Systemic innovation and the virtues of going virtual: The case of the digital video disc

According to David Teece, only strong and integrated firms can successfully innovate in a systemic fashion. Looser coalitions consisting of joint ventures, alliances, or virtual partners will not be able to create a systemic innovation, let alone to set standards for it, or to control its further evolution. In this article this position is challenged, in particular, regarding the information industry. It mill be argued that in view of the fact that industrial structure is changing from vertical to horizontal, and digital convergence ts taking place, systemic innovation today can only be undertaken by alliance networks. Although such networks are vulnerable to opportunism, these are capable of producing systemic innovations, because mutual relations can be stabilized by forms of both substantive and procedural commitment. If standards also haze to De pioneered, alliance networks will have to expand. As there are few ways in which these new allies may commit themselves, the network is weakened. It is argued that, nevertheless, the mutual competition between networks will not end in an impasse. Instead, a unique, hybrid standard is likely to emerge in the end, since contending networks are willing to compromise, and since some of the more important parties along the system chain may usefully constitute themselves as arbitrators. This argument is Put to the test by examining the case of the development of the Digital Video Duc (DVD). It is shown that a battle between two alliance networks caused (one led by Toshiba, the other by Philips and Sony), that evolved along the lines conjectured above.