The AI Battle Mirrors Past Format Wars

"History never repeats itself, but it does often rhyme." — Mark Twain

[TLDR: This week's Thursday Thought explores the ongoing battle for AI dominance among tech giants like OpenAI, Anthropic, X, Google, and Microsoft, drawing parallels to historic format wars that have shaped various industries. From the iconic VHS vs. Betamax struggle to the intense competition between gaming consoles like PlayStation, Xbox, and Nintendo, and the enduring rivalry between iPhone and Android, these conflicts reveal a recurring pattern. As AI companies follow similar paths, it's clear that, while technology evolves, the strategic dynamics remain strikingly similar.]

The current battle for dominance between tech giants like OpenAI, Google, Anthropic and Microsoft is not just a race to the top — it's a modern-day format war. By examining the patterns of previous technology battles, we can gain insight into how this AI competition is likely to play out.

Three key patterns emerge from past format battles that are now being mirrored in the AI space:

1. The Power of Network Effects: Just like previous format wars, the AI battle will be heavily influenced by network effects. (A network effect occurs when a product or service becomes more valuable as more people use it, creating a positive feedback loop that can lead to rapid growth and market dominance.)
2. The Underdog Advantage: History has shown that the winner is often not the one everyone expects — not the biggest company or even the best product. Early market leaders may fall behind as more adaptable or better-networked competitors take the lead.
3. Ecosystem Building is Key: The final battleground is not just the technology itself, but the entire ecosystem built around it. Companies that successfully create a thriving ecosystem of developers, partners, and content will probably emerge as the ultimate winners.

To understand these dynamics better, let's revisit three strategic battles that shaped the technology landscape: the VCR format war, the console wars, and the smartphone OS wars. Each of these battles offers valuable lessons for understanding the current AI competition.

The VCR War: A Template for Format Battles

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(The also-rans in the VCR war (that I know of) included Philips and Grundig's Video 2000 (V2000), and RCA's Capacitance Electronic Disc (CED).

The videotape format war between VHS and Betamax in the late 20th century stands as one of the most emblematic battles over technological dominance. Introduced in the mid-1970s, Sony's Betamax initially captivated the market with its superior video quality and compact design. However, JVC's VHS, which entered the market shortly after, quickly emerged as a formidable competitor by addressing consumer needs more effectively with longer recording times — up to two hours initially, which was soon extended to four, six, and even eight hours as the technology developed.

The success of VHS was not solely because of its technical merits. JVC employed a strategic approach by licensing its VHS technology to an array of manufacturers, including heavyweights like Panasonic, Sharp, and RCA. This move flooded the market with VHS players, making the format more accessible to the average consumer. To further tip the scale in their favour, during the mid-1970s JVC established VCR supply relationships with leading national consumer electronics companies in Europe and the United States. In supplying Thomson, Thorn, and Telefunken (all independent companies at that time) as well as U.S. partners, JVC was able to gain the cash and the diversity of market experience that ultimately enabled it to outpace Philips and Sony.

Philips developed videotape competencies in parallel with JVC, but it failed to build a worldwide network of OEM relationships that would have allowed it to accelerate the refinement of its videotape competence through the sale of core products.

According to an article from Legacybox, by the mid-1980s, VHS had achieved a 60% market share in the U.S., with over 30 million homes owning a VHS player.

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Hollywood's role in this battle was also pivotal. Movie studios, recognising the growing popularity of VHS, began releasing their films primarily on this format. Movie studios partly influenced this decision because VHS tapes could hold entire movies without requiring multiple tapes — a common issue with the shorter Betamax tapes. Video rental stores like Blockbuster overwhelmingly supported VHS because of its broader availability and the convenience of longer playtimes. A self-perpetuating cycle emerged — a classic example of a network effect: the increased availability of content on VHS led to higher consumer demand for VHS players, which further solidified the format's dominance.

The death blow for Betamax occurred when RCA, one of the largest electronics companies in the United States, backed VHS. RCA's decision, coupled with a strong marketing push, helped VHS capture an even larger share of the market. By the late 1980s, despite Betamax's technical superiority, Sony had to concede defeat. Sony eventually began producing VHS players, marking the end of the format war.

The Console Wars: The Battle for Gamers' Hearts

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The console wars between Sony's PlayStation, Microsoft's Xbox, and Nintendo highlight how the best product doesn't always win. Sony's PlayStation and Microsoft's Xbox fought fiercely over processing power and exclusive titles, but Nintendo carved out its niche with innovative gameplay and a focus on casual gamers. Each company's success depended not only on the hardware but also on the ecosystem of games and online services they built.(Also rans, I know of included: Sega Saturn, Sega Dreamcast, Atari Jaguar, and NEC TurboGrafx-16).

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