Innovation and competition in standard-based industries: a historical analysis of the US home video game market

Abstract

This paper examines the competitive dynamics in a standard-based industry through a historical observation of the US home video game industry. The paper focuses on the theoretical issues of switching costs, installed base and complementary goods as critical factors of dominant designs and firm success in a network-based industry. The authors' analysis reveals multiple stages of technological innovations and changes of market leadership and industry standards during a relatively short history of the industry. The industry exhibits six generations of technological changes in video game consoles and complementary products, with each generation represented by a new set of competitors, dominant designs, and market leaders out-competing the leaders of the prior generation. Their analysis confirms the efficacy of traditional tenets of successful strategic management in a network-based industry, such as the importance of technological innovation, building entry barriers, protecting firm-specific assets, competitive pricing, brand recognition and effective channel management. These traditional strategies, however, should be geared to achieve new strategic goals, such as building installed base and a network of complementary products, that are critical success factors in competing in a network-based industry.