In the information and telecommunications industry, among others, various kinds of innovative products are being launched. Due to the effect of network externalities on players* performances, the importance of the choice whether to make these products compatible with others cannot be overemphasized. This is also true of the consumer online service industry. Incumbent X.25-based providers are competing with each other and with other entrant Web-based providers and at the same time, trying to make their products compatible with others. Using a game-theoretic model, this paper examines how incumbent and entrant carriers strategically choose the compatibilities of their products. The welfare implications are also presented.