><ul><li>1.) Build up own “Unix” version while supporting communities. </li></ul></ul></ul><ul><ul><ul><li>2.) Rely on product features, using “super-compatibility” strategies </li></ul></ul></ul><ul><ul><ul><li>3.) To take the contest to the next generations of technology. Building up to aim at open interfaces between various hardware platforms and operating systems. </li></ul></ul></ul>

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2. Shifting Alliance <ul><li>Building up own semi-comparative versions of Unix, each with some special features. </li></ul><ul><ul><li>Finding the balance between concurrent hard/software system and open system. </li></ul></ul><ul><ul><ul><li>Tried to “lock-in” users with ‘one-way’ compatibility [easy come, hard to departure] </li></ul></ul></ul><ul><li>Separation of Unix Group due to the licensing fee issues. </li></ul><ul><ul><li>OSF[Open Systems Foundation]: IBM , Hitachi, Philips, DEC, Siemens </li></ul></ul><ul><ul><li>UI [Unix International]: Fujitsu, Nokia, ICL, Sun, AT&T </li></ul></ul><ul><ul><li>OSF and UI: Data Genral, Intel, Oracle, Toshiba </li></ul></ul><ul><li>In May 1989, UI and OSF joined X/Open (again). </li></ul>

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Source: http://en.wikipedia.org/wiki/File:Unix_history-simple.svg , CC-BY-SA

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3. “super-compatibility” strategies <ul><li>ICL, Sun, HP and Unisys: “aimed at full compatibility with the interface standard, while using other product features external to the standard to differentiate their products” </li></ul><ul><ul><li>ICL ( now in 2011 Fujitsu systems ) acted as computer manufacturer and system integrator simultaneously , builds user-oriented applications and to combine these with broad system design. </li></ul></ul>

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4. Competition for interoperable systems <ul><li>Appear of another rival than IBM, Windows NT in 1993 </li></ul><ul><ul><li>Competition in professor/architecture and operating system level. </li></ul></ul><ul><ul><li>Occurred many ‘alternative’ system </li></ul></ul><ul><ul><ul><li>“ Taligent (aka Pink)” project by IBM, Apple and HP </li></ul></ul></ul><ul><ul><ul><ul><li>“ アップル社内で進められていた次世代 OS&quot;Pink&quot; のプロジェクトを引き継ぎ、 PowerPC を搭載したオープンアーキテクチャ（ PReP 、後に CHRP ）マシン、カレイダまたはスクリプト X と呼ばれた次世代開発環境とセットで、 AIM 連合 の次世代環境として計画されていた” : http://ja.wikipedia.org/wiki/Taligent </li></ul></ul></ul></ul><ul><ul><ul><li>Keep unbundling of operating system and hardware </li></ul></ul></ul><ul><ul><li>In the result in 90s, Microsoft/Intel keeps winning and dominance via Linux/Unix in server end system. </li></ul></ul>

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Case Study: Parallels, Inc. <ul><li>Founded end of 1999 in Russia </li></ul><ul><li>700 Employees Worldwide </li></ul><ul><li>Serving 10 Million Customer End Users in 125 Countries </li></ul><ul><li>#1 in OS-level Virtualization (Parallels Virtuozzo Containers) </li></ul><ul><li>27 Awards in last 12 months </li></ul><ul><li>55+ Patents issued, pending </li></ul><ul><li>500+ Partnerships including Microsoft, Apple, Intel, AMD, Dell, HP, IBM </li></ul>

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Open Source software and Commercialized software. OpenVZ Virtuozzo Purpose Meso-Virtualization Meso-Virtualization Price Free From 300-60,000 USD (depend on the number of virtualized hosts) Support Online Forum, Wiki Online Forum, Mail, Telesupport (fees included on price) Functionality (interface) Only CUI GUI interface available Functionality (virtualization) Passive Memory Allocation Active Memory Allocation Source Code Open Closed API Available Available changeability Possible (From OpenVZ to Virtuozzo)

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Open Source software and Commercialized software.

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<ul><li>Demo: http://www.parallels.com/jp/products/pvc46/demo/ </li></ul>

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Conclusion <ul><li>New Technology calls New Markets </li></ul><ul><ul><li>and creates new markets which naturally developed open standards. </li></ul></ul><ul><li>Once Open system has been implemented, market forces have been the main determinants of the degree of openness. </li></ul><ul><li>[additional remark] open system has been deployed whole structure of computing system, but the degree of openness should be differed in terms of economies of scale. </li></ul>

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Critical Review <ul><li>What happened aftermath? </li></ul><ul><ul><li>The case of Parallels, Inc. </li></ul></ul><ul><li>Open Innovation? </li></ul><ul><ul><li>Comparative study between iPhone and Android. </li></ul></ul><ul><li>The role of Intercultural Property? </li></ul><ul><ul><li>Patenting or Open source? </li></ul></ul><ul><ul><ul><li>GNU, Creative Commons </li></ul></ul></ul>