Proprietary vs standard designs

Which designs are more capable of leading to profits: proprietary or standard? To a great extent PCs owe their phenomenal growth to standardization, which enable using single software application across systems from multiple vendors. The PC took an overwhelming lead in market share over the Macintosh because unlike PC design, Macintosh design was proprietary by intent.
Ironically, the company primarily responsible for standardizing PC design is IBM, which all through its history has believed in profitability through proprietary designs. By licensing its PC design to other vendors, IBM ushered in the era of IBM-compatible PCsÑan era still continuing. IBM's logic for departing from its traditional faith in proprietary designs was simple: Licensing the PC design to other vendors would increase PC population that would increase software development that would, in turn, widen PC utility and market, and ultimately bring more profit to IBM. Apple's logic for sticking to proprietary design was equally simple: Proprietary design would retain Apple's monopoly, preventing other vendors bringing into the market products identical to Macintosh and squeezing its profitability.

With about two decades in hindsight after the advent of the PC and the Macintosh, I wonder whose logic was right, IBM's or Apple's? IBM-compatibles that swamped the market increased software development, and widened PC utility and market, as IBM had expected. But competition forced IBM into the defensive. IBM was beaten badly in the IBM-compatible PC market, and even forced into the red for some years. Macintosh, with its widely-acknowledged superior design compared to PC, could never come anywhere close to the PC in the market share mainly because of lack of software.

Would IBM have been better off if it had kept its PC design proprietary? Would Apple have been better off if it had not kept its Macintosh design proprietary? Such questions cannot be answered with certainty. The current trend is to move away from proprietary to standard.

Apple, however, continues to believe in proprietary. Recently it criticized RealNetwork's move to allow people to buy and download songs from the music service Rhapsody and upload them onto iPod. Currently iTunes is the only legal online music service compatible with iPod. However, it is possible to use iPod to play songs from other music services with a tricky workaround. In a hostile reaction to RealNetwork's move, Apple has said that RealNetwork's Harmony technology enabling transfer will not work with iPod when Apple updates software. By sticking to its own closed digital music format, is Apple stunting the growth of digital music business, and also its own? Some observers say, yes.

I would like to make two points. First, according to the Yankee Group, of the five billion songs downloaded this year, 4.7 billion will be illegal. Thus, the gray market size is so large that music companies have small role in its growth.

Second, proprietary is not altogether passe. Take two industries, printer and video games. Printer companies are not making their cartridges interoperable, because proprietary cartridges enable enormous profits. If cartridge design becomes standard, competition will bring down prices. The profit on cartridges is so large and assured that printers can be sold at prices even below cost in the highly competitive printer market. Dell entered printers market in 2003. Michael Dell is reported to have said that the printer market is so attractive that he regrets not jumping into it earlier. What makes the printer market attractive is not the printer, but proprietary cartridges.

In the videogame industry, game developers write games for a large number of proprietary platforms, the two most popular being Microsoft Xbox and Sony's PlayStation 2. There is no move to standardize the platforms; yet the videogame industry is expected to grow at 44 percent from $23.2 billion in 2003 to $33.4 billion in 2008, according to market research firm, DFC Intelligence.


You can reach Kirtimaya Varma at kirti.varma@rbi-asia.com