Technological Leapfrogging: Lessons from the U.S. Video Game Console Industry

Abstract

In industries characterized by network externalities, the self-reinforcing effects of installed base and the availability of complementary goods can lead to a single (or few) firm(s) controlling nearly all of the market share in a product category. A new entrant may attempt to displace the incumbent standard by introducing a radically improved technology, leapfrogging the current generation. However, a technological advantage alone is often not enough. To lure customers away from the existing standard, the new technology must somehow yield more value than the combination of value yielded by the incumbent technology's functionality, installed base, and complementary goods. This article develops a multidimensional framework of technology value components, which is then applied to data from case studies of three generations of competition in the U.S. video game industry. The article presents both strategies a potential entrant can use to successfully leapfrog an incumbent and strategies an incumbent can use to defend its position.