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A four-way arms race

As the authors of some of the recent tech-related posts on this blog have expounded upon, a series of increasingly visible arms races have cropped up over the last few years as to which tech company will emerge the most popular across its respective fields. The accompanying article posits that the four foremost tech companies are Google (no surprise), Facebook (not any more shocking), Apple (fair), and Amazon (eh). Correspondingly, these companies are the most deeply enmeshed in these frequent skirmishes for preeminence in their respective divisions of technology. The author delineates the nature of these competitions as follows:

  • Companies establish exclusive dominance over some field (Facebook: social networking; Apple: phones, mobile apps, digital music/movies, mp3 players, operating systems, computers; Google: search engine, advertisements; Amazon: online sales for virtually anything, eReader).

  • Companies foray into foreign fields and simultaneously encroach on the well-established territories of the other companies.

  • The foraying company will create their product or service in such a novel way that when released, the company enjoys momentum that pushes it ahead of its hitherto uncontested competitor.

  • The competitor responds by developing its product further, and releases novel additions to that product or service, or alternatively copies a feature of the other product and improves upon it.

  • Each responds in turn, and a cycle develops that constantly accelerates.

From the vantage of consumers, this process is generally a boon, as the constant necessity for a company to improve its product and introduce innovative new features means that the resulting products are significantly better than they were when their company was uncontested. For instance, Facebook released “Video Calling” in response to Google Plus’s “Hangouts”, and both were received extremely well; as a result, Facebook’s chat feature is much more attractive. Conversely, when the upgrades or new features turn out to be busts, the competitors learn from the product’s failure and can modify their strategies accordingly.

As a consequence of this process, a high degree of cross-pollination is occurring between these companies: Amazon now sells music, Facebook is offering movie rentals, all companies but Facebook have their own tablets/eReaders, and Google has its own social networking site (this should not be news to any of you).

As is typical with arms races, these situations dispose themselves to complex games, as each company heavily considers the anticipated designs of its competitors when formulating its own strategy. If we simplify the game such that only two players are allowed, we can construct the following generalized table, where A is playing catch-up to B, assuming that the features are received positively when released (we’re talking about the titans here):

Player B
Continue improving same feature Develop new feature, and divert some of the work on the other feature
Player A Develop feature that other company already has, plus some addition 2,1 2,4
Develop new feature, but don’t develop feature that other company already has 3,1 4,6

If player A copies a feature of B, it will typically bundle in an extra feature to make it a compelling alternative, resulting in a marginally higher payoff for A. If A develops that same feature while B develops a new feature, B will have essentially the same feature A developed, plus an additional new feature, yielding a noticeably higher payoff for B. If B continues improving the same feature while A releases a new feature, A will generate more publicity and drive a higher payoff. When A and B produce a new feature, B already has the success of its initial feature, and now has the success of its new feature, which produces a slightly higher payoff than it does for A, which neglected to develop the same initial feature.

In this particular scenario, there is a Nash Equilibrium when both companies produce new features, which aligns with the proliferation of new features among these tech titans, as opposed to the systematic perfection of their current features. Of course, this table represents an extremely oversimplified scenario, so the payoffs are not perfectly representative of the realistic results.

To learn more about the four tech titans, go to:

http://www.washingtonpost.com/business/economy/four-titans-of-tech-are-racing-to-be-king-of-digital-age/2011/08/16/gIQA51i8JJ_story.html

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