Innovation and Competition in Standard-based Industries: A Historical Analysis of the U.S. Home Video Game Market

Abstract—This paper examines the competitive dynamics in a standard-based industry through a historical observation of the U.S. home video game industry. The paper focuses on the theo-retical issues of switching costs, installed base, and complemen-tary goods as critical factors of dominant designs and firm suc-cess in a network-based industry. Our analysis reveals multiple stages of technological innovations and changes of market lead-ership and industry standards during a relatively short history of the industry. The industry exhibits six generations of techno-logical changes in video game consoles and complementary prod-ucts, with each generation represented by a new set of competitors, dominant designs, and market leaders out-competing the leaders of the prior generation. Our analysis confirms the efficacy of tra-ditional tenets of successful strategic management in a network-based industry, such as the importance of technological innova-tion, building entry barriers, protecting firm-specific assets, com-petitive pricing, brand recognition, and effective channel manage-ment. 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 fac-tors in competing in a network-based industry. Index Terms—Innovation, network effects, standard based in-dustries, video games. I