View
219
Download
1
Embed Size (px)
Citation preview
Recognizing Lock-In
Jan DamsgaardDept. of Informatics
Copenhagen Business Schoolhttp://www.cbs.dk/staff/damsgaard/
This presentation is based on chapter five, pp. 103 - 134 in Shapiro and Varian (1998): Information Rules: A Strategic Guide to the Network Economy Boston, MA: Harvard Business School Press
EBUSS Jan Damsgaard, 2004 2
Recognizing Lock-In Costs of switching
– LP to CD to DVD– 36 millimeter film to APS (Advanced Photo System)
– VHS to DVD Compare
– Switching from Ford to VW– Switching from Mac to PC– Switching from CD to DVD
EBUSS Jan Damsgaard, 2004 3
Outline
What are switching costs Examples of switching costs Valuing the installed base Classification of lock-in The lock-in cycle Lessons
This presentation is based on chapter five, pp. 103 - 134 in Shapiro and Varian (1999): Information Rules: A Strategic Guide to the Network Economy Boston, MA: Harvard Business School Press
EBUSS Jan Damsgaard, 2004 4
What are Switching Costs? Costs of switching from one system to another Due to durable investments in complementary assets
– Hardware– Software
In general– Suppliers want to lock-in customer
– Customers want to avoid lock-in
Basic principle: Look ahead and reason back
EBUSS Jan Damsgaard, 2004 5
Examples
IBM’s OS/2 operating systems for students Penetration pricing
– Mobile phones only USD 1 + a one year subscription to certain infrastructure
– Cable TV (low cost to join, high running costs) Provision of complementary products/services
– Cheap modems to increase fixed net traffic
EBUSS Jan Damsgaard, 2004 6
Your examples How did you switch from LP to CD? or haven’t
you? What was your strategy? Provide some examples where you feel/felt
locked-in to some brand or system or infrastructure
Have you changed ISP or Telephone operator? On what ground did you base your decision?
What Internet services do you feel locked into? Identify lock-ins’ of society
EBUSS Jan Damsgaard, 2004 7
Switching Costs Matter
Accumulated switching costs– Phone number portability– Email addresses– Hotmail (advertising)– ACM (professional associations)– and many e-commerce sites
Look at lock-in costs on a per customer basis
EBUSS Jan Damsgaard, 2004 8
Valuing an Installed Base Customer C switches from A to "same position" w/ B
– Total switching costs = customer costs + B's costs Example
– Provide sweetener free minutes (higher market value than actual costs)
– Hand in competitor’s product to get a discount Any razor to get Phillips razor at favorable price
– Give up the use of competitors’ products to get a discount The Finnish beer industry (contract) Coca Cola at Aalborg University (conditions)
Disruption costs
EBUSS Jan Damsgaard, 2004 9
Profits & Switching Costs In General use of this rule of thumb
– How much to invest to get a locked-in baseHarvest of switching costs
– Evaluate a target acquisitionBuy or steal
– Product and design decisions that affect switching costs
Compatibility and migration paths
EBUSS Jan Damsgaard, 2004 10
Classification of Lock-In Contractual commitments Durable purchases and replacement Brand-specific training Information and data Specialized suppliers Search costs Loyalty programs
EBUSS Jan Damsgaard, 2004 11
Contractual Commitments
Commitment to source from one supplier Types of contracts
– Evergreen contracts that automatic renews Book clubs
– Requirement contract– Minimum order-size commitment
Switching costs after the contract terminates
EBUSS Jan Damsgaard, 2004 12
Durable Purchases
Buying hardware implies the need for software Aftermarket sales (supplies, maintenance)
– ZIP drives and ZIP disks, car market Usually falls with time Upgrades as aftermarket service The difference between technology lock-in
versus vendor lock-in
EBUSS Jan Damsgaard, 2004 13
Brand-specific Training
Purchase of brand products often requires specific training to use them– SAP systems, FrontPage, WordPerfect, and standard
PCs
Competitors want to lower switching costs– Word and WordPerfect help
EBUSS Jan Damsgaard, 2004 14
Information & Databases Examples
– CD players and CD disks– Address book software– Usage of home-made macros– Customization
As the library grows so does the lock-in Minimizing the lock-in
– Insist on standard and/or open source formats
EBUSS Jan Damsgaard, 2004 15
Specialized Suppliers Companies that typically offer specialized
services– Advertising, legal, accounting firms
R & D increases dependency – Pentagon– Banks selling of key IT system to competitor
Strategy of dual sourcing– IBM, Intel and AMD
EBUSS Jan Damsgaard, 2004 16
Search Costs Transactions cost in finding new supplier
– lock-in by habit Also costs borne by new supplier
– Promotion, closing deal, setting up account, credit risks
Example– Looking for satisficing and not optimal solutions
Market valuation of “loyalty” or “laziness”
EBUSS Jan Damsgaard, 2004 17
Loyalty Programs Constructed by sellers
– Frequent flyer programs– Frequent user programs
Coordinated programs– Air mileage for car renting
Personalized pricing– Gold, Silver, and Blue Status
Cumulative pay-offs, pyramid-programs
EBUSS Jan Damsgaard, 2004 18
Your examples
Provide at least one example of each of the seven types of lock-in– How was it established?– Could it have been avoided?– Can it be sustained?– Can competitors break the lock-in?
EBUSS Jan Damsgaard, 2004 19
Suppliers and partners
Anyone that makes investments that are specific to a particular supplier, customer or partner is subject to lock-in for the economic lifetime of the investment– Railroad lines to service a specific customer– Customized software
EBUSS Jan Damsgaard, 2004 20
Follow the Lock-in cycle
Brand Selection
SamplingLock-In
Entrenchment
EBUSS Jan Damsgaard, 2004 21
Lessons Switching costs and lock-in are
ubiquitous in the information economy The installed base is extremely valuable
in the information economy Your choices are limited by the decisions
of the past. Path dependency Be able to identify the 7-types of lock-in
EBUSS Jan Damsgaard, 2004 22
MICROSOFT PUTS HAILSTORM ASIDE Microsoft's My Services, formerly called Hailstorm, has
been put on hold due to lack of support from potential partners. The service, part of Microsoft's .Net initiative, was designed to act as a central repository for consumers' personal data. Partner corporations would have access to that data, eliminating the need for users to establish separate profiles for each company. According to reports, despite initial interest in the program from firms including American Express and Expedia, no major partners agreed to implement the service. Experts said that decisions not to use the My Services application are generally based on a distaste for sharing consumer information rather than on lack of trust in the technology. NewsFactor Network, 11 April 2002