Chapter 9 ibm
- 1. Schiling Chapter Nine Schilling chapter SIX page 183 Protecting Innivation The Digital Music Distribution Revolution Fraunhofer and MP3 In 1991, Fraunhofer IIS of Germany developed an algorithm that would set in motion a revolution in how music was distributed, stored, and consumed. This format for compressed audio files was later dubbed MPEG-1 layer 3—a.k.a. MP3. By 1995, software programs were available that enabled consumers to convert tracks from compact discs to MP3 files. This technology transformed how music could be manipulated—a song was now a file that could be kept on a hard drive, and the file was small enough to be shared over the Internet.
- 2. Schiling Chapter Nine Schilling chapter nine page 184 Napster Takes the Lead In 1999, while a student at Northeastern University in Boston, Shawn Fanning released Napster—a software program that allowed users with Internet access to easily share MP3 files. Napster provided a user-friendly solution to music fans wishing to share and find music online. Napster provided a user interface with a search box that pointed individuals to other users with the files they wished to download. The Napster servers did not host any MP3 files; rather they hosted a database with information on which users had which files to share and whether they were online, and connected one computer to another for downloading.
- 3. Schiling Chapter Nine Schilling chapter nine page 185 iTunes Just in Time On April 28, 2003, Apple opened its iTunes Music Store. After striking agree- ments with the five major record labels (Sony, Universal, BMG, Warner Music Group, and EMI), iTunes launched with an initial catalogs of 200,000 songs for purchase at 99 cents per song.i iTunes showed immediate signs of success, boasting 50 million downloads within the first year, and quickly became the lead- ing distributor of music online
- 4. Schiling Chapter Nine Schilling chapter nine page 188 Appropriability appropriability The degree to which a firm is able to capture the rents from its innovation. tacit knowledge Knowledge that cannot be readily codified or trans- ferred in written form. socially complex knowledge Knowledge that arises from the interaction of multiple individuals.
- 5. Schiling Chapter Nine Schilling chapter nine page 188-189 PATENTS, TRADEMARKS, AND COPYRIGHTS Patent A property right protecting a pro- cess, machine, manufactured item (or design for manufactured item), or variety of plant. Trademark An indicator used to distin- guish the source of a good. Copyright A property right protecting works of authorship.
- 6. Schiling Chapter Nine Schilling chapter nine page 200 Theory in Action IBM and the Attack of the Clones In 1980, IBM was in a hurry to introduce a personal computer. When personal computers first began to emerge at the end of the 1970s,the idea that individuals would want personal computers on their desks seemed ludicrous. However, as total U.S. per- sonal computer sales reached $1 billion, IBM began to worry that the personal computer market could actually turn out to be a significant computer mar- ket in which IBM had no share.
- 7. Schiling Chapter Nine Schilling chapter nine page 200 Continued IBM decided to use many off-the-shelf components from other vendors, includ- ing Intel’s 8088 microprocessor and Microsoft’s soft- ware. IBM was not worried about imitators because IBM’s proprietary basic input/output system (BIOS), the computer code that linked the computer’s hardware to its software, was protected by copyright. IBM’s copyright turned out not to be difficult. Copyright protected the writ- ten lines of code, but not the functions those codes produced. Compaq was able to reverse- engineer the BIOS in a matter of months without violating IBM’s copyright.
- 8. Schiling Chapter Nine Schilling chapter nine page 200 Advantages of protection Because proprietary systems offer greater rent appropriability, their developers often have more money and incentive to invest in technological development, promotion, and distribution. Protecting the technology also gives the developing firm architectural control over the technology.
- 9. Schiling Chapter Nine Schilling chapter nine page 202 Advantages of Diffusion First, external devel- opment efforts typically lack the coordination of internal development. External developers may have very diverse objectives for the technology; rather than work together toward some unified vision of what the technology could achieve in the future, they might work in different, possibly even conflicting, directions.26 Much of their effort may be redundant, as different external developers work on solving the same problems without communicating with each other.
- 10. Schiling Chapter Nine Schilling chapter nine page 202 Continued UNIX provides a stark example of this. UNIX was an operating system first developed by AT&T’s Bell Laboratories in 1969. Though a Department of Justice injunction forbade AT&T from selling software commercially, it made the source code for the product available through licensing arrangements. Though the software community made several attempts to standardize the UNIX operating language, their efforts failed. AT&T also challenged the commercialization of several UNIX variants, but to no avail. Ulti- mately, AT&T sold the division responsible for UNIX to Novell, and Novell handed over the rights to the UNIX trademark to the X/Open standards-setting body.
- 11. Schiling Chapter Nine Schilling chapter nine page 202 Production Capabilities, Marketing Capabilities, and Capital If the firm is unable to produce the technology at sufficient volume or quality levels (or market the technology with sufficient intensity), then protecting the technology so that the firm is its sole provider may significantly hinder its adoption. Example JVC was promoting its VHS standard for video recorders, its management knew JVC was at a disadvantage in both manufacturing and marketing capabilities compared to Sony (which was promoting the Beta technology). JVC chose to vigorously pursue both licensing and OEM agreements, lining up Hitachi, Matsushita, Mitsubishi, and Sharp to boost the technology’s production rate.
- 12. Schiling Chapter Nine Schilling chapter nine page 203 Industry Opposition against Sole-Source Technology Sometimes other industry members are able to exert strong pressure against the adoption of a technology that would give one (or a few) producer(s) undue control and power, caus- ing a technology that is restricted to such production to be rejected or more hotly contested than a more open technology. Sony and Philips’ Super Audio CD (SACD) audio format. Sony and Philips had jointly created the original compact disc (CD) format and split the royalties on every CD player sold, totaling hundreds of millions of dollars. The rest of the world’s leading consumer electronics producers (including Hit- achi, JVC, Matsushita, Mitsubishi, and Toshiba) and record producers (including Time Warner and Seagram’s Universal Music group) banded together to form the Digital Video Disk (DVD) Audio consortium. This consortium’s purpose is to promote the DVD Audio standard that is intended to displace the CD and enable royalties to be split among the 10 companies that control the patents.
- 13. Schiling Chapter Nine Schilling chapter nine page 203 Resources for Internal Development If a firm does not have significant resources (capital, technological expertise) to invest in the technology’s functionality, it may have difficulty producing a technology that has an initial performance level, and rate of improvement, that the market finds attractive.
- 14. Schiling Chapter Nine Schilling chapter nine page 204 Control over Fragmentation For technologies in which standardization and compatibility are important, maintain- ing the integrity of the core product is absolutely essential, and external development can put it at risk. As the UNIX example illustrates, if the developing firm relinquishes all control over the development of the technology, the technology will have no shep- herd with the ability and authority to direct its trajectory and ensure that a single stan- dard remains intact.
- 15. Schiling Chapter Nine Schilling chapter nine page 204 Incentives for Architectural Control Architectural control over the evolution of a technology is always valuable; however, it becomes particularly valuable if a firm is a significant producer of complements to the technology in question. A firm with architectural control can typically design the technology to be compatible with its own complements and incompatible with those of competitors. If the technology is chosen as the dominant design, this archi- tectural control allows the firm to ensure that it reaps the lion’s share of the rewards in complements production.
- 16. Schiling Chapter Nine Schilling chapter nine page 204-205 Summary of Chapter 1. The degree to which a firm can capture the rents from its innovation efforts is largely determined by the degree to which competitors can quickly and easily imi- tate the innovation. Some innovations are inherently difficult to copy; others are difficult to copy because of the mechanisms the firm uses to protect its innovation. 2. The three primary legal mechanisms used to protect innovation in most countries are patents, trademarks, and copyrights. Each mechanism is designed to protect a different type of work or good. 3. International treaties have helped to harmonize patent, trademark, and copyright laws around the world. Most countries now have patent, trademark, and copyright laws of some form, and in some instances protection can be applied for in multiple countries simultaneously.
- 17. Schiling Chapter Nine Schilling chapter nine page 205 Summary of Chapter 4. Protecting an innovation also preserves the firm’s architectural control, enabling it to direct the technology’s development, determine its compatibility with other goods, and prevent multiple incompatible versions of the technology from being produced by other firms. 5. Diffusing a technological innovation can encourage multiple firms to produce, distribute, and promote the technology, possibly accelerating its development and diffusion. Diffusion can be particularly useful in industries that accrue increasing returns to adoption. It is also useful when the firm has inadequate resources to be the sole developer, producer, distributor, and marketer of a good.