The origins of Wintelism and the new dynamics of competition

During the 1990s, the terms of competition in the electronics industry have shifted away from the big final assemblers such as IBM and Siemens, whose past dominance was built through vertically integrated control of technologies and manufacturing. The character of the shift in market power is suggested in the advertisements of PC producers such as IBM, Toshiba, Compaq, or Siemens Nixdorf, whose systems are nearly identical and which emphasize components or software that have become  de fact market standards—“Intel Inside,” or “Microsoft Windows installed”—rather than unique features of their own brands. The pre-Wintel electronics industry was dominated by assemblers, i.e. systems producers who designed, marketed, and assembled the final product, with almost all value-chain functions carried out in-house, and principally within the producer’s home country. Such producers, e.g. GE, RCA and IBM, prospered with quite traditional advantages of scale and vertical integration. IBM dominated the computer segment of the electronics industry and extended its franchise into Europe and Asia in pursuit of new markets. Similar strategies produced dominant players such as Western Electric and Siemens in the telecommunications segment of the market.

Also starting in the 1960s, in the course of attempting to emulate IBM in structure and strategy, Japanese producers such as Matsushita and Hitachi began to overturn established American positions in the consumer electronics market. Similar to Toyota and other Japanese car manufacturers, they did so by applying lean production principles in order to innovate in traditional consumer electronics products with all solid-state televisions. As in car manufacturing, adoption of lean production techniques enabled Japanese electronics firms to create new and distinctive market segments by the late 1970s, such as the Walkman, VCR, and Camcorder. By the early 1980s, Japanese firms were poised to challenge US leadership in other electronic markets. Here too, however, the dominant market position still lay with the final product assemblers who controlled consumer product definition, the most important underlying component technologies, and usually both the supply and the distribution chains. Their competitive strength was the ability to manufacture high quality at consumer price points with some degree of product variety.

By the early 1980s, essentially all electronics product markets were dominated by large-scale producers such as IBM, Siemens, Matsushita, NEC, and Toshiba. They produced fully proprietary systems whose key product standards—i.e. the technical specifications that describe the system architecture and enable the pieces of the system to inter-operate as a whole and with each other—were either fully “closed” or fully “open.” A fully open standard is one in which the technical information necessary to implement the standard is in the public domain, fully available on a non-discriminatory and timely basis to anyone. This was the case with most consumer and many communications interface standards such as TV or fax broadcast standards. With the relevant technical information in the public domain, products such as TVs and radios built to such open standards became commodities in which scale, quality, and cost were the defining features of competition in highly contested markets.

By contrast, telecommunications and computer firms built to “closed” standards in which the relevant technical information was owned as intellectual property and not made available to anyone other than through legally permissible reverse engineering. IBM’s mainframe computers epitomized such proprietary, closed systems. Here, too, vertical control over technologies and manufacturing was essential, especially in the early stages of competition when new systems were introduced. But once established in the market, competition centered on developing an installed base of customers who could be locked in to a firm’s product line. In the open standards case, lock in was impossible; with all products built to implement the same standard, users could seamlessly switch between them. With closed standards, the costs of switching could be very high indeed, requiring, for example, rewriting an existing base of software and retraining all users. Large installed bases were decisive over time in these competitions, as all of IBM’s competitors discovered. Firms who had them had lower per unit costs for succeeding generations than the competition, since such costs (e.g. of development or marketing) could be amortized over more locked-in users. In sum,  with both  closed and open systems, vertical control over technologies and manufacturing was the key to market success. For closed systems, it was necessary to lock customers into proprietary standards; for open systems, it permitted firms to compete on implementation, quality, and price.

This era of proprietary systems built to open or closed standards lasted until the early 1980s. Throughout there were shifts in market structure, attacks on established incumbents, a myriad of new entrants, and, not least, significant policy interventions, including trade protection, antitrust actions and government procurement, that shaped market outcomes. Some of those changes, such as the emergence of independent (so-called “merchant”) component suppliers, began to undermine the logic of competition rooted in ownership and vertical control of technology. These firms created the evolutionary ground for the emergence of Wintelism.