Managing Information Goods 4. Rights Management 5. Recognizing Lock-In 6. Managing Lock-In

2 Rights Management How digital technology affects the management of intellectual property?

3 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

5 Take advantage of lower distribution costs Giving away samples Sell complementary products –offer index or search service free –e.g. the Economist, WSJ

6 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

7 How can lower reproduction costs work for you? Digital copies are perfect copied of the original For digital content, production is reproduction. Any suggestion?

8 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.

9 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.

10 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.

11 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.

12 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.

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

14 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.

15 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

16 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.

17 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

18 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.

19 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

20 Classification of Lock-in Contractual commitments Durable purchases Brand-specific training Information and databases Specialized suppliers Search Costs Loyalty programs

21 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

22 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.

23 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”

24 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.

25 The Lock-In Cycle Brand Selection Entrenchment Lock-in Sampling

26 Managing Lock-In How to craft strategy based on the understanding that lock-in is a two-edged coin?

27 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.

28 Lock-In Strategy for Sellers Investing in an installed base of customers Encouraging customer entrenchment Leveraging your installed base

29 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

30 Some Examples Iomega’s Zip drive Netscape’s open strategy Adobe’s PostScript

31 The Myth of High Market Share A large market shares doesn’t imply lock-in –HP printer’s cartridges –Cisco (vs. 3Com)

32 Encouraging Customer Entrenchment Entrenchment by design –Adobe’s Illustrator –Aldus’s Freehand Royalty programs & cumulative discount –“cumulative referral” –Amazon’s “Associate Program”

33 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