Vendor lock-in

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In economics, vendor lock-in, also known as proprietary lock-in, or customer lock-in, makes a customer dependent on a vendor for products and services, unable to use another vendor without substantial switching costs. Lock-in costs which create barriers to market entry may result in antitrust action against a monopoly.

[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] 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 be used only with the original company, creating a perceived loss or cost when switching to a competitor.

[edit] Examples of lock-in

[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] SIM locking

Main article: SIM lock

SIM locking may be considered a vendor lock-in tactic as phones purchased from the vendor will only work with SIM cards from the same network. This creates additional hassle to the buyer as the phone cannot use a prepaid SIM from a different vendor while on vacation (a common tactic used by Asian tourists visiting another Asian country) and as a result the subscriber must also sign up the often pricey roaming service offered by the vendor. Additionally, should the subscriber wish to take out a second line for any reason, he/she must also get the line from the same vendor, as the SIM card of a competing vendor will not work. Sometimes, even the SIM card from the same vendor will not work and the buyer will be forced into buying another phone.

[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 regulate the design of certain automobile components to prevent vendor lock-in.

[edit] Other examples

The furniture chain Ikea sells beds only of European standard sizes in the UK, where standard sizes are different, encouraging owners to buy their fitted bed-linen from the same supplier."http://www.gnomon.org.uk/bed-sizes.html". http://www.gnomon.org.uk/bed-sizes.html. Retrieved on 6 December 2008.

The Filofax brand of personal filing and diary products, for example, is not compatible with standard paper and ring-binder sizes, so users can buy additional filing supplies only from Filofax or a limited number of other suppliers. Costs are several times 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."

Microsoft's application software also exhibits lock-in through the use of proprietary file formats. Microsoft Outlook uses a proprietary datastore file and interface 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. Present versions of Microsoft Word have introduced a new more open format MS-OOXML. This may make it easier for competitors to write documents compatible with Microsoft Office in the future by reducing lock-in, but as a competitor to the OpenDocument format, it is feared by many such as the FSF that future versions will have features that cause vendor lockin. Microsoft eventually released full descriptions of the file formats for earlier versions of Word, Excel and Powerpoint in February 2008^[1].

ActiveSync is a proprietary protocol used by PDAs and handheld devices for data transfer with a personal computer.

Active Server Pages and propriety extensions to HTML and Javascript provided a lock-in between Microsoft servers and Internet Explorer.^{[citation needed]}

[edit] Apple Inc.

Apple Inc. is also 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, and they 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 party 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.

When digital music files with digital rights management are purchased from the iTunes music store, they are encoded in a proprietary derivative of the .AAC format that is only compatible with Apple's own iPod and iPhone portable digital music players, as well as the Motorola ROKR E1 and Motorola SLVR. As a result, that music is locked into the iPod, and if an iPod fails, the library of music is only available for portable use through the purchase of one of the above players. ^[2] (Even though the DRM and AAC songs purchased through the Apple iTunes are technically locked to the iPod, this can be circumvented by burning the purchased tracks to a cd in audio format, then reintroduced to the iTunes software. The change in burning and importing preferences are made and iTunes will import the songs in mp3 format without the DRM restrictions. This is all accomplished at the waste of a CD-R. However there will be a slight loss in audio quality due to the conversion to CD-Audio format and back again. In addition, metadata like artist name and track titles are not preserved when transcoding through a CD-R, unless a copy of a complete, commercially released album is being made.)

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.^[3] 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.^[4]

As of 29 May 2007 tracks on the EMI label have been made available in a DRM-less format called iTunes Plus. These files are unprotected and are encoded in the AAC format at 256 kilobits per second, twice the bitrate of standard tracks bought through the service. iTunes accounts can be set to display either standard or iTunes Plus formats for tracks where both formats exist.^[5] These files can be used with any player that supports the AAC file format and are not locked to Apple hardware.

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".^[6] The retroactive changes to the Digital Rights Management conditions and the incompatibility with other music players are the major points of concern.

At present, all 4 big music studios (Warner Bros., Sony BMG, Universal and EMI) have signed up to remove the DRM from their tracks, at no extra cost. However, Apple charge consumers to have previously-purchased DRM music restrictions removed.

[edit] Sony

Probably Sony's most famous example of lock-in was the Betamax VCR system. Since then, Sony has also used lock-in as a business tool in many other applications, and has a long history of engineering proprietary solutions to enforce lock-in. In many cases Sony licenses its technology to a limited number of other vendors, which creates a situation in which it controls 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 Portable Universal Media Disc
Memory Sticks, used for a wide variety of applications in Sony products

As of 2006^[update], Sony digital cameras typically use Memory Stick cards that can be acquired only 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 marketed and which are unique to their brand of camera.

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

[edit] Cisco

Cisco is also making use of this strategy, a famous example being a 10/100 network interface card being sold for 640$ (200x the price of an equivalent PC component) just because it can fit in the router's proprietary expansion slot [4]. Also, the Cisco devices often refuse to use standard-compliant hardware components made by other producers that would otherwise work, such as SFP transceiver expansion modules, unless they are made to work by forcing device's configuration not to check for the hardware's producer.

[edit] Connector conspiracy

Manufacturers of computer hardware sometimes design unusual or proprietary connectors. The reasons for such designs vary; some are intended to create lock-in, or force upgrading customers to replace more components than would otherwise be necessary; others are the result of practical considerations such as cost, packaging, ease of design, unusual or enhanced features; and still others result from an ignorance of standards, or even an absence of standards. There may be little immediate financial incentive for a vendor to provide backward compatibility or interoperability.

The term Connector Conspiracy[5] was coined to describe this situation, and implies the worst case scenario of a cabal of manufacturers colluding in secret to sell incompatible connectors. Yet actual lock-in attempts can fail, if adapters can be purchased or manufactured to make the components compatible.

[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^{[citation needed]}. 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. The history of SQL is an archetypical example.

Since the late 1990s^{[citation needed]}, the use of free and open source software (FOSS) has been pushed^[who?] as a stronger solution. Because FOSS 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^{[citation needed]}. 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.

[edit] See also

[edit] Notes

^ http://www.microsoft.com/interop/docs/OfficeBinaryFormats.mspx Microsoft Office Binary (doc, xls, ppt) File Formats
^ "Is Apple Playing Fair?" from the Northwestern Journal of Technology and Intellectual Property. Accessed October 9, 2007 from [1].
^ "iTunes user sues Apple over iPod" from the BBC. Accessed January 6, 2005 from [2].
^ "Antitrust Suit Against Apple Over iPod, iTunes to Proceed" from findlaw. Accessed September 22, 2005 from [3]
^ "Apple Launches iTunes Plus". Apple Inc.. 2007-05-30. http://www.apple.com/pr/library/2007/05/30itunesplus.html. Retrieved on 2007-05-30.
^ "iTunes violates Norwegian law". Norwegian Consumer Ombudsman. http://www.forbrukerombudet.no/index.gan?id=11032467. Retrieved on June 8 2006.

[edit] References

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
Vendor Lock-in Definition - by The Linux Information Project

[0] ttp://www.microsoft.com/interop/docs/OfficeBinaryFormats.mspx Microsoft Office Binary (doc, xls, ppt) File Formats

[1] "Is Apple Playing Fair?" from the Northwestern Journal of Technology and Intellectual Property. Accessed October 9, 2007 from [1].

[2] "iTunes user sues Apple over iPod" from the BBC. Accessed January 6, 2005 from [2].

[3] "Antitrust Suit Against Apple Over iPod, iTunes to Proceed" from findlaw. Accessed September 22, 2005 from [3]

[itunesplus-4] "Apple Launches iTunes Plus". Apple Inc.. 2007-05-30. http://www.apple.com/pr/library/2007/05/30itunesplus.html. Retrieved on 2007-05-30.

[5] "iTunes violates Norwegian law". Norwegian Consumer Ombudsman. http://www.forbrukerombudet.no/index.gan?id=11032467. Retrieved on June 8 2006.

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