Managing Information Goods

4. Rights Management 5. Recognizing Lock-In6. Managing Lock-In

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Rights Management

How digital technology affects the management of intellectual

property?

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New Challenges

• Digital technology sharply lowers both reproduction and distribution costs.

• In other technological advances cost distinctions were more clear out; e.g. tape recorder or AM broadcast.

4

Take advantage of lower distribution costs

• Giving away samples– ergonomic costs associated with

on-line reading– demand for repeat views (option

value)

• Sell complementary products

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Take advantage of lower distribution costs

• Giving away samples

• Sell complementary products– offer index or search service free– e.g. the Economist, WSJ

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Control Illicit Copying

• Use technology such as “digital watermarks” and “MarcSpider” to find out “who’s doing what, where, and when to your stuff”.

• “Bitlegging” has a natural limit

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How can lower reproduction costs work for you?

• Digital copies are perfect copied of the original

• For digital content, production is reproduction.

• Any suggestion?

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History may not repeat itself, but it rhymes.

Producers of digital content are in much the same position now that the producers of books were in 1800 or producers of film were in 1975.

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The Rise of the Library

• In 18th century books were very expensive.

• The “circulating library” arose.

• Old publishing model was replaced by a new business model of mass-market books.

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The Rise of the Video

• In the early 1980s, videos were a medium for the rich.

• By the mid-1980s, video rental stores were thriving.

• Disney realized that people would actually buy a video if the price was right.

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Threats or Promise?

It’s easy to see the threats inherent in the new media; it’s hard to see the promise.

The key issue is how to exploit economies of scale.

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Management of intellectual property

• Don’t worry too much about protecting the intellectual property.

• The important thing is to maximize the value of the intellectual property, not to protect for the sake of protection.

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Recognizing Lock-In

How to identify, quantify, and classify the basic sources of switching costs and lock-in?

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Examples of Lock-In

• In the mid- to late-1980s, Bell Atlantic selected AT&T’s digital switches.

• In 1995, Bell Atlantic sued AT&T for monopolization.

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Mass Market Lock-In

• Even small switching costs can be critical for strategy.

• For examples:– number portability in telecom– AOL– HotMail– use behavior on the Web

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Small Lock-In Matters

Compare any switching costs to revenue on a per-customer basis and add up these costs across the entire installed base.

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What Constitutes Switching Costs?

To illustrate, suppose that– you’re an ISP trying to build your

customer base– switching ISP involves $50 for

the customer– it costs you $25 to set up a new

account

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Valuing an Installed Base of Customers

As a rule of thumb, the profits a supplier can expect to earn from a customer are equal to the total switching costs, as just defined, plus the value of other (quality or cost) advantages the supplier enjoys.

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The Valuation Principle is useful

• By anticipating the value of tomorrow’s installed base, you can determine how much to invest today

• a shortcut to evaluate a target company whose installed-base of customers constitutes a major asset

• help inform decisions affecting your customer’s switching costs

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Classification of Lock-in

• Contractual commitments• Durable purchases• Brand-specific training• Information and databases• Specialized suppliers• Search Costs• Loyalty programs

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Specialized Suppliers

US DOD has been dealing with this problem for decades–get a variety of commitments and options in selecting the winner

–dual sourcing

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The Limitations of Dual Sourcing

Disagreements between Intel and AMD over the scope and duration of AMD’s rights under its dual-sourcing agreement led to protracted litigation between Intel and AMD, and Intel has captured a commanding share of the market during the 1990s.

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Loyalty Programs

• An “artificial” lock-in

• informational tug-of-war

• New “synthetic frictions”– frictions don’t disappear; they just

mutate into new forms– e.g. Amazon’s “Associate

Program”

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Seller Lock-in and Partner Lock-in

Anyone who makes investments that are specific to a particular supplier, customer, or partner is subject to lock-in for the economic lifetime of those investments.

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The Lock-In Cycle

Brand Selection

Entrenchment

Lock-in Sampling

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Managing Lock-In

How to craft strategy based on the understanding that lock-in

is a two-edged coin?

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Lock-In Strategy for Buyers

• Bargain hard at the outset of the lock-in cycle for a sweetener or some form of long-term protection.

• Take steps to minimize your switching costs throughout the lock-in cycle.

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Lock-In Strategy for Sellers

• Investing in an installed base of customers

• Encouraging customer entrenchment

• Leveraging your installed base

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Investing in an Installed Base

• Look ahead at the whole lock-in cycle

• The “quasi-profits” isn’t real profits

• Structuring the life-cycle deal

• Selling to influential customers

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Some Examples

• Iomega’s Zip drive• Netscape’s open strategy• Adobe’s PostScript

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The Myth of High Market Share

A large market shares doesn’t imply lock-in

–HP printer’s cartridges

–Cisco (vs. 3Com)

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Encouraging Customer Entrenchment

• Entrenchment by design– Adobe’s Illustrator– Aldus’s Freehand

• Royalty programs & cumulative discount– “cumulative referral”– Amazon’s “Associate Program”

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Leveraging your Installed Base

• Sell complementary products• Sell access to your installed base• Differential pricing

– e.g. cellular telephone industry

• Raise search costs• Exploit first-mover advantage• Control cycle length