Information Rules A Strategic Guide to the Network

Information Rules: A Strategic Guide to the Network Economy Managing Lock-In for buyers and sellers Carl Shapiro Hal R. Varian

Overview • Chapter 5: how to identify, quantify and classify the basic sources of switching costs and lock-in. • Once understanding switching cost, in chapter 6, explore strategies for managing lock-in not only for buyers but also for sellers Information Rules 2/13

Basic Strategy for Buyers • Bargain for compensation at beginning • Limit your vulnerability – Dual sourcing – Demand compensation for each step throughout the lockin cycle – Avoid long term contract ex) 조건 좋다고 평생이용권 구매 X • Watch out for partial contracts (서비스 일부에만 해당하는 혜 택에 대한 계약 등. Ex) 데이트 사이트 대화쿠폰, 만남쿠폰 등으로 서비스 쪼 Temptation for supplier to cut quality in other components ex) 핸펀 공짜? 통신료 고비용, 위약금; … 개기) Information Rules 3/13

Basic Tension in Buyer’s Strategy • If you are locked-in and wish to break it, say you have large switching costs to get large compensation from the new supplier Ex) 통신사 갈아 탈 때 새로운 통신업자에게 전 환비용 크니 추가 서비스 많이 달라 하기 • But want to minimize lock-in as much as possible with the new supplier as well Ex) 새로운 통신업자에게 lock-in 안되게 조심 Information Rules 4/13

Buyers, Watch Out For • Vague commitments Ex) 잘 해드릴께. . . vs. A와 B를 드릴께… • Revealing too much about vulnerabilities Keep info on usage to yourself (카톡) • Entrenchment phase strategy – May want to switch, in part just to gain leverage Ex) 혜택 받고 통신사 갈아타기 • Avoid creeping lock-in Information Rules 5/13 creeping

Seller’s 3 Principles for Lock-in (more details next) 1. Invest: to build an installed base of customers 2. Entrench: Aim for customer entrenchment, not mere sampling product design & promotion ex) 데이팅 사이트 ‘만남 쿠폰’ 가격 적절히(너무 높지도 낮지 도 않게) 책정, 장기이용권 deep discount locked-in 3. Leverage: maximize the value of the installed base by selling complementary products and by selling access to the customers (광고) Information Rules 6/13

Sellers Strategy 1: Invest in an ㅁ Installed Base • Look ahead • Fight for new customers: product design (생체인식) • Structure the life-cycle deal: if a customer has tight capital expenditure, discount on the equipment and capture revenue in the form of multiyear service contract. Ex) 꽁짜폰, but 비싼 통신료 • High market share needs not indicate lock-in ex) 삼성 스마트폰, can switch to Google Phone or Huawei Information Rules 7/13

Sellers Strategy 1: Invest in an Installed Base • Attract buyers with high switching cost: but need to beware of 1) customer with high switching cost is likely to be already locked into rival’s product 2) the buyer with high switching cost tends to inflate the cost. • Sell to influential customers: discount for them ex) free wall street journals to professors • Multiplayer strategies: ex) infant formula Lock-in manufacturer vs. hospital vs. new moms. Discount Strategy? Discount for hospital to lock-in First new moms Information Rules 8/13 Formula

Sellers Strategy 2: Encourage Customer Entrenchment • Entrenchment by design: offer value-added information services to deepen your relationship with your customer ex) free i. Cloud of Apple; automatic back-ups of contact info & pics. • Loyalty programs and cumulative discounts: loyalty programs will turn conventional markets into lock-in markets Information Rules 9/13

Sellers Strategy 3: Leverage your Installed Base • Selling complementary products • Selling access to your installed base (ex: Naver ads) • Setting differential prices to achieve lock-in ex: Discount for new subscribers, discount for new customers at online shopping malls. • Attempt to raise search costs: make yourself easy to find and your rivals hard to find ex) Bargain finder. Refuse to give access(? ) Information Rules 10/13

Sellers Strategy 3: Leverage your Installed Base • Exploit first-mover advantage: stagger termination dates on different customer contracts to keep rivals from achieving scale economies Ex) 월세계약 12월말 아닌 3월말에 끝나게 하기 다른 월세집 구하여 나가기 어렵게 하기 • Control cycle length: lengthen the contract Ex) automatic contract renewal, complementary products (ex: printer toners) Information Rules 11/13

Lessons • Buyers – Bargain hard – Use second-sourcing and open systems – Improve bargaining position at choice stage • Sellers – Invest in your installed base – Cultivate influential buyers (power bloggers) Information Rules 10 -16 -19 12/13

Lessons, continued • Sellers – Design product and pricing to get customers to invest in your technology – Sell your customers complementary products – Sell access to your installed base Ex)광고 Information Rules 13/13

Global market share (in shipments) held by smartphone vendors worldwide • Samsung 324. 8 mil units in 2015 (23. 8% in Q 3, 2015). 2018 20. 9% Information Rules 14/13 https: //www. statista. com/statistics/271496/global-market-share-held-by-smartphone-vendors-since-4 th-quarter-2009 /