Sponsors, Communities, and Standards: Ethernet vs. Token Ring in the Local Area Networking Business

The discipline of economics has treated technological standards creation as an outcome of network externalities and decisions on the demand side. They pay little attention to the supply side, where firms make strategic choices as to which standard to support. These choices can ignite a contest between adherents to the different proposed standards. This case study examines the contest between the Ethernet and Token Ring standards for local area networking. IBM sponsored Token Ring, but then made it difficult for other firms to be successful in supplying components. In contrast, Ethernet's sponsors, DEC, Intel, and Xerox, structured the marketplace in such a way as to encourage supporters. The resulting Ethernet community was able to lower costs and improve the technology so dramatically that the Token Ring standard, which had initially been technically superior, was overwhelmed. We find that the critical difference in explaining the success of Ethernet was the nature and strategy of the standard's sponsors in assisting the growth of a community of firms supporting the standard.