Vendor lock-in

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In economics, vendor lock-in, also known as proprietary lock-in, lock-in, or the Pottersville pattern, is a situation in which a customer is so dependent on a vendor for products and services that he or she cannot move to another vendor without substantial switching costs, real and/or perceived. Frequently, the term connotes some level of intention on the vendor's part to create a lock-in situation, but often a client may be said to be "locked in" in situations that arose unintentionally.

1 Lock-in versus razor and blade
2 Consequences
3 Loyalty programs
4 Examples of lock-in
- 4.1 Consumer goods
5 Lock-in in electronics and computers
6 See also
7 References
8 External links

[edit] Lock-in versus razor and blade

The razor and blades business model involves products which regularly consume some material, part, or supply. In this system, a reusable or durable product is inexpensive, and the company draws its profits from the sale of consumable parts that the product uses. To ensure the original company alone receives the profits from the sales of consumable, they use a proprietary approach to exclude other companies. Inkjet computer printers are a common example of this model.

While the consumer is forced to purchase their consumables from a single source, this is often not considered lock-in because the cost to change, especially in the razor and consumer printer examples, is limited to the inexpensive non-consumable plus any unused, proprietary consumables remaining at the time of change.

[edit] Consequences

The extra costs to the customer create a situation which favors the vendor at the expense of the consumer. A monopoly may result when lock-in costs create market barriers to entry, and may result in antitrust actions from the relevant authorities (the FTC in the US).

Lock-in may eventually also be damaging to the company or industry in question. During the Unix wars, various Unix vendors battled so hard to lock their customers into their version of Unix that large sections of the fragmented Unix market adopted Windows NT instead^{[citation needed]}.

[edit] Loyalty programs

One way to create artificial lock-in for items without it is to create loyalty schemes. Examples include frequent flyer miles or points systems associated with credit card offers that can only be used with the original company, creating a perceived loss or cost when switching to a competitor.

[edit] Examples of lock-in

[edit] Consumer goods

[edit] Cameras

The camera industry is a good example of vendor lock-in. On many cameras, especially more expensive types, the lens can be removed and replaced with a different lens; this is known as an interchangeable lens system. The lenses are an important accessory to the camera and a source of revenue for whoever makes the lens. Since at least the 1930s, makers of cameras with interchangeable lenses have frequently patented the mechanism by which the lens attaches to the camera. This ensured that the camera manufacturer had a monopoly on lens sales for the duration of the patent.

Additionally, since 1989, interchangeable lenses have often had electronics in them to communicate with the camera body. Manufacturers attempt to create lock-in by not disclosing how the lens communicates, requiring competitors to either pay licensing fees for the information or else reverse engineer the system. Further, many parts of camera systems besides lenses are subject to vendor lock-in; there have been unique designs for film canisters, flashgun connectors, electronic cable releases, and many other items. Consumers wishing to switch brands are thus required to replace not just the camera, but also the lenses and many accessories, often a complex and expensive proposition.

[edit] Automobiles

Automobiles are often made with certain parts, such as car stereos, which might be interchangeable. Sometimes the manufacturers will attempt to create lock-in by various means; in the case of a stereo, they might make the stereo unit an unusual size and shape instead of a standard one, or create a unique way for the dashboard part of the stereo to control a CD Changer in the trunk.

Various standards organizations, such as the US Department of Transportation legislate the design of certain automobile components to prevent vendor lock-in. Headlights are probably the most obvious example of this.^{[citation needed]}

[edit] Other examples

The furniture chain Ikea only sells beds of European standard sizes in the US and the UK, where standard sizes are different, encouraging owners to buy their fitted bed-linen from the same supplier.

The Filofax brand of personal filing and diary products, for example, is not compatible with standard paper and ring-binder sizes, so users are forced to buy additional filing supplies only from Filofax or a limited number of other suppliers. Costs are several hundred percent above those of comparable stationery supplies in standard sizes and formats.

[edit] Lock-in in electronics and computers

Vendor lock-in is rampant in the computer and electronics industries.

In the computer industry, both hardware and software, vendor lock-in can be used to describe situations in which there is a lack of compatibility or interoperability between equivalent components.

This can make it difficult to switch systems at many levels; the application program, the file format, the operating system, or various pieces of computer hardware ranging from a video card to a whole computer or even an entire network of computers. Note that in many cases, there are no technical standards that would allow creation of interoperable systems. At nearly any level of systems architecture, lock-in may occur. This creates a situation where lock-in is often used as leverage to get market share, often leading to monopolies and antitrust actions.

[edit] IBM

IBM was subject to a series of the longest and most complex monopoly antitrust actions in United States history, and presented the first significant model for understanding of how lock-in affected the computer industry. IBM had significant lock-in of the punchcard industry from its earliest days; before computers as we recognize them today even existed. From dominance of the card punches, readers, tabulators, and printers, IBM extended to dominance of the mainframe computer market, and then to the operating systems and application programs for computers. Third party products existed for some areas, but customers then faced the prospect of having to prove which vendor was at fault if, say, a third party printer didn't work correctly with an IBM computer, and IBM's warranties and service agreements often stipulated that they would not support systems with non-IBM components attached. This put customers into an all-or-nothing situation, and since IBM was the largest, most reputable vendor, customers often felt that lock-in was an acceptable price to pay for stability and support.

[edit] Microsoft

Microsoft software carries a high level of vendor lock-in, based on its extensive set of proprietary APIs. Their degree of lock-in combined with their market share has made them subject to a number of antitrust lawsuits.

The European Commission, in its March 24, 2004 decision on Microsoft's business practices, quotes, in paragraph 463, Microsoft general manager for C++ development Aaron Contorer as stating in a 1997-02-21 internal Microsoft memo drafted for Bill Gates:

"The Windows API is so broad, so deep, and so functional that most ISVs would be crazy not to use it. And it is so deeply embedded in the source code of many Windows apps that there is a huge switching cost to using a different operating system instead...

"It is this switching cost that has given the customers the patience to stick with Windows through all our mistakes, our buggy drivers, our high TCO, our lack of a sexy vision at times, and many other difficulties [...] Customers constantly evaluate other desktop platforms, [but] it would be so much work to move over that they hope we just improve Windows rather than force them to move.

"In short, without this exclusive franchise called the Windows API, we would have been dead a long time ago."

Their software also exhibits lock-in through their use of proprietary file formats. Microsoft Word and Microsoft Outlook both, for example, use proprietary datastore files and interfaces which are impossible to read without being parsed, and such parsers may in turn not be able to exist legally without performing reverse engineering. For example, to access data contained in Outlook's '.PST' files, the application must process the request through Outlook instead of directly handling the file.

[edit] Apple Inc.

Apple Inc. is also sometimes accused of lock-in practices. Their market share has been small enough that their anti-trust exposure has been substantially less than that of Microsoft or IBM.

Apple often makes use of new or unusual hardware systems; they were the first vendor to make widespread use of Sony's 3.5" floppy drive, devised their own ADB system for keyboards and mice and their own networking system (LocalTalk). In all of these cases, 3rd party peripherals were available and in all of these cases, an argument could certainly be made that the solution Apple chose was superior in many ways. Still, the number of 3rd providers was more limited than for the competing IBM PC platform (though larger than for the Amiga, which had similarly unusual components) and 3rd party providers sometimes had to license elements of the interface technology, meaning that Apple made money on every peripheral sold, even if they did not manufacture it.

In January 2005, an iPod purchaser named Thomas Slattery filed a suit against Apple for the "unlawful bundling" of their iTunes Music Store and iPod device. He stated in his brief: "Apple has turned an open and interactive standard into an artifice that prevents consumers from using the portable hard drive digital music player of their choice." At the time Apple was stated to have an 80% market share of digital music sales and a 90% share of sales of new music players, which he claimed allowed Apple to horizontally leverage its dominant positions in both markets to lock consumers into its complementary offerings ^[1]. In September 2005, U.S. District Judge James Ware approved Slattery v. Apple Computer Inc. to proceed with monopoly charges against Apple in violation of the Sherman Antitrust Act ^[2].

On June 7, 2006 the Norwegian Consumer Ombudsman Bjørn Erik Thon stated that Apple's iTunes Music Store violates Norwegian law. The contract conditions were vague and "clearly unbalanced to disfavor the customer". ^[3] The retroactive changes to the Digital Rights Management conditions and the incompatibility with other music players are the major points of concern.

[edit] Sony

Probably Sony's most famous example of lock-in was the Betamax VCR system. Since then, they have also used lock-in as a business tool in many other applications, and have a long history of engineering proprietary solutions to enforce lock-in. In many cases they license their technology to a limited number of other vendors, which creates a situation in which they control a cartel that collectively has lock-in on the product. Sony is frequently at the heart of Format Wars, in which two or more such cartels battle to capture a market and win the lock.

Examples of Sony's formats include

audio Elcaset
audio or computer data Minidisc and the related ATRAC3 encoding system
Betamax, Video-8, Hi8, Digital8, and MicroMV videotape formats
Playstation Universal Media Disc
Memory Sticks, used for a wide variety of applications in Sony products

As of 2006, Sony digital cameras typically use Memory Stick cards that can only be acquired from Sony and a few select licensees, and this memory is typically much more expensive than alternative memory types available from multiple sources. This is a clear example of lock-in because other camera makers do not use memory types that they have invented and which are unique to their brand of camera.

In contrast, Blu-Ray was developed by a large group of manufacturers which includes Sony but in which they do not have a controlling position.^{[citation needed]}

[edit] Connector conspiracy

When a manufacturer designs a computer hardware product, they may choose to utilize connectors of an unusual or proprietary design. This may be done to intentionally create lock-in, or due to considerations such as cost, packaging, ease of design, ignorance of standards, desire to provide unusual or enhanced features, absence of standards for this interface, or a desire to reap a significant gain when a customer upgrades by forcing replacement of more components than might otherwise be necessary. In many cases there is little financial incentive for a vendor to provide backward compatibility or interoperability.

The term The Connector Conspiracy was devised by computer professionals to describe this situation, humorously implying that a secret cabal of manufacturers intentionally colluded to choose incompatible connectors. In many cases, this situation is not actual lock-in, as adapters can be purchased or manufactured to make the components compatible. SCSI and RS-232 are frequently cited as instances of the Connector Conspiracy.

[edit] Avoiding vendor lock-in for computer software

In the 1980s and 1990s, public, royalty-free standards were hailed as the best solution to vendor lock-in. The weakness of such standards was that if one software vendor achieved a dominant market share, "embrace, extend, and extinguish" (EEE) tactics could be used to render the standard obsolete.

Since the late 1990s, the use of free/open source software (FOSS) has been pushed as a stronger solution. Because FOSS software can be modified and distributed by anyone, the availability of functionality cannot tie a user to one distributor. Also, FOSS tends to adhere faithfully to standards. The ineffectiveness of distributor lock-in means there's no incentive for FOSS developers to invent new data formats if usable (royalty-free) standards exist.

In particular, copylefted FOSS is particularly resistant to the above mentioned "EEE" tactics since anyone distributing modified versions cannot legally prevent free or competing redistribution of the modifications and their source code.

As of 2004, IBM is promoting and contributing to the development of certain FOSS projects to weaken the market dominance of competitors such as Microsoft. Contrarily, IBM is simultaneously funding and promoting software patentability and Trusted Computing, two of the severest current impediments to FOSS development.

[edit] See also

[edit] References

^ "iTunes user sues Apple over iPod" from the BBC. Accessed January 6, 2005 from [1].
^ "Antitrust Suit Against Apple Over iPod, iTunes to Proceed" from findlaw. Accessed September 22, 2005 from [2]
^ iTunes violates Norwegian law. Norwegian Consumer Ombudsman. Retrieved on June 8, 2006.

Arthur, W. B. 1989. Competing technologies, increasing returns, and lock-in by historical events. Economic Journal 97: 642-65.
David, P. A. 1985. Clio and the economics of QWERTY. American Economic Review 75: 332-7.
Liebowitz, S. J. and Margolis, S. E. 1995. Path dependence, lock-in and history," Journal of Law, Economics, and Organization 11: 205-226.
Liebowitz and Margolis "Path Dependence" entry in The New Palgraves Dictionary of Economics and the Law, MacMillan, 1998.
The Fable of the Keys, Liebowitz, S. J. and Margolis, S. E. 1990 Journal of Law and Economics 22: 1-26.

[edit] External links

Vendor Lock-In (AntiPattern), which provides examples and notes alternative names such as "Pottersville".
Jargon File entry on The Connector Conspiracy
Lessons from Format Wars has a section on Sony
EU report in favor of adopting open source software

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