Which Is More Important For Innovation: A Standard Platform Or Competition?
from the or-a-little-of-both? dept
There’s an interesting debate going on in the video game world over the question of whether or not the video game market would be better off if there were a standard console platform, rather than separate walled gardens (Xbox, Playstation, Nintendo). What the discussion is really about is what is more important for innovation: having a standard platform that everyone agrees on or having competition between platforms — and that debate extends well beyond the video game world. It also isn’t a question that has an easy answer — and, indeed, we’re clearly on the record advocating for more competition in some markets and standardization in others. So I thought it might be interesting to explore the arguments for each, and a basic framework for understanding what’s likely to make more sense in what situation.
The argument for standardization: A drawn out standards battle between different systems can often seriously harm a market. First off, it makes it that much more difficult to attract developers to build on your platform, because you have to convince them that it’s better than the alternatives. Standards battles can also scare off customers who are (reasonably) worried about buying into a standard that later loses and being stuck with mostly useless hardware. Having a standard clearly makes sense when the lack of a standard forces a serious delay in development and adoption. However, if a fragmented market can stand on its own, standardization doesn’t necessarily make as much sense. Generally, standardization only really makes sense when you have cases of natural monopolies, where the cost of duplicated efforts is quite high, such that it becomes quite wasteful and disruptive to allow that duplicated effort to occur. It’s worth noting there are some who believe there’s really no such thing as a natural monopoly, but cases such as railways, highways and laying fiber seem pretty convincing. It’s also worth pointing out that the process of agreeing to a single standard is often extremely acrimonious — as it becomes a “winner take all” market, and no one wants to be on the losing side. That means some standards battles get dragged out for years, harming everyone in the process.
The argument for competition: Most of you (hopefully) know this one already. You don’t have to be Adam Smith to recognize that competition tends to drive innovation, as firms compete to out-innovate each other and provide a better and better product that the market is willing to purchase. Competition is a key driver in innovation and economic growth. Preventing competition has been known to stifle growth. It’s worth noting, of course, that a fight for “standardization” isn’t “anti-competitive.” It’s just a question of shifting the competition from being between platforms to being on top of a single platform. For example, it’s good to have competition in who can sell you lamps, but it wouldn’t be good to have competition among different types of electric systems with different outlets. So, we standardize on a single electric system, and it allows all the competition on electric devices on top of it.
So how do the two square up? It helps to separate the market into different factors. First off, standards clearly only make sense when we’re talking about some kind of platform on which other applications/business/services are going to be built. Second, there’s the natural monopoly question: how big a disruption does it cause if there are multiple competitors and one fails? If we had competing highway systems and one had to shut down, leaving rotting highways everywhere, that’s a problem. The third factor is where the biggest economic contribution comes from: the platform or the applications on top of the platform. If it’s the platform, then competition makes sense. If it’s really the applications on top of the platform then it’s going to make sense for there to be a standard to let the competition occur on top of the standardized platform. Finally, it’s worth looking at the difficulty for those building the apps/businesses/services on top of platforms to port from and between competing standards. If it’s relatively easy to port from one to another, then there’s less of a reason to push for a single platform.
The video game market really comes down in the middle on some of these factors. However, in the end, I see little support for the idea of looking for a standardized platform. The disruption isn’t that great to their being multiple platforms out there (not much of a natural monopoly). The economic impact point may be up for debate, but so far, the two are more intertwined than most people realize, with many consoles sold at a loss with the hope of making it up in selling high margin games. That makes it difficult to determine how much money really goes towards software and how much is effectively paying for hardware. The final issue may be the most damning: while porting videogames does take time and effort, and isn’t always easy, the cost is relatively low compared to, say, the idea of ripping out your entire electric wiring and replacing it with a new standard.
In the end, competition is definitely a key component in driving innovation, but it’s important to question where that competition should be occurring, and where it’s mutually beneficial to have a standard. It’s reasonable that video game developers would favor a single platform to develop on, as it focuses their attention and efforts — but that doesn’t mean it’s necessarily best for the overall industry.