MARKETING DEPARTMENT

BACHELOR THESIS MARKETING The success of a hardware device: A study on the effects of software on the brand choice of the hardware device

Date

: 11 June 2010

Name

: Moamer Klempic

ANR

: 376551

Topic

: Marketing of high-tech products

Supervisor : Drs. J.H. Slot

Bachelor Thesis Marketing – Moamer Klempic

Abstract

This thesis investigates the effect of software on the brand choice of the hardware device, thus not considering the hardware characteristics such as hardware quality and price. The effect of software is analyzed on the five characteristics of software: quantity, variety, quality (superstar software), exclusivity and price. Prior literature has mainly focused on the effect of software quantity on the brand choice of the hardware device. To the best of our knowledge, this is the first paper that attempts to completely describe the effect of software on the brand choice of hardware device. We provide evidence that software can have large effects on the brand choice of the hardware device. Having a superior hardware device is not enough, consumers value the product on the hardware performance and software availability. The adoption of a hardware device is largely based on the software availability and less on the superiority of the hardware device. We have shown that quantity and quality positively influence the brand choice of the hardware device, adoption decision of a hardware device largely depends on these two variables. The effect of software quality is enhanced when it is exclusively released on a hardware device. Hardware devices with a lack of software quantity or without a single superstar software title have failed.

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Bachelor Thesis Marketing – Moamer Klempic

Table of contents

Chapter 1 – Introduction ............................................................................................................ 4 1.1 The problem background .................................................................................................. 4 1.2 The problem statement and research questions ................................................................ 5 1.3 Managerial relevance ........................................................................................................ 6 1.4 Academic relevance .......................................................................................................... 6 1.5 Overview of the Rest of the Chapters ............................................................................... 7 Chapter 2 - The effect of software quantity and software variety on device brand choice ........ 8 2.1 Effects of the software quantity and variety on brand choice ........................................... 8 2.1.1 The chicken-and-egg problem .................................................................................... 8 2.1.2 Timing ........................................................................................................................ 9 2.1.3 Consumer’s future expectations ............................................................................... 10 2.1.4 Critical mass of software .......................................................................................... 10 2.1.5 Industry effects ......................................................................................................... 11 2.1.6 Assortment literature ................................................................................................ 12 2.2 Moderating effect of duration of device on market on software quantity ....................... 12 2.3 Conclusion ....................................................................................................................... 13 Chapter 3 - The effect of software quality on device brand choice ......................................... 14 3.1 Effects of the software quality on brand choice .............................................................. 14 3.2 Conclusion ....................................................................................................................... 17 Chapter 4 – The effect of software exclusivity and software price .......................................... 18 4.1 The effect of exclusivity on brand choice of device ....................................................... 18 4.2 Conclusion ....................................................................................................................... 19 Chapter 5 – The effect software price on device brand choice ................................................ 20 5.1 The effect of software price on the brand choice of device ............................................ 20 5.2 Conclusion ....................................................................................................................... 21 Chapter 6 – Conclusion, discussion and recommendations ..................................................... 22 6.1 Conclusion ....................................................................................................................... 22 6.2 Discussion ....................................................................................................................... 23 6.3 Recommendations ........................................................................................................... 24 References ................................................................................................................................ 25

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Bachelor Thesis Marketing – Moamer Klempic

Chapter 1 – Introduction

1.1 The problem background President of Sony, Kazuo Hirai, once said that even with the best technology and most advanced device but without the applications that device will only collect dust on the retail shelves. “Many products have little or no value in isolation, but generate value when combined with others” (Katz and Shapiro, 1994, page 93). In many high-tech markets, firms provide products that are dependent on other complementary products to be usable. In the academic literature these markets are often referred to as hardware/software markets (Binken and Stremersch, 2009). Hardware and software are interdependent products and are composed of complementary products; these products do not have any value to customers if they are not used together. The value of hardware (e.g. DVD-player, game console, mobile phone) depends on complementary software (e.g. movies, games, operating system) and the value of the hardware is enhanced when the variety of software is increased (Church and Gandal 1993). Firms producing such hardware devices are confronted with, in the literature often called, the chicken and egg paradox (Stremersch, Tellis, Franses & Binken, 2007).

The success of their hardware

products depends on the availability of software provided by (mainly) other firms. For example, a DVD-player is worthless if there are no DVD movies available to watch and a game console (e.g. Nintendo Wii) is worthless if there are no available compatible games made for. Lee and O’Connor (2003) stated that DVD players could not overcome the VHS market without enormous industry investment in producing movie titles on DVDs.

Binken and Stremersch (2009) observed that importance of software in hardware-software markets became a prime concern for hardware firms. The software for the hardware device is mainly made by other firms, in the case of DVD players the movie production firms are of great influence on DVD player attractiveness and consequently on purchase intention.

Prior literature has paid limited attention on the effect software has on the sales of hardware. Overall extant literature focused mainly on the effect of software quantity on hardware sales (Stremersch et al. 2007). For example, Binken and Stremersch (2009) studied the effect of superstar software (individual software titles of exceptional quality) on hardware sales. This paper seeks to fill this gap in literature and will more closely investigate the influence of software (software) on the hardware device brand choice by the consumers. The purpose of 4 A study on the effects of software on the brand choice of the hardware device

Bachelor Thesis Marketing – Moamer Klempic

this paper is to define what the effects are of the software variables on the brand choice of the hardware device. In doing so, this paper will only address the effects of software on brand choice of the hardware device and will not take into account hardware features such as device quality, device price and brand image.

1.2 The problem statement and research questions This leads to the following problem statement guiding this study: What is the effect of software on the brand choice of the hardware device?

This study examines a number of software characteristics. Specifically, the following research questions will be answered: 1. What is the effect of software quantity on brand choice of the hardware device? 2. What is the effect of software quality on brand choice of the hardware device? 3. What is the effect of software variety on brand choice of the hardware device? 4. What is the effect of software exclusivity on brand choice of the hardware device? 5. What is the effect of software price on brand choice of the hardware device?

The following conceptual framework depicts the focus on software characteristics:

Although the independent variables in the framework have been split up, they all are part of the (umbrella) variable software. They are all related, for example the exclusivity of software could have influence on the (higher) price of that particular software. Further the variables quantity and variety show strong similarities, the increase in variety directly influences the 5 A study on the effects of software on the brand choice of the hardware device

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total catalog of software (quantity). The effect of quantity is expected to be moderated by the ‘duration of device on market’, in the introduction phase of the device the effect is expected to be greater.

For a proper understanding of the independent software variables, the definition needs to be clear. Variables such as software price and software quantity are clear, but quality is a much wider term. In this paper software quality is defined as the availability of superstar/blockbuster software for the device (superstar/blockbuster: “individual software titles of exceptional quality”, Binken and Stremersch 2009). Software variety is defined as the availability of different genres of software for the device. Software exclusivity is the availability of exclusive software titles for a particular hardware device in a market with multiple (incompatible) hardware devices.

1.3 Managerial relevance The value of hardware and consumer’s brand choice of device in the systems markets does not only depend on the features of the device but may depend more on the availability of compatible software (Gandal, Kende and Rob, 2000). In these markets the one product is worthless without the other, thus the assumption that availability and characteristics of the compatible software for the device influences the brand choice of the device (Basu, Mazumdar and Raj, 2003). This paper will investigate the effects of software on the brand choice of the device, the goal is to provide a deeper insight in which software variables affect the brand choice and how large that effect may be. From a managerial point of view it is important to know what the effects of software are on the consumers brand choice of device. The success of a device depends on the software, thus the managers and marketers operating in systems markets benefit from knowing the effects of software on brand choice of device such that they may act accordingly. Although the focus of this paper is on the intangible software (e.g. music) it can be used by managers working with less technologically intensive products in hardware/software markets (e.g. Senseo or Nespresso).

1.4 Academic relevance Prior literature has mainly focused on the effect of quantity and quality of software on hardware sales (Binken and Stremersch 2009; Stremersch et al., 2007). Other researchers focused mainly on software availability (quantity) on hardware sales. Most of the literature focused only on one specific market in their study and on mainly one effect of software on 6 A study on the effects of software on the brand choice of the hardware device

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hardware, frequently on the software availability on hardware sales (Stremersch et al. 2007). This implies the academic literature so far has not fully grasped the effect of software variables on device sales. In this thesis the goal is to provide a clear framework that explains the influence of different software variables on brand choice of device/hardware. The aim is to fully describe the effects of these variables on the brand choice of consumers.

1.5 Overview of the Rest of the Chapters The remainder of the thesis will proceed as follows. The five core characteristics of software will be studied in three following chapters. In the first chapter the effect of software quantity and software variety on device brand choice will be studied. In doing so, we will take into account the moderating effect of the duration the device is present on the market. In the second chapter, we will inspect the effect of software quality. Next, the effects of exclusivity are examined in chapter 4 and the effect of software price will be examined in chapter 5. Finally, all insights will be integrated and conclusions will be drawn.

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Chapter 2 - The effect of software quantity and software variety on device brand choice

This chapter focuses on the subject of software quantity and variety effects on brand choice of the hardware device. In section 2.1 the effects of the software quantity on brand choice will be examined. In section 2.2 the moderating effect of the duration of the device on the market will be discussed.

The goal of this chapter is to examine the effects of software quantity and software variety on the brand choice of a hardware device. These two independent variables are discussed in one chapter because they are strongly related. Variety refers to the number of software genres where quantity refers to the number of software titles. For example, a software catalog can have a large quantity of software but the variety can be rather limited by availability of one or two genres. In the prior literature the basic view is that the hardware sales or adoption by consumers depends on the quantity of available software. It can be posited that the greater the software availability and variety for a specific hardware device the greater the value of that hardware device.

In the prior literature the researchers have also referred to software quantity as software availability or software variety. Binken and Stremersch (2009) observed that prior literature also referred to software quantity as software variety. This paper distinguishes quantity and variety in the sense that the two variables are related, but they are not the same. In this chapter the term quantity refers to the number of software titles available for a hardware device. Software variety is defined as the number of different genres of software available for the device.

2.1 Effects of the software quantity and variety on brand choice

2.1.1 The chicken-and-egg problem The effect of software quantity on hardware sales has been examined by various researchers and they have almost only focused on this dimension (Stremersch et al. 2007). That is understandable because the indirect network effect primary gives rise to the chicken-and-egg problem (Stremersch et al. 2007). Katz and Shapiro (1985) made a distinction between direct and indirect network effects. Direct networks effects arise when “a direct physical effect of the number of purchasers on the quality of the product” (Katz and Shapiro, 1985, page 424), a 8 A study on the effects of software on the brand choice of the hardware device

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classic example is the telephone; the more people adopted the telephone the higher the benefits to each adopter (John, Weiss and Dutta, 1999). In case of indirect network effect, the utility of the hardware device, and its sales, increases as more complementary software becomes available (Stremersch, Lehmann and Dekimpe, 2010; Church and Gandal, 1992). Indirect network effects result in a coordination problem between the hardware and software producers, in the literature popularly referred to as the chicken-and-egg problem (Gupta, Jain and Sawhney, 1999). The hardware device requires software “in order for customers to value the whole product” (Gupta, Jain and Sawhney, 1999, page 396). Consequently the availability of complementary software depends on the installed base of the hardware device (Stremersch et al. 2007). According to Gupta, Jain and Sawhney (1999) indirect network effects “create a two-way contingency between the demand for the hardware product and the supply of software products, and result in a strategic interdependence between the actions of hardware manufacturers and the actions of software providers” (Gupta, Jain and Sawhney, 1999, page 396). Software needs to be “accessible before the focal product (e.g. CD player) can successfully diffuse” (Frels, Shervani and Srivastava, 2003, page 33). Consumers will not choose for a hardware device until there is not enough software available and on the other side the software manufacturers will wait with producing software until enough consumers have adopted the hardware, thus availability of software depends on the actions of consumers (Stremersch et al. 2007, Katz and Shapiro, 1994). Hence there is great interdependence not only between the hardware and software producers but the consumers play a role also. The value of a hardware device to consumers’ increases when more software quantity and variety is introduced (Church and Gandal, 1996). Lee and O’Conner (2003) observed that the more software produced for a hardware device the higher the value for the customers who own that hardware device.

2.1.2 Timing The importance of software quantity is greatest when the hardware product is introduced and in the early months after the introduction. Lee and O’Connor (2003) state that when launching a new hardware product more focus need to be on extrinsic values (e.g. complementary software) than on core intrinsic values of a hardware device. In the short term, the consumer’s purchase decision depends more on extrinsic value rather than on intrinsic (Lee and O’Connor, 2003).

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2.1.3 Consumer’s future expectations A consumer will not choose for a hardware device merely for its intrinsic characteristics but more for its complementary software. When choosing for a hardware device the consumer requires that there is or will be in the future enough available software. Katz and Shapiro (1994) observed that “rational buyers must form expectations about availability, price and quality of the components (software) that they will be buying in the future” (Katz and Shapiro, 1994, page 94). Church and Gandal (1993) reported that when consumers are faced with a choice between two hardware devices, they evaluate the hardware device on the basis of software expected to be available and that the survival (in a format war) of a technology depends on the availability of the software. Bridges, Yim and Briesch (1995) observed that consumer expectations play a essential role in consumer selection of high-tech products. According to Rosen, Schroeder and Purinton (1998) consumer’s expectations in the high-tech markets are probably more critical than in other markets due to rapidly changing product attributes.

2.1.4 Critical mass of software Stremersch et al. (2007) observed that several researchers came to the same conclusion that “a critical mass of software titles is required for hardware sales to take off”. This critical mass of software titles for a hardware device is needed to make the hardware device attractive enough for the consumers. Oppewal en Koelemeijer (2005) have done research in other markets and their conclusion was that a larger assortment is rated more positively by the consumers. Although the results from the research of Stremersch et al. (2007) contradict this view of the prior literature, Stremersch et al. (2007) came to the conclusion that the hardware device sales take off before software quantity does. They observed further that hardware sales leads software quantity and not the other way around. This could be explained by the fact that consumers adopt a hardware device on the basis of their expectation of future availability of software quantity and variety as Church and Gandal (1993) concluded. Stremersch et al. (2007) further observed that consumers may not be interested in the complete catalog of software but rather only in a small selection of it (e.g. comedy or sports game genre). Thus offering different software genres reaches a larger audience which leads to greater hardware sales.

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2.1.5 Industry effects The question is why the results from the research of Stremersch et al. (2007) contradict the widely held views that amount of software is essential to hardware sales and thus for the brand choice of hardware device. The most logical answer is that it depends on the hardware/software market. Stremersch et al. (2007) show that in the case of GameBoy only one software title was responsible for enormous hardware sales. But the examples of format wars between HD-DVD vs. BluRay and Betamax vs. VHS show that a large library of software titles is essential. In these cases the market will tip “toward the product with the stronger network“ (Frels, Shervani and Srivastava, 2003, page 40). Thus the availability of complementary software seems essential in some cases. The extent of availability of complementary software affects consumers’ choice between hardware devices, a hardware device with a lack of complementary software is likely to be rejected (Schilling, 1998). According to Rosen, Schroeder and Purinton (1998) one of the reasons that the Philips CD-I failed was due to limited software availability and variety in the introduction phase. Stremersch, Lehman and Dekimpe (2010) cite Philips CD-I as a notorious failure due to “lack of platform support of complementors” (Stremersch, Lehman and Dekimpe, 2010, page 1). Further it is reasonable to assume that the hardware sales take off because of the consumer’s expectations of future releases of software titles. Stremersch et al. (2007) point out other reasons for this: snob appeal of owning new hardware, availability of a killer application, popularity of the hardware device or because of possibility of user generated software.

Cottrell and Koput (1998) concluded that in the computer market the variety of software is important to the adoption and diffusion of new hardware device. They went even further stating that since early adopters “cannot easily observe the quality of hardware, software variety serves as a quality signal” of a hardware device (Cottrel and Koput, 1998, page 335). In another study providing evidence of the effect of software quantity and variety on hardware, Church and Gandal (1996) give the example of how the CD became the digital audio standard in the early 80’s. According to Katz and Shapiro (1994) introduction of a new audio format will not succeed unless compatible software becomes available. Philips and Sony allied with several music studios (software producers) to provide a catalog of music titles for CD’s and commitment to software quantity and variety. This gave the CD a huge advantage over the other systems and the CD and the CD player became the dominant design (Church and Gandal, 1996). This example shows that the quantity and variety of software availability has a positive effect on the brand choice of the hardware device. Apart from the 11 A study on the effects of software on the brand choice of the hardware device

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price and the capabilities of the hardware device, “no software means no hardware sales” (Church and Gandal, 1992, page 85). Church, Gandal and Krause (2008) demonstrated that software variety could be even more important to consumers than the software quantity. A broader variety of software titles could reach more heterogeneous groups of consumers. Katz and Shapiro (1994) further observed “a frenzy of activity establishing alliances among hardware and software firms in the entertainment and telecommunications industries” (Katz and Shapiro, 1994, page 113). These alliances and acquisitions (e.g. acquisition of Columbio Pictures by Sony) demonstrate the importance of assuring the availability of software.

2.1.6 Assortment literature In the assortment literature the prior belief was that larger variety (quantity and variety) is good. Prior research and practice suggest that when a brand increases its product assortment or variety it should benefit through increased market share, Gourville and Soman (2005) show in their paper that this is not always the case. They state that effect of assortment size is moderated by assortment type. In some cases increased assortment size had a negative effect on brand market share. Although these findings could be translated to the hardware side (e.g. overchoice in hardware devices) they are not applicable to the software side. Market specific literature (e.g. Stremersch et al, 2007) shows that in the hardware/software market more choice is better and increases the utility of the hardware device. Another important factor in some hardware/software markets is that a constant supply of software is required (Katz and Shapiro, 1994). For example, in the movie and home video games markets. When a consumer has seen a movie or played a video game, that software title is ‘consumed’ and further not of any value to the consumer.

2.2 Moderating effect of duration of device on market on software quantity

In the previous section, we learned how software quantity and software variety influence choice for a hardware device. However, it is suspected that the effect of software quantity is not the same across the product life cycle of the hardware device. Frels, Shervani and Srivastava (2003) observed that a critical mass of software titles is required for hardware sales to take off. This leads to the proposition that effect of software quantity is greater in the introduction phase of the hardware device compared to later in the lifecycle of the hardware device. In the markets confronted with indirect network effects the 12 A study on the effects of software on the brand choice of the hardware device

Bachelor Thesis Marketing – Moamer Klempic

consumers may take a “wait-and-see” approach in the introduction stage of hardware (Goldenberg, Libai and Muller, 2010). Consumers wait for hardware adoption until there is enough software available. This effect is increased in case of competing formats/standards, consumers are afraid of adopting the wrong format/standard and wait until dominant design has emerged (Goldenberg, Libai and Muller, 2010). In case of considering adopting a hardware device in its introduction phase, customers would rather have numerous software titles to chose from rather than wait for others’ adoption (Goldenberg, Libai and Muller, 2010). The wait for others chills the adoption process of hardware and in some cases it leads to failure of a hardware device when supply of software is insufficient (Stremersch, Lehmann and Dekimpe, 2010). Stremersch et al. (2007) have included 9 systems markets in their research, in all these markets the total quantity of software titles increases over time. It can be concluded that in the introduction phase the effect of quantity of software on hardware device brand choice is stronger than in later phases.

2.3 Conclusion

There are positive effects of software quantity as well as software variety on the brand choice of the hardware device. Consumers prefer to adopt a hardware device with a greater variety of software. The more software is available for a hardware device the higher the value to the customers who adopt the device. The extrinsic value of the hardware device is enhanced by increase of compatible software. This causes the wait-and-see approach by consumers, they wait with adopting a hardware device until there is sufficient software available or in some cases the dominant design has emerged.

Although the hardware sales lead software quantity, this phenomenon could be explained by the expectation consumers have over the future availability of software. Thus hardware sales mainly depend on availability of software or the future expectation of software availability. The hardware adoption depends on the quantity as well as on variety of software, quantity and variety have a positive effect on brand choice of the device. The effect of quantity is moderated by duration of hardware device on the market. Effect of software quantity is the largest in the introduction phase of the hardware device. In the introduction phase the consumer prefers the hardware device with larger quantity of software when choosing to adopt a hardware device.

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Chapter 3 - The effect of software quality on device brand choice

This chapter focuses on the subject of software quality effects on brand choice of the hardware device. The purpose is to examine what the effect of software quality is on device brand choice. In section 3.1 the effects of the software quality on brand choice will be examined and in section 3.2 the conclusions will be made.

Software quality in this context is hard to define, for example the average quality of all available software for a hardware device is a vague definition. What does the average quality really say? Binken and Stremersch (2009) introduced the term “superstar” for describing high quality software. The following term of software quality is used in this paper: the availability of superstar/blockbuster software for the device. Superstar software, or blockbuster, is defined as: “individual software titles of exceptional quality that may have disproportionally large effects on the hardware sales” (Binken and Stremersch, 2009, page 88).

Although the authors only focused on the game industry in their research, this definition is useful for the other hardware/software systems as well given the fact that prior research studied the effects of superstars (e.g. music industry and movie industry) using the same definition (Binken and Stremersch, 2009).

3.1 Effects of the software quality on brand choice

Why are the products of Apple popular? Is it because of the design or does the software quality play a major role? The fact is that most professionals working on video and/or photo editing are using Apple computers because of the software (Goldenberg, Libai and Muller, 2010). The same goes for the iPhone and the iPhone apps (software only compatible with iPhone). Given the fact of the increasing availability and great popularity of the apps (Lyons, 2008), one could say that software quality of Apple is superior to other mobile phone makers and therefore responsible for a part of the success of iPhone.

Nair, Chintagunta and Dube (2004) observed that including software quality, rather than only software availability, would be a useful extension to their model. Stremersch et al. (2007) came to the same conclusion. The authors concluded that in some cases the availability of superstar software is more important than the quantity; they support this argument by various 14 A study on the effects of software on the brand choice of the hardware device

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examples (e.g. Tetris and Game Boy). Frels, Shervani and Srivastava (2003) state that it is possible that a sizeable consumer segment buys a hardware device because of superstar (they refer to “killer app”) software regardless of the quantity of software available. The emergence of the IBM desktop as the computing standard in the business segment was significantly influenced by the (killer app) Lotus 1-2-3 (Frels, Shervani and Srivastava, 2003).

3.1.1 Dominant designs That quality of software has a positive effect on the brand choice of a device is not surprising. A hardware device on its own is worthless if there is no compatible software. But when there is (enough) available software the question arises if the software is appealing enough to consumers to trigger them to buy the hardware. The latest format war (for a dominant design) between HD-DVD and Blu-Ray proves that superstar software influences the brand choice of hardware. The most blockbuster movie studios have chosen for the Blu-Ray format to release their movies on (Warner, 2008). Among other reasons, the releases of old and new blockbusters movies only on Blu-Ray have put HD-DVD out of the market. This is an excellent example of a “winner take all” war that is typical for a market with network effects where a dominant design emerged from competition among several designs (Srinivasan, Lilien and Rangaswamy, 2006). The availability of blockbuster movies for Blu-Ray hardware devices will have a great influence on consumers brand choice of device. Binken and Stremersch (2009) observed that this was the deciding factor in this format war and that the market is tipping to Blu-Ray format. Tipping is described as “the tendency of one system (format) to pull away from its rivals in popularity once it has gained an initial edge” (Katz and Shapiro, 1994, page 106).

Although one could think that in every product category a “winner take all” war takes place, that is not the case though. Srinivasan et al. (2006) reported that, counter to assumption in the prior literature, dominant designs may never emerge in some product categories. In many product categories several standards may compete for years or decades without one standard emerging as a dominant design (Schilling, 1998). That a dominant design do not emerge in every product category (e.g. camcorders, video game consoles) could be explained by the fact that “consumer heterogeneity and product differentiation tend to limit tipping and sustain multiple networks” (Katz and Shapiro, 1994, page 106). Gupta, Jain and Sawhney (1999) observed that heterogeneity in preferences for software positively effects coexistence of

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multiple incompatible hardware devices. This means that superstar software could be released for different formats, for example in the video game console industry.

3.1.2 Superstar software The Sega Dreamcast is an excellent example of effect of superstar software on device brand choice. In the first year that the Dreamcast was introduced there were plenty of superstar games available and the sales of Dreamcast exceeded expectations. In the second year the introduction of superstar software for Dreamcast dried up and so did the sales of Dreamcast. The software producers switched to PlayStation and Dreamcast disappeared from the market even though there were still new releases of software (Frels, Shervani and Srivastava, 2003).

Brinken and Stremersch (2009) observed that systems in the videogame market with no or only one superstar software failed. The authors have shown that superstar software may have disproportionately large effects on hardware sales. They concluded that the introduction of a superstar title significantly increases hardware sales. According to Corts and Lederman (2009) hardware demand is driven by quantity and quality of software and superstar video games “are critical drivers of market share” (Corts and Lederman, 2009, page 134). According to Lee (2007) consumers often base their purchase decision of a hardware device in the presence of a particular superstar title or killer app. Thus the assumption that the quality of software influences the brand choice of device is substantiated.

Frels, Shervani and Srivastava (2003) observed that quality of software can play a large role in the adoption of the hardware device. As mentioned above, these authors give the example of Lotus 1-2-3 and its positive effect on the emergence of IBM as the desktop computing standard. Examples of one software title that was responsible for a great part of the sales of hardware devices are plenty. Binken and Stremersch (2009) observed that Walt Disney’s “Wonderful World Of Color” greatly influenced the sales of the color televisions. The Super Bowl is reported to have large effects on the sales of HDTV sets in America (Dickinson, 2008) Another very good example is the game Tetris that on its own was responsible for sale of tens of millions of Game Boys (Stremersch et al. 2007).

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3.2 Conclusion

As one would logically expect, the effect of software quality (as carefully defined in this context) has a positive effect on the device brand choice. A hardware device that needs complementary software to have value to customers will fail if there are no superstars available, especially in a format/standard war where non-compatible systems are competing to become the dominant design. On the positive side we can conclude that superstar software (dramatically) increases hardware sales. In some cases there were single software titles which reached a sizeable consumer segment and were responsible for great part of the hardware sales. These extreme examples prove the positive effect that superstar software has on brand choice of device. In a format/standard war where a dominant design emerges, the superstar software seems to be more important because it can push incompatible hardware out of the market. Nevertheless, in some markets a dominant design will never emerge, for example in the home video game market.

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Chapter 4 – The effect of software exclusivity and software price This chapter focuses on the subject of software exclusivity effects on brand choice of the hardware device. The purpose is to examine what the effect of software exclusivity is on the brand choice of the hardware device.

We define software exclusivity as the availability of exclusive software titles for a particular hardware device in a market with multiple (incompatible) hardware devices. An exclusive software title is only compatible with the hardware device it is released on. From the hardware device producers’ perspective exclusive software is a crucial factor in the hardware/software markets, exclusive software supply relationships are especially prominent in the TV, home video and video game markets (Mantena, Sankaranarayanan and Viswanathan, 2007).

4.1 The effect of exclusivity on brand choice of device

The Korean high-tech firms LG and Samsung stated that mobile phone makers should jointly compete against BlackBerry because of their exclusive chat software Ping. BlackBerry is gaining market share after the introduction Ping (Wokke, 2010). This is the latest example of the power of software exclusivity on hardware sales. BlackBerry messenger (Ping) is a true superstar software in accordance with the definition of Stremersch and Binken (2009). This example shows that exclusive superstar software can have positive effect on the hardware sales. Prior literature suggests that exclusive software is a valuable commodity in hardware/software markets (Binken and Stremersch, 2009). The large investments made by video game firms in contracting development studios to release exclusive software for their hardware device are the evidence for importance of software exclusivity. Software exclusivity can decrease consumer confidence in competing hardware devices, thus delaying or blocking the sales of competitors’ hardware devices (Shapiro, 1999). Mantena, Sankaranarayanan and Viswanathan (2007) observed that exclusive software is often necessary for hardware producers to attract new customers, they point out that this is especially true in the early stages of the hardware diffusion and when the hardware devices have relatively equal installed bases. For example, imagine that there are two new video player formats A and B who are competing and who are incompatible. Now assume that video player A signs an exclusivity deal with movie studio X, a studio that releases Dutch movies. 18 A study on the effects of software on the brand choice of the hardware device

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When a consumer, who is interested in Dutch movies, is confronted with an adoption decision between video players A and B, we can assume that he will choose for video player A. When consumers are interested in a particular software title or a particular genre of software titles, making these software titles exclusively available for a hardware device will increase the sales of this hardware device (Binken and Stremersch, 2009). In another study Corts and Lederman (2009) also observed that exclusive software has a larger demand for a hardware device than non-exclusive software. The demand is further increased when it is superstar software (Corts and Lederman, 2009). Exclusive superstar software is able to tip the market toward one specific hardware device during a format/standard war (Binken and Stremersch, 2009).

Katz and Shapiro (1994) have observed that exclusive contracts do not only assure the hardware device supplier of availability of software, but they also serve to deny availability of software to rival hardware device producers. Nintendo used this strategy of signing exclusive contracts with third party video game developers, making those games unavailable to Nintendo’s rivals and tipped the market in its favor (Katz and Shapiro, 1994). Nintendo’s NES reached a market share of eighty percent, even though the NES was of inferior quality compared to competitors, because of software only being released on Nintendo NES (Church and Gandal, 1992; Lee, 2007). When superstar software is exclusively released on a particular hardware device, it is reasonable to think that this will affect the hardware sales positively. Thus we can assume that the effect of software exclusivity is enhanced by superstar software.

4.2 Conclusion

We can conclude that the software exclusivity has an positive effect on the hardware device brand choice. The hardware producers seem to be aware of this, thus making large financial investments in software producers to secure exclusive software for their hardware device. The effect of exclusive software seems to be larger in the introduction phase and the early stages of the hardware device to ensure an installed base and to attract new consumers. Thus we can conclude that there is moderating effect of ‘duration of hardware device on market” on the effect of the software exclusivity. Further we can conclude that the effect of software exclusivity is enhanced by superstar software, the effect of exclusive superstar software seems to have a larger positive effect on brand choice of hardware device than non-exclusive superstar software. 19 A study on the effects of software on the brand choice of the hardware device

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Chapter 5 – The effect software price on device brand choice This chapter focuses on the subject of software price effects on brand choice of the hardware device. The purpose is to examine what the effect of software price is on the brand choice of the hardware device. Software price is defined as the price of a single software title.

In the prior literature there has not been much research on the effect of software price on the hardware device (brand choice). However, this thesis presumes that the software price has an effect on the brand choice of the hardware device. The scarcity of the literature on this variable complicates the analysis of the effect of software price.

5.1 The effect of software price on the brand choice of device

Chou and Shy (1990) showed that consumers brand choice does not only depend on the price of the hardware and the variety of software, but also on the price of complementary software. Consumers believe that the price of product is highly correlated with the quality of the product, thus why consumers often tend to buy expensive products (Andersen, 1987).

Ding, Rodd Jr. and Rao (2010) have also shown that consumers infer product quality from price and that consumers have a reference price for a particular product. According to Katz and Shapiro (1994) a firm needs to convince consumers that the complementary software will be reasonably priced in the future. If the firm is not able to set such a pricing commitment, then it faces a credibility problem (Katz and Shapiro, 1994).

Binken and Stremersch (2009) state that the attractiveness of the hardware device increases when the price of software decreases. But Bridges, Yim and Briesch (1995) show that when the price of a high-tech product is too low, customers believe that the product is of inferior quality. Thus consumers fear to buy a high-tech product with a price which is low enough to imply that the product might soon become outdated (Bridges, Yim and Briesch, 1995). However consumers do expect that the price of a high-tech product (hardware or software) will decrease over time (Bridges, Yim and Briesch, 1995). This means that it is possible that the consumers might assume that the hardware device is of inferior or of outdated technology when the price of software is too low, which has a negative effect on the sales of the hardware device.

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In contrast, too expensively priced software will have a negative effect on the hardware device. Rosen, Schroeder and Purinton (1998) give the example of Sony‘s BetaMax where they state that besides the price of the BetaMax hardware, the price of its software formed an barrier to adoption of BetaMax hardware device itself. The BetaMax’s rival JVC’s VHS, that became the dominant design, priced its software considerably lower. According to Schilling (1998) when the complementary software is not of competitive price, the hardware device may find itself locked out of the market.

5.2 Conclusion

The literature examining the effect of software price on brand choice of hardware device is scarce. We can conclude that the price of software affects the hardware device brand choice, which does not always imply that a lower price is better. Consumers believe that the price of software and the quality of software are correlated. Consumers could infer from a (too) low software price that the hardware device is of inferior or outdated technology, which could have a negative effect on the hardware device sales. However, a too high price of software can mean that the hardware device could be locked out of the market.

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Chapter 6 – Conclusion, discussion and recommendations This final chapter consists of conclusion, discussion and recommendations. In the first paragraph the conclusions will be formulated, the second paragraph will discuss the limitations of this literature study and in the final paragraph the recommendations are given for future research and for practical level.

6.1 Conclusion

This thesis studied the effects of five different software dimensions on the brand choice of the hardware device, where prior literature mainly focused on software quantity.

This purpose of this paper is to give an answer to the following problem statement: What is the effect of software on the brand choice of the hardware device?

As we have elaborated in the previous chapters the software does have an effect on the brand choice of the hardware device. Software quantity, software variety, software quality and software exclusivity al have positive effects on the hardware device brand choice. The price of software has a two-way effect, where too low priced software could infer outdated hardware technology and a too high price could lock the hardware device out of the market. From the effect of ‘killer apps’ we can conclude that software can have disproportionally large positive effects on the brand choice of the hardware device. We have shown that the adoption decision of a hardware device depends on the software. Hardware firms need to focus on the availability of software before introducing a hardware device to secure availability of software to prevent rejection from consumers. When consumers are confronted with an adoption decision of an hardware device, they tend to evaluate them on the basis of software available and expectations of future software availability for the hardware device. Having a superior hardware device is not enough in hardware/software markets. In some cases an inferior hardware device can become the dominant design due to better supply of software in terms of quantity and quality. The coexistence of multiple networks can be explained by consumer heterogeneity and product differentiation. Hardware device producers are able to secure software quantity, software variety and superstar software through exclusive contracts with software producers. As we have observed, exclusive software has a positive effect on the brand choice of the device.. The positive effect of exclusive software on hardware device brand choice is enhanced by superstar software. 22 A study on the effects of software on the brand choice of the hardware device

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Exclusive superstar software affects hardware device sales more positively that non-exclusive superstar software.

6.2 Discussion

The problem statement and the research questions of this thesis have not been empirically tested, the conclusions are merely based on the prior literature. We have observed contradicting findings in the literature, Stremersch et al. contradicted the widely held views that the quantity of software is essential to hardware sales. We found evidence that this conclusion is true in some cases and untrue in other cases, we concluded that it depends on the type of hardware/software market. Literature is inconsistent in the terminology of software quantity, researchers used the terms quantity, variety and availability to describe the total number of software titles. This thesis defines variety as the number of genres of the total software catalog and quantity as the total number of software titles. The literature on the effects of software price on the hardware device brand choice is limited. The limited literature on the effects of price has limitations to the generalization of the observed effects. The prior literature on the effects of software on the hardware device has mainly focused on a couple of specific home entertainment markets (video games, video cassette/DVD and music). We have observed that the home video game market is a greatly examined area by the previous researchers. However research in other hardware/software markets is limited, which raises questions about the generalization of the results. The results from the prior research describe the effects of software on hardware in these markets adequately, however the question is can these results be used in other system markets as well. The home entertainment system markets are similar and the results concur, thus generalization to dissimilar hardware/software markets requires caution. Further this study treats the competing hardware devices as being comparable in terms of performance, and quality, however that is not always the case. In some cases the difference in performances and abilities of hardware devices can make the effects of software irrelevant. The effect of exclusive software is moderated by ‘duration of hardware device on market’; the positive effect seems to be larger in the introduction phase to ensure an installed base. This moderating effect was not presumed at the beginning of the thesis and in the conceptual framework.

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6.3 Recommendations

Future research in this area should especially focus on the effect of software on the hardware device in other hardware/software. We observed that prior research mainly focused on the home entertainment markets, thus extending the research with other hardware/software markets and comparing the results would be valuable addition for generalization purposes. The literature is scarce about the effects of price of software on the hardware device. As we observed the effect of price is two-sided and it does have an effect on the brand choice of the hardware device, thus future research should focus on the effects of software price. For example, is there a tradeoff between software price and quality? Are consumers willing to pay a higher price for superstar software, this would be a great addition to the literature. The consumers’ expectations of future software availability can be examined in the future research, besides current software availability the future expectations seem to positively influence the hardware adoption decision as well. Further, future research can focus on the fact why in some markets dominant designs emerge and in others multiple hardware devices coexist. The question is what triggers a ‘winner takes all’ format war and why in other markets the coexistence of multiple hardware devices is established.

Considering practical recommendations, managers should acknowledge the importance of focusing on the software availability during the development of the hardware device. Managers should secure software supply (e.g. exclusive contracts with software producers) before the introduction of a hardware device to support the diffusion of the hardware device. Thus creating software availability in the introduction phase will positively affect the diffusion of the hardware device. In addition of creating early software availability managers should consider effectively managing the consumers’ expectations of future software availability, positive future expectations can have a positive effect on the hardware sales. The managers should not primarily focus on the quantity of software titles, but should acknowledge the importance of software variety and superstar software. The availability of superstar software is essential in the hardware software markets, we have observed the positive effects that they can have on the hardware sales. Further, managers should recognize the possibility of enhancing the hardware device sales by securing exclusivity over superstar software, although it requires large financial investments it can be profitable in the end.

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