industry dynamics and types of market … and markets.” as a result, market convergence often...
TRANSCRIPT
Paper to be presented at the DRUID Summer Conference on "Industrial Dynamics of the New and Old Economy - who is embracing whom?"
Copenhagen/Elsinore 6-8 June 2002
Theme A Technical Change, Corporate Dynamics and Innovation
INDUSTRY DYNAMICS AND TYPES OF MARKET CONVERGENCE
THE EVOLUTION OF THE HANDHELD COMPUTERS MARKET IN THE 1990s AND BEYOND
First Draft
Nils Stieglitz
Philipps University Marburg Universitaetsstr. 24
35032 Marburg (Germany) tel +49 (0)6421 282-6592 fax + 49 (0)6421 282-6595
May 9, 2002
Abstract: One recurrent theme in the discussion about the features of the ‘new economy’ is the claim that due to an increased rate of technological change and widespread deregulation, markets like telecommunications, computers, and entertainment are converging. After clarifying what is meant by market convergence, four different broad patterns of market convergence and their impact on industry dynamics are analyzed. The developed framework is then used to discuss market evolution and firm behaviour in the market for handheld computers.
Keywords: Technological convergence, corporate strategy, handheld computer industry
JEL codes: L1, L63
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1. Introduction One recurrent theme in the discussion about the salient features of the ‘new economy’
is the claim that due to an increased rate of technological change and widespread
deregulation, markets like telecommunications, computing, and entertainment are converging
and will one day evolve into a huge multimedia industry (e.g. Collis/Bane/Bradley, Economist
2000). What is surprising is that the notion of convergence is often used in this context, but
seldom clearly defined, making its meaning quite vague (Katz 1996). For example,
Choi/Valikangas (2001, 426, their emphasis) recently defined convergence indiscriminately as
the blurring of “boundaries between industries by converging value propositions,
technologies, and markets.” As a result, market convergence often means different things to
different authors.
The idea that markets converge goes back to Rosenberg (1976) and his study of the
emergence and evolution of the US machine tool industry. In the early 1800s, machines were
constructed in-house to the specific production needs of their end users. The degree of vertical
integration was therefore very high. A separate, specialized machine tool industry only began
to emerge in the mid-1800s. According to Rosenberg (1976), the main reason for this process
of vertical disintegration was the application of similar mechanical skills like drilling,
grinding, polishing, etc. to diverse final products. Rosenberg (1976) termed this process
technological convergence, since different industries increasingly relied on the same set of
mechanical skills. Industries which were apparently unrelated from the point of view of nature
and uses of the final product were very closely related on a technological basis. Examples for
these technologically convergent industries in 1800s are firearms, sewing machines, and
bicycles.
In evolutionary economics, Sahal (1985) and Dosi (1988) have developed similar
conceptions of technological convergence. They argue that certain technological paradigms
spread their effects over a range of industries and induce innovative activities in once stagnant
markets. An example is digital electronics and its impact on both the computer and
telecommunications industries (Hagedoorn/Duysters 1998, Rao 1999). From this perspective,
an important consequence of technological convergence is the broadening of the technological
base of large established firms (e.g. Cantwell/Fai 1999, Fai/Tunzelmann 2001). In order to be
able to adapt to technological change, large firms have to digest technological knowledge
increasingly developed in other industries but which has an impact on their businesses.
Furthermore, firms could use their broader technological base as a springboard for entering
new technologically convergent markets (Teece/Rumelt/Dosi/Winter 1994). Since
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technological competencies can be utilized in more than one industry, diversified firms
possibly have competitive advantages over their more focused competitors.
Not surprisingly, this idea figures prominently in the management literature on
corporate strategy and market convergence. Important early authors are Porter (1985) and
Hamel/Prahalad (1994), who argued independently that technological innovations and
political deregulation of product markets “blur” the boundaries of traditional industries.
Technologies (Porter 1985) and core competencies (Hamel/Prahalad 1994) can be exploited in
formerly different industries. At the same time, different existing products are becoming close
substitutes, since their functions are increasingly unified and bundled in innovative products
(Katz 1996, Yoffie 1997, Collis/Bane/Bradley 1997). Thus, from this point of view, industry
convergence not only implies the convergence of technologies but of products at the same
time. Furthermore, industry convergence can also lead to a convergence in complements. In
this case, previously unrelated products became complementary and tend to be used together
(Greenstein/Khanna 1997). The strategic response to this “new competitive landscape”
(Bettis/Hitt 1995) is an increased reliance on corporate networks and strategic alliances
(Gomes-Casseres 1996), and the migration and diversification of firms into new markets
(Reve 1990, Wirtz 2001).
Despite this common interest in the convergence of industries and technology, there
has been very little cross-fertilization between evolutionary economics and the strategic
management literature. The diversity of definitions and meanings of what market convergence
really means certainly does not help. Recently, Malerba (2002, 259) concluded his discussion
of sectoral systems of innovation by pointing out that
“even more work is necessary when the transformation of sectors involves not just
traditionally defined sectors […], but the emergence of new clusters that span
over several sectors, such as Internet-software-telecom, biotechnology-
pharmaceutical and new materials. Here, the analysis of sectoral systems has to
consider the integration and fusion of previously separated knowledge and
technologies and the new relations and overall dynamics among different types of
users and consumers, firms with different specialization and competencies, and
non-firms organizations and institutions and institutions grounded in previously
separated sectors”
The present paper contributes to these questions, in particular to the question of how
market convergence affects firm behaviour, innovative activity, and industry evolution. If
market convergence is to be more than a popular buzzword, the concept of market
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convergence needs more analytical clarity. Consequently, in the first section, four generic
types of market convergence are defined and related to the existing body of literature.
Building on evolutionary economics and industry life cycle theories, these four types of
convergence and their impact on market structure and firm behavior are discussed in the
second section of the paper. Specifically, it is asked what kind of effect these types have on a)
market entry, b) corporate strategy, and c) corporate alliances. In the third section, the
developed theoretical framework is applied to the analysis of the market for Personal Digital
Assistants (PDAs) and handheld computers in the 1990s and beyond. Three stages of industry
evolution are identified. In the formative stages in the early 1990s, industry evolution was
driven by complementary technological convergence. Following this convergence, the
industry entered a growth stage (mid-1990s to the end of the 1990s), which was characterised
by incremental innovative activities and rapid growth. Since the early 2000s, changes in the
competitive landscape of the industry are increasingly shaped by a convergence of different
products. Consequently, to fully appreciate the evolution of this particular industry, it is
necessary to take account of these different kinds of convergence. A fourth section concludes.
2. Convergence Defined If one is interested in a definition of market convergence, it is useful to reflect about
what is actually meant when talking about industries and, especially, markets. From an
economic viewpoint, a market is a locus of exchange. In order to understand the formation of
prices in a particular market, the relevant suppliers and demanders have to be identified
(Stigler/Sherwin 1985). This delineation of market boundaries is an important topic in
industrial economics, antitrust policy, and strategic management (Geroski 1998,
Pleatsikas/Teece 2001). Traditionally, markets are defined by the substitutability of the traded
products (Robinson 1969). In an influential book, Abbott (1955) argued that products should
be treated as substitutes if they satisfy the same want. In this vain, the demand theory
developed by Lancaster (1966) perceives a product as a bundle of multiple product
characteristics. Consumers do not derive their utility from the product as such but from the
embodied mixture of product characteristics. Substitutes are products that share common
characteristics, even if the exact mixture or specification of the characteristics varies.
Consequently, the boundary or width of a market (Lancaster 1979) is determined by grouping
products with similar characteristics. Moreover, to derive or increase the utility of certain
products it is required to jointly use other products, e.g. video recorder and video cassette.
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Products can not only be substitutes, but complements as well. Market definition has to take
this into account.
Besides this demand side approach to market definition, there is also a small but
growing stream of literature which tries to tackle the problem from the supply side. An early
attempt is Narver (1967). Building on Penrose (1959), he defined a market as a “supply
space” spanning firms with the similar resources and technologies. Integrating supply and
demand factors, Abell (1980) included the production technology in his conceptualisation of
market delineation. From a resource based view of the firm, Bettis (1998) claims that firms
compete against other firms that have similar resources, not just against firms producing
current product substitutes. Consequently, markets or industries should be defined by groups
of firms with similar resource bases. It is therefore possible to define a market from the supply
and from the demand side.
Dictionaries define convergence as the movement towards the same point or the
meeting of two elements. Applied to our discussion, this means that at least two existing
markets have to be effected by market convergence. Since markets can be defined by demand
or by supply factors, we can distinguish supply sided technological convergence from product
convergence on the demand side. Technological convergent markets produce different goods
and services with similar sets of technological capabilities. Convergent markets on the
product level, on the other hand, offer substantial substitute or complementary product
characteristics, but employ different technologies. Thus, markets can also converge either as
substitutes or as complements. Technologies can be substitutes and complements, too. In the
former case, an existing technology is replaced with another, while in the later case two
formerly unrelated technologies are used together.
To sum up, we can distinguish four generic types of market convergence (Figure 1).
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Figure 1: Four generic types of market convergence.1
Note that market convergence, whether technological or product convergence, is an
inherently dynamic process with three distinct stages. In the first stage, two existing markets
are unrelated from the supply and demand side. The process of convergence is then triggered
by an outside event, for example the invention of new technologies or political deregulation.
In the second stage, markets converge, implying on-going changes in market structures and
firm behaviour. Finally, in the third stage, the markets are related from a technological or
product market perspective, and market structures stabilize.
To characterize each generic type of market convergence in more detail, we employ a
framework advanced by Saviotti/Metcalfe (1984) and Saviotti (1996). They have developed
an approach which integrates the supply and demand characteristics of products and markets
in a common conceptual framework.2 A particular product can be represented by its
technology and product characteristics respectively (Figure 2).
1 For a similar representation, see Pennings/Puranam (2001). However, their treatment differs from our discussion on a conceptual level. In contrast to our approach, Pennings/Puranam (2001) treat consumer preferences as endogenous, and interpret complementary product offerings solely as the bundling of products. Likewise, in their framework technological innovations only have an impact on the supply side, while deregulation and societal changes lead demand side convergence. 2 See also Gallouj/Weinstein (1997) for an extension of the concept to service industries.
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Figure 2: Technology and product characteristics (Source: adapted from Saviotti 1996)
On a basic level, the technological capabilities X1, X2,…, XN contain the knowledge
required to transform inputs and labour into a final product. This product exhibits a mixture of
certain characteristics C1, C2,…, CN which are used by the buyers to satisfy basic wants. As a
result, the product characteristics offered by a firm depends crucially on its technological
capabilities. From this starting point, it is now possible to define different types of
convergence, since the interrelationship between technology and product characteristics can
be made explicit.
2.1 Technological Convergence
In the case of technological convergence, unrelated product markets become related
from a technological point of view, because they begin to share the same technological
capabilities. As already mentioned, two principal causes for technological convergence can be
distinguished: technological substitutes and technological complements.
2.1.1 Type I: Technological substitutes
In this case, two markets exist which use different technological capabilities to
produce different products A and B. These products do not share any product characteristics
(Figure 3a).
A process of technological convergence is now triggered by the invention of a
technology XZ. This technology can be applied both in the production of product A and B,
and it is thus a technological substitute for older technologies in these markets. Consequently,
this process of technological convergence is characterized by the development and diffusion
of the new production technology and the parallel learning processes of the technological
users. Eventually, the older technologies XM and XM+1 will be replaced, and the former
unrelated markets become related from a technological point of view. In a pure case, as
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depicted in Figure 3a, XZ is a process innovation only. The main effect is to lower the
production costs of the two products. The product characteristics are not affected.
Empirically more relevant is the case in which process innovations induce changes in
quality of products. In many cases, process innovations not only make the production of
existing goods cheaper, but transform the trade offs associated in the bundling of product
characteristics, too (Rosenberg 1982). Process and product innovations are then
interdependent. Additionally, the new technology may also lead to changes in other
technologies. Thus, the initial invention, development, and diffusion of XZ leads to a complex
innovation process, in which the technological capabilities and products in the two markets
are constantly modified and improved. In this case, the technological convergence is
characterised by changes in the established market structures, since the process is now also
driven by product innovations.
Figure 3: Types of technological convergence
This generic type of market convergence is identical to Rosenberg’s (1976) classic
treatment of technological convergence. As described above, industries like firearms (“A”)
and sewing machines (“B”) became technologically convergent, since broad mechanical
capabilities like precision grinding (“XZ”) replaced older, more specialized technologies
(“XM”, “XM+1”) in those markets. This kind of technological convergence also lies at the heart
of the discussion surrounding the “new economy”. The productivity gains of the US economy
in 1990s are often tied to the diffusion of digital technologies in different industries, like
consumer electronics, financial services, telecommunications, and many more
(Jorgensen/Stiroh 2000). Accordingly, these technologies have been termed “general purpose
technologies” (Bresnahan/Traitenberg 1995, Helpman 1998, David/Wright 1999). Other
historical examples of general purpose technologies include the steam engine, rail transport,
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and electric power. General purpose technologies share the following characteristics
(Lipsey/Bekar/Carlaw 1998). They are
(1) applicable across a broad range of uses,
(2) offer a potential for use in a wide variety of product and processes,
(3) offer a wide scope for improvement and elaboration,
(4) and exhibit strong complementarities with existing and potential new technologies.
The former points highlight the technological convergence of markets, as defined above,
while the later two underscore the importance of subsequent innovations in products and other
existing technologies which can be induced by the new general purpose technology.
2.1.2 Type II: Technological complements
A different type of technological convergence, on the other hand, involves existing
technologies that are combined to develop entirely new products (Figure 3b). In other words,
existing technologies are fused together to create new technologies and products (Kodama
1992).
In this case, two markets exist which produce two separate products A and B with
different technological capabilities. A process of technological convergence is triggered by
the creation of new technology XZ that opens up the possibility to combine the existing
technologies XM and XM+1 to produce the new product C. Alternatively, the combination
could also be induced by regulatory changes. In this case, it has been technically possible to
combine the technologies, but it was not attempted due to government regulations.
This type of technological convergence is influenced by two learning processes. First,
since the product C is an entirely new product, an entrepreneurial process of trial and error
drives the technological convergence, since firms and buyers have to find out which basic
product characteristics constitute the product and how value is derived from it (Utterback
1993, Adner/Levinthal 2000). Second, the existing technological capabilities have to be
amended and developed in order to be able to modify and enhance the quality of the new
product. This process of technological learning is a significant force if technological
convergence is triggered by an entirely new technology XZ. Furthermore, there can be
important spill-over effects into the existing markets as well (Markides/Williamson 1995, Fai
2001).
An example of this complementary technological convergence is the emergence of the
market for handheld computers in the early 1990s. Partly triggered by new advances in
handwriting recognition technology (“XZ”), companies from different industries like
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telecommunications, computers, and consumer electronics combined different technologies
(“XM”, “XM+1”) to offer the first handheld computers (“C”).3
2.2 Product convergence
In the case of product convergence, established markets become related from a
demand point of view. They begin to share similar or complementary product characteristics,
leading to a convergence in substitutes or complements.
2.2.1 Type III: Product convergence in substitutes
A product convergence in substitutes leads to a greater substitutability of formerly
unrelated products as they increasingly share the same characteristics. As sketched out in
Figure 4a, a product “B” is changed to also include the new feature CM, making it a (partial)
substitute of product A. Once again, this generic type of market convergence is often sparked
by a new technological capability (“XZ”) which enables the changes in product
characteristics. Another possible cause is the deregulation of these markets, making it possible
to integrate a wider range of characteristics into the final product.
Independent of what causes the process, the speed and the pattern of market
convergence critically depends on the substitutability of the products. Products are closer
substitutes the more product characteristics they share. Since the potential array of product
characteristics depends on the underlying technological capabilities, the convergence in
products could also lead to changes in technological bases of the involved firms. Similar
product characteristics are frequently based on similar technologies, and we hypothesise that a
product convergence of substitutes is often followed and paralleled by technological
convergence. In this case, increasing competition between the two markets forces firms to
expand the product characteristics by incorporating features of the other market’s product.
Correspondingly, besides having to assimilate the new technology XZ, firms of both markets
also have to adopt existing technological capabilities of the other market. In an extreme case,
both markets merge into one larger market with very similar technologies and product
characteristics.
3 On a more aggregate level, Andersen (1998) finds in her analysis of the long term evolution of technological trajectories from 1890 to 1990 that recent technological progress has been shaped by the combination of diverse technologies into more integrated technological systems. Thus, it appears that the long term trend is fundamentally shaped by this type of technological convergence.
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Figure 4: Types of Product Convergence
Examples for this type of market convergence are manifold. For years, the discussion
about a multimedia industry has centered around digital broadband TV, and it has been
predicted that PCs and TVs will one day evolve into close substitutes
(Baldwin/McVoy/Steinfield 1996). Broadband TV allows to access a wide range of services,
like Video/Music-on-Demand, games, electronic shopping, etc. In the past, most of these
services could only be accessed via PCs, and there was no substitutability between TVs and
PCs. According to industry commentators, this might change with the advent of broadband
technology. Thus, the new broadband (“XZ”) technology has the potential to integrate certain
product features into a TV set like Internet access, electronic shopping, and Music-on-
Demand, which were formerly only accessible via a PC (“CM”).
2.2.2 Type IV: Product convergence in complements
Finally, in the case of a convergence in product complements, existing unrelated
products become complementary to one another. In the past, both products have been used
independently, and there was no connection between them from a demand perspective. Once
again, this process of market convergence is caused by a new technology which opens up the
potential to jointly use the two existing products (Figure 4b). In other words, the products are
now complementary to each other, delivering a higher value if consumed together.
Unlike the case of product convergence in substitutes, convergence in complements
does not lead to technological convergence. While a prerequisite for their joint use, the new
technology XZ is not needed to produce the existing products A or B individually. Its task is to
provide the “glue” for the two existing products. What is needed, however, is some kind of
standard that warrants the complementary use of the products. Consequently, product
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convergence in complements is also being shaped how and what kind of standards are being
set and modified.
An example of this type of product convergence is the development of the computer
language HTML and the introduction of graphical browser programs. These new technologies
(“XZ”) allowed private households to easily access Internet services via their PCs (“A”) and
existing telephone lines (“B”). Formerly, phones and PCs were two distinct products which
served different needs, e.g. “data processing” and “communications”. It was only after the
advent of the Internet that computers and telephone lines were perceived as complementary
products by private consumers.
The defined four cases of market convergence are fairly generic, and they represent
abstract “ideal types” in the sense of Max Weber (1988). Empirically, processes of market
convergence are paralleled by other innovation activities which have nothing to do with
convergence. In addition, different types of market convergence may be present at the same
time. For instance, as already discussed, product convergence in substitutes often brings about
a process of technological convergence. But the four generic types nevertheless allow the
identification and disentanglement of different drivers of change in convergent markets.
Furthermore, they provide a basic framework to structure and to explain broad patterns of
market convergence. The next section discusses these patterns in greater detail.
3. Industry Dynamics and Types of Convergence
3.1 Systems of Innovation and Firm Behaviour - A Conceptual Framework
In recent years, several authors have developed the related concepts of technological
regimes and of sectoral systems of innovation to organize different determinants of industrial
dynamics (e.g. Nelson/Winter 1982, Dosi/Malerba/Orsenigo 1994, Dosi 1997, Marsili 2001).
Malerba (2002, 250) defines a sectoral system of innovation and production as
„a set of new and established products for specific uses and the set of agents
carrying out market and non-market interactions for the creation, production and
sale of those products.”
A sectoral system is shaped by four main factors, namely (1) technological
opportunities, (2) cumulativeness of knowledge, (3) sources and accessibility of knowledge,
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and (4) appropriability of innovative rents, and we discuss each in turn (Malerba/Orsenigo
2000, Marsili 2001, Malerba 2002):
(1) Technological opportunities shape the incentive to invest into R&D. High technological
opportunities are present if new technological knowledge is applicable to a wide variety of
products or leads to large increases in the performance or quality of a product. Sectors with
high technological opportunities are characterized by higher investments into R&D and a
higher rate of innovations.
(2) The condition of cumulativeness of knowledge captures an important property of
evolutionary theories of economic change and its underlying theory of the firm (Nelson
1995). The knowledge base of a firm is the outcome of firm-specific and path-dependent
learning processes (Rosenberg 1976). Therefore, the knowledge base constrains the strategic
behaviour of firms, and it is an important source for first mover advantages and performance
differences between firms (Teece/Pisano/Shuen 1997). Because of differences in their
knowledge bases, firms differ in their ability to exploit the technological opportunities
(Nelson 1991).
The cumulativeness of knowledge is high, and learning is more rapid, if new knowledge
builds incrementally on the existing body of a firm’s knowledge. Cumulativeness is low, on
the other hand, if firms have to learn entirely new pieces of knowledge.
To add analytical clarity, the knowledge base of the firm can be separated into two broad
domains (Teece/Rumelt/Dosi/Winter 1994, Granstrand 1998). The first domain includes the
knowledge about the underlying technologies. These represent the technological capabilities
of the firm. A different knowledge domain consists of the specific knowledge about the
market and its products, its users, competitors, and applications. These are the marketing
capabilities of the firm. Teece (1986) considers these capabilities as complementary to the
technological capabilities since they enhance the value of an innovation.
(3) Besides cumulativeness, the sources and accessibility of knowledge are a second
important determinant of how easy it is to gain access to technological opportunities. Sources
of knowledge can be, for example, external sources like universities (Rosenberg 1982),
internal sources like users, suppliers, competitors, but also external firms active in other
sectors (Hippel 1988). The accessibility of knowledge depends on the codification of
knowledge, and the associated spill over effects. Important mechanisms for gaining access to
tacit knowledge are strategic alliances and other inter-organizational arrangements.
Furthermore, existing technological capabilities can also be accessed if they are embodied in
off-the shelf products (Demsetz 1991).
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(4) The appropriability conditions influence how difficult it is for an innovator to capture the
innovation’s profit. Appropriability is influenced, among other things, by the level of
competition and the accessibility of knowledge. Low appropriability conditions are present if
new knowledge is easily accessible by competitors, or the level of competition is high. If the
potential appropriability is high, technological opportunities are rapidly exploited, leading to
an upsurge in innovative activity.
These factors describe the important determinants of innovations and industry
structure. The industry life cycle theories offer a dynamic conceptualisation of these four
conditions, highlighting their evolution over time (Klepper 1997). These theories are therefore
an important backdrop for our discussion. But to capture how firm behaviour is influenced by
market convergence, additional dimensions are needed.
A first question concerns the corporate strategy of the established firms that are
involved in the process of market convergence. Broadly, they either have the option to focus
their business activities or to diversify into new markets. Taking up the above distinction
between domains of technological and marketing capabilities, it is possible to distinguish
between technological and product market diversification (e.g. Gambardella/Torrisi 1998,
Granstrand 1998, Piscitello 1998). Consequently, we can discern four different strategic
options on the corporate level (Figure 5).
Besides the behaviour of incumbent firms, it is also possible to discuss the role of new
entrants. These are firms that have previously not been active in the converging industries.
The threat of entry is especially high if, due to a low cumulativeness of technological
knowledge and easy accessibility of complementary capabilities, the technological and market
barriers to entry are low. In this case, new entrants are formidable competitors and an
important source of innovations.
Figure 5: Options of corporate strategy
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Finally, a key aspect of firm behaviour associated with market convergence is the
formation of interorganizational arrangements. It is often claimed that market convergence
leads to an upsurge in the number of strategic alliances and corporate networks
(Harianto/Pennings 1996, Duysters/Hagedoorn 1998, Santangelo 2000, Dittrich 2001). To
broadly describe the rationale for the formation of an alliance, we distinguish the direction
and the motivation of an alliance. Firms can form alliances vertically with suppliers and users,
or horizontally with competitors or firms in other markets. The motivation for an alliance is
either the creation of new capabilities or the joint use of existing capabilities (March 1991,
Mowery/Oxley/Silverman 1996, 1998).
3.2 Technological Convergence
3.2.1 Type I: Technological substitutes
If market convergence is characterized by a convergence in technological substitutes,
then technological opportunities are usually high. The reasons for this are two-fold. First, the
new technology can be exploited in many industries. Consequently, the basic innovation leads
to a variety of process innovations in different markets. The second reason is the effect on the
rate of product innovations in the established markets. Often, new processes will not only
bring about reductions in production costs but increase the likelihood for product
improvements as well. This critical link between process and product innovation is stressed in
the current debate about general purpose technologies, and it was already discussed in
Rosenberg’s (1976) classical study of the machine tool industry. A consequence for the
established market is an upsurge in competition, since the new technology raises the
likelihood of cost cuts and product innovations.
Technological convergence is often triggered by new technologies that solve older
problems; the cumulativeness of technological knowledge is as a result usually low. Like the
term “substitutes” suggests, older technological capabilities in the existing markets are
superseded by the new technology. In terms of Tushmann/Anderson (1986), technological
substitutes are competence-destroying. As a reaction, incumbent firms in the existing markets
have to update their technological knowledge base. Furthermore, the cumulativeness of
marketing knowledge associated with the new technology is low, because potential users of
the technology are the established firms in the existing markets. On the other hand, changes in
the knowledge about consumers, applications, and competitors in the existing markets are
cumulative. The complementary downstream capabilities of the firm are thus largely
unaffected by this type of market convergence.
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High technological opportunities and a low cumulativeness of technological
knowledge imply a high rate of entry upstream of the existing markets. The entry into
upstream markets is fostered by the low cumulativeness of marketing knowledge. The high
rate of entry into upstream activities eventually leads to a creation of a specialized supplier
industry that serves the existing markets. This process of market entry and of vertical
disintegration is, for example, described by Rao (1999), Fransman (2000), and Gaffard/Krafft
(2000) for the telecommunication industry. However, entry into the existing product markets
is made more costly and more risky by the downstream capabilities of the incumbent firms.
The process of market convergence also has an effect on the corporate strategy of the
existing and the new firms. For existing firms, a major challenge is to adapt their knowledge
bases to the new technology. They are thus forced to diversify their technological knowledge
base to keep up with the process of technological substitution. Many established firms
consequently react by pursuing a multitechnology strategy. While broadening their
technological capabilities, they focus their product market activities on established markets
(Gambardella/Torrisi 1998, Fai/Tunzelmann 2001). In contrast, a diversification strategy is
much more risky, even if new technological capabilities can be exploited in many markets.
The firms must not only learn and develop the new technology, but they also have to build up
the complementary marketing capabilities. Corporate strategies of new firms, on the other
hand, differ. Entrants are likely to pursue a focus strategy, concentrating on the development
of a specific application of the new technology for a distinct group of users. They are thus
specialized suppliers (Pavitt 1984). Successful suppliers are able to pursue a multimarket
strategy, exploiting their technological capabilities in a range of existing downstream markets.
An important mechanism to gain access to and to develop the new technology is the
formation of strategic alliances. They are especially vital if innovations in the new technology
persist, and the new knowledge is not readily accessible through off-the-shelf products. In this
case, established firms and suppliers form vertical alliances to create new technological
knowledge. An important outcome is the broadening of the established firm’s technological
knowledge base, and vertical alliances are for that reason an essential stepping stone of a
multitechnology strategy.
3.2.2 Type II: Technological Complements
In contrast to the case of convergence in technological substitutes, the technological
opportunities of technological complements are more limited. The driving force is the fusion
of existing technologies into novel products, and technological changes are usually confined
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to the new emerging market. Only if significant new technologies are developed for the new
markets, and these spill over into the existing markets, technological opportunities are higher.
This process of market convergence builds on existing technological capabilities, and
the cumulativeness of technological knowledge is high. The same does not apply to demand
and marketing capabilities. The new market implies new consumers, new applications, and
new competitors (Adner/Levinthal 2000). In other words, firms have to explore by trial and
error how potential consumers derive value from the product characteristics and which
mixture and interactions of characteristics constitute a dominant design
(Christensen/Suárez/Utterback 1998). Because of this fundamental learning process, the
cumulativeness of marketing knowledge is low.
Since established firms already have parts of the technological capabilities needed to
enter the emerging markets, they pursue a diversification strategy. The main entrants into the
emerging markets are consequently the established firms from existing markets. In contrast,
the entry of entirely new firms is low, because they lack the technological capabilities. Only if
these are accessible easily, for example through off-the-shelves products, then there is a
higher rate of entry. In this case, the low cumulativeness of marketing knowledge and the
learning process associated with the emergence of a dominant design opens a window of
opportunity for entrants. In this case, the technological capabilities of incumbent firms are not
an important first mover advantage anymore. Even more so, the incumbent’s early designs are
often framed by past experiences in the established markets, and this can hamper the trial and
error process. In other words, the local search processes in the new markets are still
constrained by the marketing capabilities that applied to the old market. In the new market,
these capabilities can be more a liability than an asset.
A crucial problem for established firms and entrants is that they only command parts
of the necessary technological capabilities, because the new product is the outcome of the
fusion of existing technologies previously employed in different markets. Firms have to
access the complementary technologies if they want to enter the market. A main mechanism
for gaining access to these complementary technological capabilities is through horizontal
alliances with established firms from other markets. Since alliances are formed to access
existing technologies, their impetus is the joint use of existing knowledge. Alternatively, firms
can also merge or acquire firms to integrate the complementary technologies.
18
3.3 Product Convergence
3.3.1 Type III: Convergence in Substitutes
The technological opportunities in the convergence of product substitutes are low,
since the effects of a new technology are closely confined to the existing markets. New
technologies enable innovative changes in the characteristics of existing products. While
competitive pressures mount for the reason that these products evolve into substitutes, the
knowledge bases of the existing firms nonetheless allow the absorption of new technological
knowledge. The cumulativeness of technological knowledge is usually high, and the same is
true for the marketing capabilities of the established firms in the two existing markets,
because the existing products, applications, and dominant designs are the starting points for
product innovations. High uncertainty, however, exists about the new competitors and new
groups of customers, since the boundaries of the markets are “blurring” in the wake of new
product features (Greenstein/Khanna 1997).
The rate of entry by new entrants is low, because the incumbent firms can apply their
existing knowledge bases to cope with market convergence. They have all the capabilities to
successfully deal with the threat of entry, and the process of convergence is thus more driven
by their competitive actions than by the entry of innovative entrants. The incumbent’s
strategies are either focus or diversification. In the former case, firms concentrate on serving a
niche market. The creation of new knowledge is closely restricted to their existing
technological and marketing knowledge, and they passively adapt to the convergence process.
A more active role is played by the diversifiers. These firms’ competitive strategies are the
fundamental driver of this type of market convergence. They are vigorously seeking to
expand product characteristics and to extend their market reach beyond their traditional
industry boundaries.
In view of the fact that product convergence in substitutes often requires the adoption
of the other market’s technological capabilities, horizontal strategic alliances are an important
method to access these capabilities and jointly use the existing knowledge. Also, the
magnitude of mergers and acquisitions is increased, since diversifiers can rapidly expand their
technological base and market reach by acquiring other established firms in the “other”
market.
19
3.3.2 Type IV: Convergence in Complements
The technological opportunities of a convergence in complements are generally high.
Like in the case of technological substitutes, the reasons are, first, the innovation avenues
opened by the new technology itself, and second, the potential changes in the product
characteristics in the existing markets. An illustrative example is the convergence in
complements of telecommunications and personal computers through Internet technologies.
Here, the complementarity of PCs and telecommunications was not only made possible by
new hard- and software, but tempted alterations in the characteristics of PCs (their hardware
and especially software) and of telecommunication services (Baldwin/McVoy/Steinfield
1996, Collis/Bane/Bradley 1997).
Since entirely new technologies often initiate the process of convergence in
complements, the cumulativeness of technological knowledge is low. In contrast, the
cumulativeness of marketing knowledge is often high, since customers and new applications
are tied to the existing products. Still, incumbent firms are often slow to respond to the new
technological opportunities. This opens up the possibility of entry for new entrants. As a
result, the rate of entry by new firms is high. Entrants pursuit a focus strategy, concentrating
on the development of the new technology and new complementary services. Once again, this
can be illustrated by the advent of the Internet, and the subsequent emergence of an “Internet
industry”.
The same is true for incumbent firms, since the gains from diversification are limited.
They can not exploit their technological base in the emerging new industry or in the other
established industry. More common than outright diversification are horizontal alliances
between incumbent firms and new entrants. These are often knowledge using, because the
new entrants can profit from the marketing capabilities of the established firms, while
incumbent gain access to the new technologies developed by the entrants. Incumbent and new
firms have a mutual interest in an expanded market due to the new complementarity of
products. A very important motive for the formation of knowledge using alliances in this type
of market convergence is the setting of standards that govern the interfaces between the
complements (Katz 1996,Yoffie 1997).
20
3.4 Patterns of Market Convergence
The following table sums up the discussed broad patterns of market convergence. This
theoretical framework is applied in the next section to the evolution of the Personal Digital
Assistant and handheld computer market in the 1990s.
Type of Market
Convergence
Pattern of…*
Technological
substitutes
Technological
complements
Product substitutes Product
complements
Dominant Type
of Innovation
Process Innovation Product Innovation Product Innovation Product Innovation
Technological
opportunities
High Low Low High
Cumulativeness
- technology
- demand
- Low
- Low
- High
- Low
- High
- High
- Low
- High
Threat of New
Entrants
High Low Low High
Corporate
Strategy
- Multitechnology
(incumbent)
- Focus (entrants)
- Diversification
(incumbent)
- Focus (entrants)
- Focus
- Diversification
- Focus
Alliances
- direction
- motivation
- vertical
- knowledge creating
- horizontal
- knowledge using
- horizontal
- knowledge using
- horizontal
- knowledge using
Example Machine Tool industry
Personal Digital
Assistants
PCs versus TVs
Internet (PC, Online
Services)
Table 1 Patterns of Market Convergence
*Accessibility and appropriability conditions are very important building blocks of sectoral systems of innovation, and they have a major impact on the process of market convergence. Nevertheless, these conditions are idiosyncratic, and a stable relationship between the generic types of convergence and these conditions does not exist.
21
4. Market Convergence and the Evolution of the Handheld Computer Industry
A handheld computer or Personal Digital Assistant (PDA) is a compact, palm sized
computing device. One of it’s defining product characteristics is the user’s ability to hold the
device in one hand while entering data at the same time. Today, input devices are either small
keyboards or stylus-based touch-screens with handwriting recognition. Other key product
characteristics are mobility, an expandable set of programs and applications, and the ability to
communicate with other devices like personal computers, fax machines, and cellular phones.
A PDA’s hardware consists of a microprocessor, solid-state memory, a liquid crystal display
(LCD), an input device, batteries, and various input/output ports and extension slots. The
software consists of an operating system and applications which are often stored permanently
in the Read-Only memory (ROM) or are available on cartridges and extension cards.
In the following case study4, it is shown how the evolution of the handheld computer
market was affected over time by three different types of market convergence. Actual market
processes roughly correspond to the broad patterns identified in the theoretical section of the
paper.
4.1 Technological complements and the search for a dominant design: 1984 to 1996
The early years of the handheld computer market were shaped by the fusion of
complementary technologies which had their roots in different industries. For example, LCD
displays and power management technologies emanated from the consumer electronics
industry, operating systems, memory chips, and handwriting recognition technologies from
computers, fax and paging technologies from telecommunications, and semiconductors from
computers and consumer electronics (Figure 6). Early market dynamics was thus driven by a
convergence in technological complements.
4 The data for the case study has been collected from public sources like press releases, business magazines, and industry publications. In addition, it builds and extends on earlier case studies of the PDA market (Bayus/Jain/Rao 1997, Yoffie et al. 1997, Gomes-Casseres/Leonard-Barton 1997, Wegberg 1998). A fully referenced version is available from the author upon request.
22
4.1.1 Early Experiments: 1984-1992
The first handheld computing device sharing some of the characteristics of a PDA was
introduced by UK software company Psion in 1984 (Potter 1998).5 The Organiser was build
around a 8-bit Hitachi microprocessor, a 16 character LCD display, a tiny keyboard, and an
operating system developed by Psion. It featured a clock, simple calendar, math functions,
and a database with a search function. With the optional Science Pack, the Organiser was
capable of being programmed in its own simple computer language. The product was a
modest success and until the early 1990s, Psion sold over 500,000 units of the Organiser and
its successor, the Organiser 2.
Figure 6 Convergence in complementary technologies in the handheld computer market
The Organiser was basically a programmable calculator with a database and a simple
calendar. Early imitators were suppliers which had been active before in the market for
handheld calculators. In 1988, the Japanese consumer electronics companies Sharp and Casio
entered the market with Organiser clones that later evolved into the Wizard and Boss
electronic organizer series respectively. Both companies had commercialized early prototypes
of handheld computers in the beginning of the 1980s. Sharp had pioneered the development of
LCD displays in 1970s, and was the largest supplier of LCDs in the late 1980s. The Wizard
electronic organizers were based on LCD displays and semiconductors originally developed
for Sharp’s long-standing product line of calculators. The company could thus draw on its
existing technological capabilities to develop the Wizard. Casio, as a diversified electronics
company, was able to draw on its experiences in calculators, watches, and handheld LCD
television receivers. Early imitators were also other Japanese and US consumer electronics
companies like Seiko, Selectronics, Radio Shack, Rolodex, Royal, and Zenith. Despite the
5 A summary of major entries (and exits) into the handheld computer industry can be found in the appendix.
23
number of market entries, Sharp and Casio quickly gained nearly 90 percent of the market
share for electronic organizers worldwide (1991), largely confining Psion’s customer base to
Europe.
Early electronic organizer models were stand-alone, non-programmable devices, with
rudimentary organizing functions like agenda, contacts, alarm, and note taking. A 1991
product survey by Consumer Reports (1991) described them as a cross between a pocket
calculator and a laptop computer. But the electronic organizers were not true computers, since
they were not able to run any other programs and applications, and their build-in features
were inspired by pen and paper organizers like Filofax. In 1989, two products were launched
that promoted the concept of a “palmtop computer”. These palmtop computers were supposed
to be more compact and mobile substitutes for laptop computers. The Portfolio was
commercialized by hardware computer supplier Atari and introduced to the European market
in 1988. The Portfolio had been designed and licensed to Atari by UK company Distributed
Information Processing (DIP), a Psion spin-off. In 1988, the US company Poqet Computer
Corporation was founded in the US by former Fairchild, Texas Instrument, and DIP
employees. In 1989, Poqet introduced the powerful, but high-priced Poqet PC. The Portfolio
and Poqet PC both were full-fledged MS-DOS compatible handheld computers built around
an Intel-licensed 80C88 microprocessor using off-the-shelf products in a highly innovative
way. Despite much praise from industry journals, especially for the Poqet, both products were
only very modest commercial successes.
An important introduction into the handheld computer market was the HP 95 LX that
Hewlett-Packard shipped in 1991. In just 16 months, HP had developed a handheld computer
which heavily built on its existing technological capabilities, especially in computing and the
design of scientific calculators. Hewlett-Packard had pioneered the scientific handheld
calculator in 1973 and had developed an early prototype of a handheld computer, the HP 75C,
in 1982. The HP 95 LX was based on Intel’s 8086 microprocessor and ran the MS-DOS
operating system. Besides rudimentary organizing functions, key features were a version of
Lotus’ spreadsheet software and an optional connectivity pack designed by Traveling
Software that linked the 95 LX to a desktop computer. The HP 95 LX was a modest
commercial success, and in the next three years, over 390,000 units were sold. In Europe,
Psion launched the Psion Series 3, a major revision of the Organiser, featuring organizing
functions, computing capabilities, and Psion’s own proprietary OS. The Series 3 was designed
with the help of, among others, microprocessor supplier NEC. In next year, Sharp introduced
the PC 3000. It was the result of an alliance with DIP. Like DIP’s Portfolio design, the PC
24
3000 was based on a 80C88 microprocessor, and it ran DIP’s proprietary operating system
and applications.
Thus, in the early 1990s, two distinct segments in handheld computer industry existed.
The larger sub-market for electronic organizers was dominated by consumer electronics
companies Casio and Sharp, while in the smaller sub-market for palmtop computers Hewlett-
Packard, Psion, and Poqet were the leading suppliers. The large technologically diversified
companies Casio, Sharp, and Hewlett-Packard were able to draw on their technological in-
house capabilities to develop their handheld products, while entrants like Psion, DIP, and
Poqet relied on off-the-shelf products and, increasingly, on knowledge-using alliances.
Furthermore, while established firms choose to diversify, entrants focused their activities on
the emerging market.
Widespread adoption of handheld computers, however, failed to materialize. All these
early models relied on tiny keyboards that made entering data a slow and cumbersome
process. Industry observers argued that the user interface was the key problem of handheld
computers, and a major obstacle to mass market acceptance. The technological problems
surrounding the user interface were to act as a focusing device for further innovations in the
market. Incidentally, pen-based computing with handwriting recognition was predicted to be a
major new breakthrough technology for PC computers, and GriD, a Tandy division, had
introduced one of the first pen-based computer, the GRiD Pad in 1988. In 1991, Canon, IBM,
NCR, and Toshiba had announced plans to bring pen computers to market, and venture
capitalists financed start-ups developing pen-based computing technologies like GO and
Momenta. And following the path paved by Apple’s MacOS, software companies like
Microsoft, GeoWorks and General Magic were developing graphical user interfaces (GUIs)
that simplified user interaction. Thus, in the early 1990s, new technological opportunities
were opened by these innovations.
At the same time, new communication hardware like pagers and cellular phones were
introduced, while older technologies like fax machines evolved into mass market products.
New communication services like electronic messaging, and proprietary information networks
like for example CompuServe and AOL were brought to market. Demand for these innovative
communication products was steadily increasing. Additionally, the technological advances in
consumer electronics and computing continued rapidly, allowing for the development and
introduction of new technologies like CD-ROM and and DVD and the miniaturization of
existing technologies and products.
25
Therefore, the stage was set for a range of product innovations in handheld computing,
fueled by the advances in technologies as diverse as telecommunications, computers, and
consumer electronics. In 1992, Apple, AT&T, and Tandy announced their entry into the
handheld computer market. In his product announcement speech, Apple CEO John Sculley
coined the name “Personal Digital Assistant” in early 1992. In next two years, established
companies from different markets like Amstrad (consumer electronics), IBM (computer
hardware), BellSouth (telecommunications services), Sony (consumer electronics), and
Motorola (computers, telecommunications hardware and services) brought to market different
PDA models. But by 1998, all these entrants had left the handheld computer market.
4.3.2 The Rise and Fall of the Personal Digital Assistants: 1992-1995
During the next years, incumbents Hewlett-Packard, Sharp, Casio, and Psion
continued to extend their products, adding new technologies and features. In 1993 and 1994,
seven major new handheld computers were brought to market by Amstrad, Apple, AT&T,
Tandy, Motorola, Sony, and IBM. The new entrants heavily relied on strategic alliances to
develop and market their products. Alliances were especially important if the product was
based on new technologies (Gomes-Casseres/Leonard-Barton 1997). However, knowledge
using alliances dominated because companies applied their existing technological capabilities
to new products.6
Apple Newton
Apple started to develop their first PDA, to be called the Newton, in early 1990. At the
same time, Apple began to weave a dense network of alliances for the Newton, spanning
computer hardware and software suppliers, consumer electronics, telecommunications, and
media companies. The first Newtons were shipped in August 1993. Within the first month,
50,000 units were sold, but subsequent sales were much lower than expected. Apple pulled
the plug on the Newton in 1998, having barely sold 120,000 units overall. Despite its
technological and marketing capabilities in the Personal computer market, Apple had failed to
turn the Newton into a successful mass market product.
To develop the Newton, Apple acquired a capital stake in the UK semiconductor
company Advanced RISC Machines (ARM) which was developing the low power
consumption ARM610 microprocessor chip that was later used in the Newton. An integral
part of the Newton was the pen-based user interface which was able to interpret cursive hand-
6 See the appendix for an extensive listing of alliance partners involved in the development and marketing of major products introduced in 1993.
26
writing. Apple developed the operating system alone and the necessary handwriting
recognition software together with the Russian software company ParaGraph. Sharp
developed the LCD display for Newton and released a Newton under the Sharp brand, the
Expert Pad. Sharp also manufactured the Newton. Motorola and Siemens both negotiated
licences to develop complementary products for the Newton and to build devices based on
Newton’s technologies. Other partners included telecommunication companies like
BellSouth, US West, and Ameritech, but also publishing company Random House and online
service provider AOL.
The final product was a highly innovative product incorporating state of the art
technologies. But despite the high price, the Newton offered only limited functionality. The
handwriting recognition, while technologically advanced, was nevertheless error-prone and
unreliable for serious day-to-day use. Despite the lack of a keyboard, the Newton was quite
bulky. The much advertised communication features required the purchase of an additional
device and were limited to a send-only fax and a modem. An additional device was also
necessary to connect the Newton to a PC.
AT&T EO
During the 1980s, former telecommunication company AT&T had actively diversified
into semiconductors and computing, and had acquired hardware computer supplier NCR in
1991. In 1992, AT&T unveiled the Hobbit RISC microprocessor which became the integral
building block of the EO 440 “personal communicator” that was developed by the start-up
company EO. AT&T had financed EO’s start-up, and, shortly before the release of the EO in
the first half of 1993, acquired 51% of EO’s equity. Until it was discontinued in July 1994,
less than 10,000 units of EO personal communicators were sold. With the end of the EO, all
further developments of the Hobbit were stopped, ending AT&T’s engagement in
semiconductors.
EO Inc. was founded in 1991 as a spinoff of GO Corp. In the early 1990s, GO was one
of the leading companies developing handwriting recognition software (Kaplan 1994), and the
EO used the PenPoint operating system and handwriting recognition software developed by
GO. The basic hardware and software design of the EO was developed together with the UK
computer company Active Book Company. The manufacturer of the EO was Matsushita,
while Marubeni and Olivetti were distribution and sourcing support partners. Other alliance
partners included Sharp and an assortment of software start up companies that developed the
applications for the EO.
27
AT&T’s long-standing involvement in communication services heavily influenced the
design and product characteristics of the EO which was announced not as a PDA but as a
“personal communicator”. The EO’s handwriting recognition software was only able to
interpret block letters, and its computer capabilities were more limited than Newton’s. But the
EO had a fax/modem built in that could also be linked to a cellular phone, and it was so able
to send and receive fax and send e-mails via AT&T’s EasyLink network. Additional features
included built-in microphone to voice annotate documents, and access to the Internet and
proprietary networks like CompuServe. But with its steep price, large and heavy design, poor
connectivity with PCs, and just 4 hours of battery working time, the EO failed on the market.
Tandy/Casio Zoomer
Casio had been one of the first movers in the market for handheld computers with the
Boss electronic organizer, while Tandy’s GriD subsidy had introduced one of the first pen-
based computers. Both companies were thus in a good position to exploit the commercial
opportunities of the handheld computer market. In 1992, Casio and Tandy had formed an
alliance to develop and market the Zoomer PDA, and, in stark contrast to Apple, they used
modifications of existing hardware and software to build the unit. Casio developed an Intel-
compatible CPU, which was equivalent to the 8086. With its long-standing production skills
in consumer electronics, Casio was also the main manufacturer, while Tandy distributed and
marketed the product. GeoWorks modified their existing GEOS operating system for the
Zoomer. Palm Computing, a GriD spinoff, provided the handwriting recognition software
based on technology originally devised for the pen-computer Grid Pad. Furthermore, Palm
Computing wrote most of the application and the connectivity software that was shipped with
the Zoomer.
At roughly the same price as the Newton, the Zoomer had very good personal
organizing and finance features, and provided easy connectivity with desktop computers. And
with an additional fax/modem, it was easy to send faxes, write e-mails, and access online
services like America Online. With nearly 100 hours of battery life, the Zoomer was a truly
mobile device. But like the Newton and the EO, the Zoomer had only poor handwriting
recognition, and it was bulky, too. Moreover, because of its dated Intel microprocessor and
Casio’s insistence on a very long battery life, the Zoomer was extremely slow. Launched in
October 1993, sales of the device were a lot poorer than expected. In March 1994, Casio
pulled out of the alliance, putting an end to the Zoomer project.
28
Other entries
The UK consumer electronics company Amstrad was the first to bring to market a
self-styled PDA in March 1993. Amstrad had successfully diversified into computer hardware
during the 1980s by selling cheap home computers and PC clones using off-the-shelf
components. Amstrad applied this approach to the emerging PDA market. Together with UK
software company Eden and using its own vintage 8-bit Z80 microprocessor, Amstrad
developed the PenPad. It was the cheapest and lightest of all PDAs introduced in 1993 and
1994. Lacking any communication features, the programmable PenPad had a limited set of
software applications included and a very crude handwriting recognition technology. In the
same year, Amstrad had acquired the Danish telecommunication hardware supplier Dancall,
and announced the InfoPad for 1995, with strong communication features. With sluggish
sales of PenPad, and growing difficulties for Amstrad in other markets, the InfoPad was
never shipped.
The Simon was a joint development by IBM and BellSouth. Introduced in August
1994, it was a cellular phone with very rudimentary organizing features and electronic ink as
the main input device. The Simon was discontinued in 1995. Motorola introduced two PDAs
in 1994. The Marco was based on Newton’s technologies and included a wireless modem
allowing faxes and email to be sent, but it did not support voice communications. The Envoy
used Motorola’s own Dragon microprocessor. The operating software and communication
software had already been developed by General Magic. Like the EO, the Envoy was
supposed to be a “Computing Communicator” with very strong communication features. Like
the Envoy, it had a built-in wireless modem. Both PDAs gave access to Motorola’s own
proprietary ARDIS network. Sony’s Magic Link was marketed as a personal communicator as
well and it was also based on General Magic’s software. Motorola and Sony independently
announced their withdrawal from the PDA market at the end of 1996, Motorola having sold
less than 5,000 units of the Envoy and the Marco.
To conclude, as a consequence of new technologies like handwriting recognition there
was a wave of innovative entries into the emerging PDA market in the mid-1990s. An
important area for experimenting and learning was the product itself and its key
characteristics. The entrants tested different concepts and models of a Personal Digital
Assistant, and these concepts were heavily influenced by the firm’s pre-entry experiences and
the existing technological and marketing capabilities of the firms.
29
With the Newton, Apple developed a highly innovative product which was, in essence,
a mobile information processor. Its design and features were inspired by the personal
computer. According to Steve Sakoman, the head of the Newton development division, “the
idea was to see if the personal computer could be rethought without carrying around a lot
baggage.” Furthermore, Apple planed to generate most of its profit from selling application
software for the Newton. Accordingly, like may firms in the computer industry, Apple freely
licensed their technology (McGahan et al. 1997). In contrast, AT&T’s participation in the
development of the EO, and Motorola’s and BellSouth’s background in telecommunications
lead to the creation of personal communicators with very strong communication features.
Profits were supposed to come from accessed communication services, less from the sale of
hardware. Amstrad’s experience in consumer electronics and the home computer market lead
to a cheap electronic gadget with limited functionality. But all these products failed more or
less spectacularly in the market.
The segment that continued to grow steadily during these years was the market for
electronic organizers. Sharp, Hewlett-Packard, Casio, and Psion continued to develop
incrementally their products, adding new features with each new product model. The market
grew steadily: In 1993, 685,000 handheld computers were sold worldwide. Two years later, in
1995, the market had nearly doubled to 1,200,000 units, a lot less than industry observers had
expected. But in the next two years, the market was to more than double, this time
unexpectedly. In 1997, PDA sales grew by more than 65 percent (Figure 7). This rapid market
growth can be attributed largely to the introduction of the Pilot PDA in April 1996.
Figure 7 PDA Sales worldwide 1993 to 2002 (*expected)
30
4.3.3 The Pilot: A modest innovation
The software company Palm Computing7 had already been engaged in the
development of the Zoomer. After the demise of the Zoomer, Palm had initially focused on
writing software for handwriting recognition and connectivity packs for the Hewlett-Packard
line of handheld computers. But, due to the small market for handheld computers, the
potential for revenue was limited. Building on their experience in the handheld computer
market, Palm embarked on a mission to develop its own PDA, the Pilot. In their design, they
relied on off-the-shelf products. The Pilot was built around Motorola’s Dragonball processor
and an outdated Toshiba memory chip. For hardware design, Palm relied on Palo Alto Design
Group, and its manufacturing company was Singapore-based Flexotronics, a manufacturer
with a long-standing experience in consumer electronics.
In addition, Palm could build on their own technology for handwriting recognition,
Graffiti. Unlike other approaches to handwriting recognition, Graffiti did not try to interpret
the handwriting of the user, but forced the user to adopt a simple to learn, stylized alphabet.
Thereby, Graffiti was much more reliable and faster than other, more ambitious handwriting
recognition technologies. Palm also developed its own operating system, PalmOS. From the
beginning, Palm made its operating system available to independent software developers.
The shirt-pocket sized Pilot was designed expressly to complement a personal
computer. Accordingly, it only had limited, but tightly integrated features. Its standard
applications – calendar, address manager, to-do list, and memo pad – were launched instantly
by pressing a button. The synchronization between the desktop PC and the Pilot, often a
tedious task with other PDAs, was made easy by a specially designed docking cradle and
Palm’s own connectivity software. With a very low price, the Pilot became an instant hit.
Despite the lack of any communication features, and without sophisticated software packs, the
Pilot was successful, because in the words of one reviewer (Himowitz 1996, 224), it is a
“gadget that does a few things very well”. The Pilot was built according to quality standards
developed in telecommunications, as Yoffie/Kwak (2001, 59) remark “the Pilot adhered to the
telecommunications-industry standard of ‘five nines’, working 99.999% of the time, whereas
PC programs often crashed several times a day.”
The Pilot reached a market share of more than 70 percent of the US handheld
computer market at the end of 1996. In one year, the Pilot sold more than 500,000 units. After
7 Before the launch of the Pilot, Palm Computing was acquired by US Robotics in September 1995. It became a part of 3COM when 3COM acquired US Robotics in June 1997. In March 2000, after a successful IPO, Palm was an independent company once again. See Butter/Pogue (2002) for a history of Palm Computing.
31
three and half years, Palm had sold more than 5 million units of different Pilot models. With
the Pilot, Palm established the dominant design for handheld computers for years to come.
The PDA was, above all, a mobile complement to a desktop or laptop computer. For that
reason, effortless synchronization with a desktop computer became an essential feature of a
PDA. Compactness, reliability, and ease of use became other defining product characteristics
of a PDA, while Palm’s Graffiti quickly evolved into the de facto industry standard for
handwriting recognition. In the next years, rivals tried to emulate the product characteristics
of the Pilot, and its basic design became the starting point for further product improvements
for all firms in the handheld computer industry.
As a startup company in the handheld computer industry, Palm was nevertheless able
to successfully enter the market for handheld computers because the technological knowledge
required to build a handheld was largely accessible through off-the-shelf products and
alliances. The critical new technologies like handwriting recognition and connectivity
software were developed in-house. Furthermore, Palm’s product design was not constrained
by existing marketing capabilities, while Palm’s involvement in the Zoomer project was an
important learning experience. Thus, Palm was able to exploit the window of opportunity
opened by the technological convergence in complements.
4.2 The handheld computer industry in the 2000s: Towards Product Convergence
After the success of the Pilot, the market for handheld computers grew rapidly.
Despite a number of market entries of established firms with a strong background in
computers and consumer electronics like, among others, Philips, Compaq, and Toshiba that
brought to market handheld computers based on a Microsoft operating system, Palm remained
the dominant firm in the next few years. Newly founded Handspring, a Palm spin-off, evolved
into its main competitor. In 2000, the two firms had a combined market share of nearly 80
percent worldwide. Innovative activities was incremental: Building on the dominant design of
the Pilot, the competitors added new features like color LCD display, voice recording and
music playing, while the existing features were improved.
At the same time, the wireless telecommunication markets is changing fundamentally.
With falling prices and increasing adoption, cellular phones evolved into genuine mass market
products. Due to advances in miniaturization technologies, cell phones got smaller and more
functional at the same time. Based on the WAP (wireless application protocol) standard,
32
mobile phone producers like Nokia, Ericsson, and Motorola added rudimentary data
communication features to their devices. While adoption was slow, the WAP standard
nevertheless foreshadowed future development in wireless data communications. The SMS
(short message service) standard for simple text messaging, on the other hand, was an instant
hit. More demanding data communication is expected to be available via wideband networks
which provide higher bandwidth. Emerging technologies are GPRS (General Packet Radio
Standard) and especially the 3G/UMTS standard which is launched in 2002. Other emerging,
personal and local area network technologies are Bluetooth and 802.11b. All these emerging
wireless telecommunications technologies offer a higher bandwidth than the current GSM
(Global System for Mobile Telecommunications) standard. They finally make possible the
complementary use of cellular phones and multimedia online services. Consequently, cellular
phones and online services are converging as complementary products.
However, the same is true for PDAs. While many PDA models had data
communication features like fax, e-mail, and rudimentary Internet access, they were not the
key features as the success of the Pilot showed. The main task of a PDA still is data
processing. The emerging wireless telecommunications technologies thus open the possibility
to make data communication a key feature of a PDA, not an expensive add-on. In this context,
the ability to be always “online” appears to be a crucial feature. Using technologies developed
for paging devices, the Canadian company Research in Motion (RIM) introduced the
Blackberry wireless e-mail pager in early 1999 and it is a huge success with corporate clients.
Relying on a dated pager network, the Blackberry’s allows to instantly receive e-mails
without the need to actively go “online”. Thus, like a cell phone, the PDA is rapidly becoming
a complementary product to online services. As in mobile telecommunications, a convergence
in complementary products of PDAs and online services is at hand.
In addition, the miniaturization achieved in the production of cell phones makes the
integration of voice communication features in a PDA and vice versa technically viable. Early
attempts were the Simon, but also the Nokia Communicator introduced in 1996 and a
PalmOS-based cellphone by Qualcomm. These devices had only very rudimentary organizing
features, and could not be considered as a substitute for a PDA. But this is changing at the
moment. Telecommunication companies Kyocera, Samsung, Motorola and Nokia, and
Handspring have all released “intelligent cell phones” in late 2001, with many more models to
follow in 2002. These hybrid products are integrating the salient product characteristics of a
PDA and a mobile phone into one compact design. Thus, due to advances in miniaturization
33
the product convergence in complementarities is paralleled by the convergence in product
substitutes of PDAs and cell phones (Figure 8).
Figure 8 Product Convergence in wireless communications and handheld computers
The technological opportunities in this constellation are high, since the emerging
wireless telecommunications technologies are leading to changes in the complementary
markets. First, there are the technological spillovers into the mobile phone and handheld
computer markets. The new possibilities for data communications and the resulting
convergence in complements prompt the search for new or enhanced product characteristics,
thereby speeding up the convergence of PDAs and cell phones. Second, innovations are also
induced in the online service and media industries. Here, new product offerings like wireless
Video/Music-on-Demand, gaming, and mobile commerce are becoming technically feasible.
The firms in the mobile phone and the handheld computer markets are reacting in
different ways to the new challenges. Virtually all companies are trying to exploit the growth
opportunities opened up by the complementary product convergence, and they are
accordingly extending the communications and multimedia features of their products. Many
of these firms are pursuing a focus strategy at the moment. For example, Palm has released its
first wireless, Internet-enabled handheld in 1999, and a handheld with a color LCD display in
early 2000. Palm’s strategy is to focus on the PDA market and not to develop convergent
hybrid cell phone/PDAs. Its latest model, the Palm i705, features instant messaging and push
e-mail technology like the Blackberry. For these communication services, Palm has formed
alliances with AOL (instant messaging), Ericsson (paging technology) and Cingular
Interactive (paging network). Furthermore, Palm has built up their own wireless network for
Internet access, Palm.net. In 2002, Palm introduced a Bluetooth extension card for its PDAs
that has been developed together with Toshiba. Palm has also entered alliances with Texas
34
Instrument and start-up company Broadcom to develop wireless technologies and
applications. At present, Palm’s only stakes in the emerging market segment for hybrid
products are licenses for their PalmOS operating system to telecommunication companies
Kyocera and Samsung. Introduced in 2001, the Kyocera QCP 6035 and the Samsung SPH-
I300 were one of the first hybrid products on the market.
Beside Kyocera and Samsung, other telecommunication companies like Nokia,
Ericsson, and Motorola are also pursuing an active diversifying strategy by developing
hybrid models. Nokia has been an early mover in this market segment. In 1996, Nokia had
released the Communicator 9000, an early cell phone/PDA hybrid. While not very successful
commercially, it started Nokia’s ongoing involvement in the development of hybrids. In 1998,
Nokia was one the founding members of Symbian, a joint venture founded by Psion, Ericsson,
and Motorola. Symbian was formed to promote Psion’s EPOC operating system, originally
developed for Psion’s handhelds, as the standard operating system for wireless
communications. Matsushita joined as a stockholder in 1999, while Siemens became a
stockholding member in early 2002. Other, non-stockholding Symbian partners include Sony,
Philips, NTT DoCoMo, Oracle, Qualcomm, IBM, Sonera, and Sun Microsystems, but also the
music entertainment company Beatnik. In 2001, Nokia has released the latest Communicator
smart phone, the 9210, with great success in Europe. Building on former models, Nokia has
added a color screen, a powerful browser, and improved organizing features. Motorola and
the Sony Ericsson joint venture also released Symbian-based smartphones in 2001 and 2002.
In the PDA market, it is Handspring that has committed itself to a diversification
strategy. In late 2000, Palm shipped the VisorPhone module for Handspring’s Visor PDA.
Developed together with Belgian company Option International, the VisporPhone adds voice
and data communications to the Visor. With the acquisition of BlueLark Systems in 2000,
Handspring has extended its in-house technological capabilities in data communications.
BlueLark had developed the Blazer browser which can access not only Internet content
explicitly designed for mobile content but also standard HTML sites. To commercialize this
technology, Handspring has licensed the Blazer to telecommunication companies OmniSky
and Sprint, and to PDA maker Xircom. In late 2001, Handspring finally released a hybrid, the
Treo, with built-in voice communication. The GSM radio module had been developed by
French company Wavecom. Handspring is cooperating with telecommunications company
Sprint and telecommunications start-up Airprime to develop the 3G-enabled Treo during
2002, and it has also forged ties to wireless carriers such as VoiceStream, Cingular, and
Rogers, and online content providers like Microsoft’s MSN.
35
It is too early to tell how the two types of product convergence will play out in the
handheld computer and mobile phone markets. But some of the salient features of these types
of convergence are already visible. The convergence of complements extends the
technological opportunities in these markets, and stimulates innovative activity in the existing
markets. For the underlying technologies of the complementary technologies, established
firms are looking for alliance partners in horizontal markets. The Symbian joint venture,
Palm’s licenses to Kycoera and Samsung, and Handspring’s cooperation with Sprint,
Xircomm, and MSN are examples. In addition, the product convergence in complements also
encourages entry by new firms like AirPrime, BlueLark, Broadcomm, and Wavecom into the
market for complementary technologies. These firms pursue highly focused strategies, and
they are important alliance partners for established firms.
As already explained, the product convergence of complements is also an important
driver of the product convergence in substitutes. Here, the established firms in the handheld
computer and mobile phone markets are introducing hybrid smart phones that substitute for
PDAs or cell phones. So far, the threat of new entrants has been negligible. The established
firms are building on their existing products, and use these as the starting point for the
development of these hybrid products. Over the years, Nokia has incrementally extended the
Communicator’s organizing features, while Handspring started from a PDA, first with an add-
on, later with a built-in voice communication module. An important consequence will be the
slow convergence of the technological capabilities of handheld computer and mobile phone
makers, probably leading to the long-term technological convergence of these diversifiers. On
the other hand, other established firms in both markets are continuing to pursue focus
strategies. Palm is the prime example. It remains to be seen how successful the hybrid
products really are, and how large the market segment for these convergent offerings will turn
out to be. This will influence the future viability of focus and diversification strategies.
5. Conclusions This paper has tried to contribute to the question of what kind of impact market
convergence has on innovations, market structure, and firm behavior. It has been argued that
four different ideal types of market convergence can be distinguished, and that these differ
markedly in their effects on industry evolution. To illustrate the framework, it has been
applied to explain the evolution of the handheld computer market in the last 20 years. It was
shown that different types of convergence shaped the evolution of handheld computers at
36
various times. The observed patterns of market evolution broadly correspond to the theoretical
patterns of market convergence.
In the early stage of the market, market dynamics were driven by complementary
technological convergence of the computer, consumer electronics, and telecommunications
industries. These industries were the commercial backgrounds of entrants into the handheld
computer market, since they could exploit their existing technological capabilities to develop
new markets. To access missing technological capabilities, firms formed horizontal, usually
knowledge using alliances to access the technologies, or relied on off-the-shelf products. This
was also part of the reason why a start-up company eventually came to dominate the market.
Successful entry was also fostered by the low cumulativeness of the established firms’
marketing capabilities for entry into the handheld computer market. Recent developments in
the handheld computer market are influenced by product convergence. Emerging
telecommunications standards and technologies like 3G lead to a product convergence of
complements in the wireless telecommunications, handheld computer, and online services
industries. Innovative entrants are especially important for the development of the new
complementary technologies, since the cumulativeness of technological knowledge is low.
These entrants are important alliance partners for the established firms. Furthermore,
advances in miniaturization increasingly lead to the product convergence in substitutes of the
handheld computer and cellular phone industries. In this case, established firms of the two
markets are diversifying by developing hybrid products that incorporate product
characteristics of cell phones and PDAs. Since the cumulativeness of technological and
marketing knowledge is high, the role of entrants in this process of convergence has been
negligible.
By looking at one particular market in quite some detail, this qualitative case study
complements the more quantitative, inter-industry studies of technological convergence
(Gambardella/Torrisi 1998, Fai/Tunzelmann 2001).
37
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7. Appendix a) Major market entries and exits 1984 to 2001 in the handheld computer market
Year Entrant Product Origin Exit ?
1984 Psion Organiser Computer Software 2001
Casio Boss Consumer Electronics 1988
Sharp Wizard Consumer Electronics
Atari Portfolio Computer Hardware 1996 1989
Poqet Poqet PC Startup 1996
1991 HP LX 95 Computer Hardware
Amstrad PenPad Consumer Electronics 1996
Apple Newton Computer Hardware 1998
AT&T EO440 Telecommunications 1994
1993
Tandy Zoomer Consumer Electronics 1995
IBM/BellSouth Simon Computer Hardware /Telecommunications
1996
Motorola Envoy, Marco Computer Hardware 1996
1994
Sony MagicLink Consumer Electronics 1996
1995 Texas Instrument Pocket Solution Computer Hardware 1998
Compaq PC Companion Computer Hardware
Hitachi Handheld PC Computer Hardware
Nokia Communicator Telecommunications
1996
Palm Pilot Startup
Everex Freestyle Consumer Electronics
Franklin Rex-3-DS PDA Consumer Electronics
IBM (reentered) WorkPad Computer Hardware
LG Electronics GP40MHPC Consumer Electronics
NEC MobilePro Computer Hardware
Philips Velo, Nino Consumer Electronics
1997
Rolodex
(later: Xircomm)
REX PC Companion Consumer Electronics
1998 Olivetti/Royal DaVinci Computer Hardware
Handspring Visor Startup 1999
TRG
(renamed: HandEra)
TRGpro Startup
1999 RIM Blackberry Startup
Acer Slim Mate Computer Hardware 2000
Sony (reentered) Clié Consumer electronics
2001 Toshiba Genio Computer hardware
41
b) Alliances in the handheld computer industry for major products released in 1993 Product Company Industry Task Direction Motivation
Ameritech Communication Hardware/Services
Messaging Horizontal Knowledge Using
AOL Communication Services
Online Services Horizontal Knowledge Using
ARM Computer Hardware Microprocessor ARM 610 Vertical Knowledge Using BellSouth Communication
Services Development Online-Banking
Horizontal Knowledge Creating
Cirrus Logic Computer Hardware ARM licensee Vertical Knowledge Using GEC Plessy Computer
Hardware ARM licensee Vertical Knowledge Using
LSI Logic Computer Hardware Application specific chip Vertical Knowledge Using Motorola Computer/
Communications Hardware
Newton licensee Horizontal Knowledge Using
ParaGraph Computer Software
Handwriting Recognition Horizontal Knowledge Creating
Pen Magic Computer Software Software Horizontal Knowledge Using Random House Publishing Reference content Horizontal Knowledge Creating Sharp Consumer Electronics LCD display
Manufacturing Netwon licensee ARM licensee
Horizontal Knowledge Using
Siemens Electronics Newton licensee Horizontal Knowledge Using Sky-Tel Communication
Services E-mail services Horizontal Knowledge Using
Texas Instrument Computer Hardware ARM licensee Horizontal Knowledge Using Toshiba Computer Hardware CD-ROM Horizontal Knowledge Using US West Communication
Services Communication Services Horizontal Knowledge Using
Apple Newton
VLSI Technology Computer Hardware ARM licensee Vertical Knowledge Using Active Book Company
Computer Hardware Hardware and Software Design
Horizontal Knowledge Creating
Aha! Computer Software Software Horizontal Knowledge Using GO Computer Software Handwriting Recognition
Operating System Horizontal Knowledge Using
Ink Development Computer Software Software Horizontal Knowledge Using Lexis Computer Software Software Horizontal Knowledge Using Marubeni Electronics Sourcing
Distribution Horizontal Knowledge Using
Matsushita Consumer Electronics Manufacturing Horizontal Knowledge Using Notable Technologies
Computer Software Software Horizontal Knowledge Using
Olivetti Computer Hardware
Sourcing Distribution
Horizontal Knowledge Using
Pen Magic Computer software Financial Software Horizontal Knowledge Using PenSoft Computer Software Software Horizontal Knowledge Using Sharp Consumer Electronics LCD Display Horizontal Knowledge Using Slate Computer Software Software Horizontal Knowledge Using
AT&T EO
Sunselect Computer Software Software Horizontal Knowledge Using Casio Consumer Electronics LCD display
Microprocessor Manufacturing
Horizontal Knowledge Using
GeoWorks Computer Software Operating System Horizontal Knowledge Using Palm Computing Computer Software Handwriting Recognition
Software Horizontal Knowledge Using
Intuit Computer Software Financial software Horizontal Knowledge Using
Tandy Zoomer
AOL Communication Services
Online Services Horizontal Knowledge Using