Technological Leapfrogging: Lessons from the U.S. Videogame Industry

Abstract

In industries characterized by network externalities, the self-reinforcing effects of installed base and the availability of complementary goods can lead to a single (or few) firm(s) controlling nearly all of the market share in a product category. A new entrant may attempt to displace the incumbent standard by introducing a radically improved technology, "leapfrogging" the current generation, however it is argued here that a technological advantage alone is often not enough. To lure customers away from the existing standard, the new technology must somehow yield more value than the combination of value yielded by the incumbent technology’s functionality, installed base, and complementary goods. This paper develops a multidimensional framework of technology value components. This framework is then applied to data from case studies of three generations of competition in the U.S. video game industry to yield insight into what strategies a potential entrant can use to build actual, perceived, and expected sources of value to successfully leapfrog the incumbent, and what strategies an incumbent may use to defend its position.