Razors, blades and business models

One of the classic stories that relate to business models involving compatibility standards is that of Gillette. The story goes that Gillette built a proprietary standard for safety razors and handles. To profit from this strategy, they gave away handles (or sold them at low cost), with the idea of selling higher priced razor blades on which they had a monopoly by virtue of the standard.

This, by the way, is the model that HP uses with ink jet printers ... you purchase a printer at relatively low cost (and below production cost) and HP will recoup this "investment" by selling you ink cartridges above production cost ... they NY Times wrote:

H.P.’s printing group has long been one of the company’s star performers. It accounts for nearly a quarter of overall revenue. Printer ink remains one of the most expensive liquids on the planet — more valuable than expensive perfumes — providing H.P. with far higher profit margins than PCs and other types of computing hardware provide.

This came to mind because of this paper by U. Chicago law school Professor Randall Picker. In it he writes:

The actual facts of the dawn of the disposable razor blades market are quite confounding. Gillette’s 1904 patents gave it the power to block entry into the installed base of handles that it would create. While other firms could and did enter the multi-blade market with their own handles and blades, no one could produce Gillette handles or blades during the life of the patents.

From 1904-1921, Gillette could have played razors-and-blades - low-price or free handles and expensive blades - but it did not do so. Gillette set a high price for its handle - high as measured by the price of competing razors and the prices of other contemporaneous goods - and fought to maintain those high prices during the life of the patents. For whatever it is worth, the firm understood to have invented razors-and-blades as a business strategy did not play that strategy at the point that it was best situated to do so.

It was at the point of the expiration of the 1904 patents that Gillette started to play something like razors-and-blades, though the actual facts are much more interesting than that. Before the expiration of the 1904 patents, the multi-blade market was segmented, with Gillette occupying the high end with razor sets listing at $5.00 and other brands such as Ever-Ready and Gem Junior occupying the low-end with sets listing at $1.00.

Given Gillette’s high handle prices, it had to fear entry in handles, but it had a solution to that entry: it dropped its handle prices to match those of its multi-blade competitors. And Gillette simultaneously introduced a new patented razor handle sold at its traditional high price point. Gillette was now selling a product line, with the old-style Gillette priced to compete at the low-end and the new Gillette occupying the high end. Gillette foreclosed low-end entry by doing it itself and yet it also offered an upgrade path with the new handle.

But what of the blades? Gillette’s pricing strategy for blades showed a remarkable stickiness, indeed, sticky doesn’t begin to capture it. By 1909, the Gillette list price for a dozen blades was $1 and Gillette maintained that price until 1924, though there clearly was discounting off of list as Sears sold for around 80 cents during most of that time. In 1924, Gillette reduced the number of blades from 12 to 10 and maintained the $1.00 list price, so a real price jump if not a nominal one. That was Gillette’s blade pricing strategy.

So another good story is shattered by facts ...

Mobile apps

If you have been following the standards battle between rival mobile operating systems, you will have noticed that one tie-in that the sponsors of each mobile OS touts is the number of apps that are available on their respective platform. This, along with complementary hardware, is an indicator of the size of the ecosystem, which is often a key determinant of a potential user's adoption decision (there are clearly others).

It should not come as a surprise that some observers, often advocates of those mobile OS's with the quantitatively smaller ecosystem, argue that the total number is less important that the number of useful apps. To that end the folks over at AppBrain used the data provided by their system (a subset of Android users) to plot the popularity of apps on the Android platform as measured by the number installed. The resulting curve looks perilously like a power law distribution ... as it should if you follow Chris Anderson's argument in the Long Tail.

Are mobile "bar codes" a new standards battle?

On a recent canal tour in Amsterdam, I noticed a QR code emblazoned on the side of a canal. At the recent Google I/O meeting, participants were given T-shirts with these codes on them. The Pittsburgh Post Gazette also prints a QR code on the front page.

If you haven't interacted with these, the basic idea is that you can, through your mobile phone, use the code to access information. You need a code scanner/interpreter on your phone, which takes images from the phones camera, decodes them, and then passes the decoded information to your phone's web browser, which then calls up the web site via your wireless Internet connection.

Microsoft has developed a denser code which it is trying to popularize. This code uses colors and other shapes as opposed to the black-and-white squares used by QR codes. It is not hard to conclude that this Microsoft code is in many ways superior since it can encode more information for a given surface area.

On the canal tour, I started to wonder whether this is the latest incarnation of the standards battles, the most famous of which is BetaMax vs. VHS, and the most recent of which is HD-DVD vs. Blu-Ray. In this case, QR codes seem to have the early lead because of their popularity in Japan, because they can be printed in black and white, and because they have (implicitly) Google's backing. Microsoft, for its part, has given away the required mobile phone software but must now convince publishers and content providers to use its code.

Is it a standards battle? Is it one that is already over or will Microsoft's technology win the day in the end?

Android and standards sponsorship

The story of Google's "sponsorship" of Android has been making the rounds on various mobile phone and gadget websites in the past days. This story appears to be the source. The essence of the story is this:

In just 18 months, the number of Google (NSDQ: GOOG) Android phones being shipped has soared to 60,000 a day, and over that period countless new devices have been released by handset makers for sale by carriers worldwide.

Nothing typically moves this fast in wireless. So how has Google done it?

Well, at least part of the answer appears to be that Google is sharing advertising revenues with carriers that use Android, according to multiple sources who are familiar with the deals. In some cases, sources said, Google is also cutting deals with the handset makers. The revenue-sharing agreements only occur when the handsets come with Google applications, like search, maps and gmail, since that is not a requirement of Android. Google declined to comment, and said terms of its agreements with partners are confidential.

When researchers began studying standards in the 1985-1995 timeframe (see, for example papers by me, Joe Farrell, Garth Saloner, Michael Katz, Carl Shapiro, Marvin Sirbu, Michael Spring and others), we focussed on understanding the market dynamics of standards wars -- why did one standard dominate the market? How did markets prone to standardization behave? Why do firms use the committee process and what is effective in this process?

Mobile phone operating systems for smart phones arguably represent a market prone to standardizations because of the application ecosystem demanded by users and because of the operating efficiencies demanded by carriers. So, why is Android succeeding where WebOS is struggling? One of the significant answers to this question is sponsorship. The endorsement of key handset manufacturers would encourage carriers to adopt the handsets because of operating efficiencies; however, that is perhaps a weaker form of sponsorship. Google's more overt sponsorship is far more compelling because it results in direct revenues for carriers and would account for the more enthusiastic reception of Android. In contrast, Palm has arguably a superior operating system in WebOS (also Linux-based) but does not have the resources to credibly sponsor its OS. As a result, its system and phones have received an embrace by carriers that is far more lukewarm than Android; indeed, it is perhaps only because of its compelling OS that Palm is getting any interest at all! Its Treo Pro phone, based on Windows Mobile, was treated with much less interest than its WebOS phones.

It is nice when reality lines up with theory!

LTE vs. WiMAX: The next standards rivalry?

Standards rivalries have always fascinated me. The dynamics are quite surprising sometimes. Until I saw this item over at GigaOm today, I thought that LTE had won the battle for the next generation mobile standard. What this article points out is that this may well be true for the industrialized world, but it is far from the case globally. So are not going to converge on a single mobile air interface (to facilitate roaming) this generation?

Standards rivalries

I have been interested in standards rivalries for a long time, so this article over at Ars Technica caught my attention (see this search on HD-DVD vs Blu Ray, for example). There are more nuanced analyses of both the Betamax vs. VHS and HD-DVD vs. Blu Ray rivalries, but I think the most interesting contribution of the Ars Technica article is the prediction of a shift from hardware rivalries to content distribution rivalries as we move from hardware to software. I think they have an interesting point, one that the economic literature on standards has not addressed explicitly (to my knowledge).

iPhone Apps and economic networks

I have blogged around this subject before, so when this article in BusinessWeek showed up, my interest was piqued. When economists began looking at standards in IT in the 1980s, researchers like Joe Farrell, Garth Saloner, Carl Shapiro and Michael Katz began noting the importance of networks of tie-ins to the lock-in often associated with standards. They noted in particular the importance of software to the success of PCs vs. Macs (though this view was disputed by Margolis and others).

The BusinessWeek article is significant because it shows a weakening of the tie-ins to the iPhone, which would, according to the economic theories of standards, suggest that the durability of this platform in the face of other existing (and emerging platforms) is not particularly strong. Note that this is not unrelated to the "opaqueness" of the approval process by the Apple App Store and the relatively poor profitability of iPhone apps.

Intel and Dell

I found this article, which describes the background behind Andrew Cuomo's (NY Attorney General) suit against Intel, interesting. Intel apparently made payments to Dell in exchange for their continued (exclusive) use of Intel processors in their machines. These payments were substantial:

In 2006, Dell received $1.9 billion. During two quarters that year, Intel payments even exceeded Dell earnings. In the quarter that ended in April, payments were $805 million, compared with $776 million in net income. For the quarter that ended in July 2006, Intel's payment amounted to 116% of net income.

I find this article interesting because it illustrates the "sponsorship" a "standard". Economists who have studied standards (Farrell, Saloner, Katz, Shapiro, David and others) have cited sponsorship as a rational strategy for firms wishing to establish (or defend) a de facto standard. In its interactions with Dell, Intel seems to view its processors as a standard platform for PCs (as opposed to Intel). Thus, this reveals the costs of (and limits to) sponsorship.

Linux development report

I came across this report by way of this article in Ars Technica. It brought to mind the paper I wrote with a student a decade ago or so where we looked at who was developing 10BaseT standards and who was profiting from them (i.e., free ridership) which was published in the now-defunct ACM StandardView.

There are lots of interesting data in this report if you're interested in studying FLOSS (eg. Linux). Apropos the free ridership article was this graph that I extracted from Table 10 of the report.
It is interesting that the largest single class of contributors are those claiming no commercial affiliation, hence people who don't directly profit from their effort. The graph does seem to exhibit a "long tail" character ...

IBM's new standards participation policy

IBM has announced a new policy with regard to standards particiption. There are a couple of interesting things around this. Notably, this policy was developed by IBM employees using a Wiki. Quoting the policy:

The tenets of IBM's new policy are to:

• Begin or end participation in standards bodies based on the quality and openness of their processes, membership rules, and intellectual property policies.
• Encourage emerging and developed economies to both adopt open global standards and to participate in the creation of those standards.
• Advance governance rules within standards bodies that ensure technology decisions, votes, and dispute resolutions are made fairly by independent participants, protected from undue influence.
• Collaborate with standards bodies and developer communities to ensure that open software interoperability standards are freely available and implementable.
• Help drive the creation of clear, simple and consistent intellectual property policies for standards organizations, thereby enabling standards developers and implementers to make informed technical and business decisions.

To me, it will be interesting to see how quickly IBM moves to adhere to this policy. Suppose there was a consortium that did not meet one of the tenets (eg. the first one) that was in an area of vital business interest to IBM. I wonder how they would respond?

More on standards rivalry

In this previous post, I described an emergent standards rivalry. Shortly after I posted it, this item appeared over at GigaOm.

Game Over: Blu-Ray seems to have won

This story over at TechCrunch points to the end of HD-DVD in the format wars. From the point of view of standards rivalry, what event(s) "tipped" the scales in favor of Blu-Ray? Warner's decision was clearly the precipitating event, but what was it that caused Warner to make this decision? Technical features of Blu-Ray? Sponsorship (via side payments)?

According to this article over at Forbes, the content industry is more interested in a standard, regardless of which. Their concern is the market for digital media.

I think the speculation that this may be hollow victory is more interesting ... quoting the Forbes article:

But Sony can't afford to spend too long drinking the champagne. The real news isn't that HD-DVD's future looks grim. It's that if Blu-Ray's backers can finish off HD-DVD quickly, Blu-Ray might have one.

With Apple, Amazon.com, NetFlix and Microsoft pushing downloadable movies and cable and phone companies peddling a plethora of on-demand, high-definition content, the day is coming when the stacks of plain vanilla DVDs that clutter many home entertainment centers will go the way of the CD collection.

JVC even introduced a flat-screen television at the International Consumer Electronics Show that allows users to simply pop in one of Apple's iPods to watch video content--threatening to turn the slim media players into an alternative to digital video discs. And Panasonic is building iPod docks into its home theater systems alongside an integrated Blu-Ray player.

Another worry, according to Robin Harris, an analyst with the Data Mobility Group, is that Blu-Ray adoption will be slow because few people will notice the difference between formats, since many players can neatly "up-convert" DVDs for high-definition sets. As a result, few will opt to replace their entire DVD libraries, as many did with the earlier generation of videotapes. "So is this going to be a pyrrhic victory for Sony? I think that there's a fair chance that it will be," Harris says.

HD-DVD vs BluRay (again)

So I can't keep my fingers out of this one, OK? There were two articles, both from Gizmodo, that I found interesting and relevant. The first is this one, which reports that the Toshiba HD-DVD player that has been selling for US$ 99 costs approximately US$674 to build. This is a classic "technology sponsorship" move, even if it is driven by retailers at this point. How long is this sustainable?

What is reported in this item is more subtle and is predictable when you have broad cartels consortia. Will Blu-Ray end up "losing" because of what amounts to unfinished standards?

4G Standards

I found this article in BusinessWeek interesting. The article describes the upcoming technology battle between Qualcom's UMB, GSM-based LTE, and next generation WiMAX for dominance in the 4G environment. One of the interesting things to me is that apparently Verizon Wireless, a CDMA-based carrier, is considering changing its technology to LTE. To me, this makes sense given that it is partly owned by Vodafone, and that its target market is more upscale and is therefore more likely to travel internationally. I am surprised that it has taken this long, and that they haven't followed Korean carriers in moving to HSDPA for the high end. Sprint, of course, has already declared WiMAX as their next generation standard. This seems to leave Qualcomm with few major backers. Still, this battle is far from over, it seems ...

Update (2007-11-8): I came across this item that is relevant to this topic. Does this change your sense of where this is going?

WiMAX news

WiMax got a few boosts over the past week:

• This article reports that WiMAX has been approved as an ITU standard. This endorsement means that it will be easier for companies to get spectrum for this technology. Since the ITU is a treaty organization, this approval can, in some countries, serve as an enabler for its adoption.
  
• This article reports that Taiwan has made commitments to invest in WiMAX networks
  
• Sprint has announced plans to continue its WiMAX rollout, despite the change in their executive suite.
  

Next Gen DVD format wars again

I keep coming back to this topic ... there were a couple of announcements recently that provided contradictory signals.

1. According to this, Blu-Ray disks outsold HD-DVD disks in the first nine months of the year in the US. This suggests momentum for Blu-Ray
   
2. According to this item, Samsung has abandoned its next generation Blu-Ray DVD player for one that plays both HD-DVD and Blu-Ray. This suggests that Samsung, a major backer of Blu-Ray, is not confident that Blu-Ray will win.
   

Do you think either of these facts are indicative of future outcomes? If so, which do you think is more meaningful?

Microsoft and the EU

As has been widely reported (see this), Microsoft's appeal of the European Commission's decision failed. This story in BusinessWeek and this one in the NY Times begin to contemplate some of the longer term consequences of this decsion beyond Microsoft.

Some of the other cases mentioned involve Qualcomm and other firms that have technologies that are either de facto or de jure standards. If the markets that these firms compete in benefit from standards, should the firms whose technology has been adopted by the marketplace be subject to government scrutiny or intervention? Should a de jure process exempt firms from this?

More broadly, how much should the government manage competition? Do consumers benefit from this kind of intervention? What should be the standard for determining "successful" government intervention?

Update (2007-09-18): Here is an analysis from TLF.

Update (2007-09-21): I found this item to be a worthwhile read. Do you agree or disagree?

Update (2007-09-25): This article suggests that smaller companies may begin "venue shopping" in the EU in order to gain favorable rulings. Is this a good development?

Update (2007-09-26): This item is critical of the EU ruling, and frames the Antitrust fine as a tariff that bypasses the WTO. Do you think this has merit?

Blu-ray recorders

This story is an interesting development in the ongoing format war. The price is steep, up to US$1752 (compared with US$199 for an upcoming HD DVD player).

How much would a 50 Gbyte hard drive cost? Are these storage media substitutable? Assuming that digital rights management (DRM) issues can be resolved, do you think that this feature will make a difference in this war? Has the market moved away from the need for high capacity, portable storage like this?

On this topic, China has announced a third format, as reported by Ars Technica. Do you think this will have an impact on the ongoing format war?

Standards and the future of CDs

For the recent anniversary of the compact disk, I was asked about the past and the future of this large scale data storage medium (this article in the Pitt News is a product of these queries).

In response to a question, I wrote:

I think the CD still has some value, though downloading has diminished the technology's future prospects. There are still a large fraction of consumers who purchase CD's , and they do so for several reasons. First, there are many music systems that accommodate CDs (home stereos, car stereos, etc.), so they remain more versatile until these are retired by consumers. A factor in this is the lack of a standard digital interface for MP3 players. Not everyone owns iPods! Second, CDs can be (legally) shared and resold. it is legal to create MP3 (or other compressed audio formats), so a CD gives owners the option of using multiple formats. Finally, CDs tend to be a more durable format. That is, it is not vulnerable to disk crashes or xray erasures the way hard disks or flash memory are.

We have also seen bridge technologies. Prior to CDs, cassette-based audiotapes dominated the music industry. Many cars had cassette players, so when CDs came to dominate, it was possible to purchase an (analog) cassette interface that connected to a portable CD player. In this transition, it is possible to purchase low power FM transmitters that use an "empty" slot in the FM band. The downside of this approach is that this "empty" slot varies by location, so it requires a bit of adjustment on the part of the user to match the tuner to the player. It is definitely not as good as the prior transition technology, in my opinion.

How much is the transition to MP3 players from CDs hampered by the lack of a standard digital interface? The de facto standard is Apple's iPod interface, though I don't know if other digital media players support that standard. Some audio devices now have an analog interface, which can be connected to the analog (headphone) output of the digital media player. Is that adequate?

More on standards committees

This item in the NY Times caught my eye today (it was a followup to this earlier one). It reminded me of the early days of digital communications, when AT&T came into the ITU with the T1 transmission system to have it standardized. It too failed ... and it led to a world of two standards -- the North American digital hierarchy and the ITU digital hierarchy.

It points to the reality that standards committees are made up of people, usually who work in organizations that compete in the marketplace. So, standards committee deliberations are extensions of marketplace competition. These discussions and decisions are also deeply influenced by all of our human traits and foibles that aren't always logical or rational.

So, much as Microsoft clearly wanted its Office Open XML standardized, do you think that they have the market clout to have its proprietary "standard" prevail? Are we going to have a world of two "standards"? If we do, is anyone going to care about the non-Microsoft one? Can Microsoft go another rout, such as the formation of an Open Office XML consortium to guide this standard, effectively bypassing ISO?