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.

Examples of lock-in

SIM locking

Main article: SIM lock

SIM locking may be considered a vendor lock-in tactic as phones purchased from the vendor will work with SIM cards only from the same network. This creates additional inconvenience 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 expensive 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.^{[citation needed]}

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^{[dubious – discuss]}, 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.

Gift certificates

Gift certificates are textbook examples of vendor lock-in as they can be used solely in the vendor's shops. Gift certificates typically only worth their face price (no bonus credit is added), so generally, they do not represent any advantage over money.

Also, some vendors practice a store-credit/gift certificate refund policy in the time of warranty if they can't replace or repair the product. This is illegal in many jurisdictions as it forces the client to buy a different article in the same shop possibly for lower price/quality ratio. It's also possible that the client is forced to buy a completely different product if the original product line is no longer sold.

This policy is different from the refund policy in case of dissatisfaction. In this case, the vendor offers to exchange the article in a typically short time frame. If the article is not faulty then the vendor has no obligation to exchange or refund it unless he's committed to do so in advance.

Telephone equipment

The Bell System monopoly initially refused to allow anyone to interconnection of their network to other networks or to non-Bell equipment, until the Hush-A-Phone v. United States federal court ruling and the Carterfone FCC regulatory ruling.

The Bell System allowed interconnection to third-party equipment only through the added expense of protective acoustic coupler, while Bell equipment could be directly electrically connected to the network, until a later FCC order which led to standardized modular connectors.

Other examples

• Many printers manufacturers claim that if any ink cartridges, beyond those sold by themselves, are used in the printer, the warranty of the printer becomes void.
• The Filofax brand of personal organizers, for example, is not compatible with standard paper and ring-binder sizes, so users can buy additional and replacement 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.
• The K-Cup single-use coffee pod system is patented and licensed by Keurig, which is a subsidiary of Green Mountain Coffee Roasters. All K-Cups are licensed, there are no generics. K-Cup brewers can be used only with K-Cups, with the alternative being the optional reusable filter for use with any coffee grounds other than brands or blends approved by Keurig. Other Single-serving coffee brands, such as Nespresso, also have proprietary systems.
• Many vacuum cleaners are only compatible with specific filter bags.
• The detachable heads of electric toothbrushes can often only be replaced by heads made by the same company.

Lock-in for 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.

Adobe

Adobe is accused of vendor lock-in because of their Flash Player. Adobe's browser plug-in is present in over 95% of computers worldwide and has been a cause of scrutiny against its privacy policies.

In response to Flash Player's dominance as a video player, the HTML5 specification allows video playback without requiring the Adobe Flash plugin. In accordance with this standard, Mozilla Foundation has natively (no plug-in necessary) included Vorbis and Theora playback in its flagship browser Firefox starting from the version 3.5, as they say "to enable unencumbered, royalty-free, open-source friendly audio and video playback on the Web" and Firefox 4.0 and later versions supports native (no plug-in necessary) playback of WebM & VP8 in addition to Theora playback support.

As of 13 December 2010 (2010 -12-13)^[update], the biggest video website that has adopted HTML5 video playback is Daily Motion (with YouTube currently running a beta) although a sizable amount of videos aren't encoded with a royalty-free codec.^{[citation needed]}

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 punched card 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.

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,^[1] quotes, in paragraph 463, Microsoft general manager for C++ development Aaron Contorer as stating in a February 21, 1997 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 format MS-OOXML. This may make it easier for competitors to write documents compatible with Microsoft Office in the future by reducing lock-in. Microsoft released full descriptions of the file formats for earlier versions of Word, Excel and PowerPoint in February 2008.^[2]

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

Apple Inc.

Apple Inc. has historically been well-known for its lock-in practices. For a long time 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 Apple Desktop Bus system for keyboards and mice, their own LocalTalk networking system, the high-speed FireWire serial interface for storage and video transfer, the 30-pin iPod dock connector, and non-standard display interfaces such as ADC, Mini-DVI, and Mini DisplayPort. Due to Apple's smaller market share the number of third-party providers was more limited than for the competing IBM PC platform (though larger than for the Amiga, which had similarly unusual components), and third-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.

Prior to March 2009 digital music files with digital rights management were available for purchase from the iTunes music store encoded in a proprietary derivative of the .AAC format that used Apple's FairPlay DRM system. These files are compatible only with Apple's iTunes media player software on Macs and Windows, their iPod portable digital music players, iPhone smartphones, iPad tablet computers, and the Motorola ROKR E1 and SLVR mobile phones. As a result, that music was locked into this ecosystem and available for portable use only through the purchase of one of the above devices,^[3] or by burning to CD and optionally re-ripping to a DRM-free format such as MP3 or WAV.

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.^[4] 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.^[5]

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.

As of 29 May 2007 (2007 -05-29)^[update], tracks on the EMI label became available in a DRM-free 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.^[7] These files can be used with any player that supports the AAC file format and are not locked to Apple hardware. They can be converted to MP3 format if desired.

As of January 6, 2009, 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 charges consumers to have previously purchased DRM music restrictions removed.^[8]

As of the end of March, 2009, all music available on iTunes is DRM-free,^[8] however, digital downloads of television shows, movies, and iOS mobile apps through iTunes are still DRM-protected.

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. For 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
• Super Audio CD
• 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 and a number of other Sony products typically use Memory Stick cards that can be manufactured only by Sony, co-developer SanDisk, and select licensees. This memory can be more expensive in some markets when compared to alternative memory types that exhibit similar characteristics such as data transfer speeds. This is an example of vendor lock-in, as existing users of Sony products are less likely to purchase a competitors product that uses a different storage medium due to the extra cost of acquiring a differing storage media. Similarly this can discourage consumers with non-Sony merchandise from purchasing Sony products.

In contrast, Blu-ray Disc was developed by the Blu-ray Disc Association where Sony is a member, but does not have a controlling position.

Connector conspiracy

Manufacturers of computer hardware sometimes design unusual or proprietary connectors. The reasons for such designs vary; some are intended to quietly force customers into a vendor lock-in situation, 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^[9] 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.

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. But there is still a possibility that one software vendor uses "embrace, extend and extinguish" (EEE) tactics to achieves a dominant market share, which could render the standard obsolete. The history of SQL is an archetypal example.

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

In particular, copylefted FOSS is in some respects 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. It is also, however, particularly well suited to those tactics in other respects, such as in competition with non-copyleft free and open source software.^[10]

Similar models

Razor and blade

Main article: Freebie marketing

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.

Loyalty programs

Main article: Loyalty program

One way to create artificial lock-in for items without it is to create loyalty schemes. Examples include frequent flier 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.

See also

• Anti-pattern
• Embrace, extend and extinguish
• Format war
• Free software
• Groupthink
• Market power
• Network effect
• Open format
• Open source software
• Open standard
• Open system
• Path dependence
• Hardware restrictions
• Proprietary software
• Digital Dark Age
• Vendor Relationship Management (VRM)
• Customer Relationship Management (CRM)
• Extended Relationship Management (XRM)
• Capability Maturity Model Integration (CMMI)
• Capability Immaturity Model (CMII)

Notes

1. ^ "Commission Decision of 24.03.2004 relating to a proceeding under Article 82 of the EC Treaty (Case COMP/C-3/37.792 Microsoft)" (PDF). European Commission. March 24, 2004. http://www.microsoft.com/presspass/download/legal/europeancommission/03-24-06EUDecision.pdf. Retrieved June 17, 2009. 
2. ^ "Microsoft Office Binary (doc, xls, ppt) File Formats". February 15, 2008. http://www.microsoft.com/interop/docs/OfficeBinaryFormats.mspx. Retrieved June 17, 2009. 
3. ^ Sharpe, Nicola F.; Arewa, Olufunmilayo B. (Spring 2007). "Is Apple Playing Fair? Navigating the iPod FairPlay DRM Controversy". Northwestern Journal of Technology and Intellectual Property (Northwestern University) 5 (2). http://www.law.northwestern.edu/journals/njtip/v5/n2/5/#note10. Retrieved June 17, 2009. 
4. ^ "Itunes user sues Apple over iPod". BBC. January 6, 2005. http://news.bbc.co.uk/2/hi/technology/4151009.stm. Retrieved June 17, 2009. 
5. ^ Higgins, Donna (September 22, 2005). "Antitrust Suit Against Apple Over iPod, iTunes to Proceed". FindLaw Legal News. http://news.findlaw.com/scripts/printer_friendly.pl?page=/andrews/bt/cmp/20050922/20050922slattery.html. Retrieved June 17, 2009. 
6. ^ "iTunes violates Norwegian law". Norwegian Consumer Ombudsman. June 7, 2006. http://www.forbrukerombudet.no/index.gan?id=11032467. Retrieved June 8, 2006. 
7. ^ "Apple Launches iTunes Plus". Apple Inc.. May 30, 2007. http://www.apple.com/pr/library/2007/05/30itunesplus.html. Retrieved May 30, 2007. 
8. ^ ^{a b} "Changes Coming to the iTunes Store". Apple Inc.. January 6, 2009. http://www.apple.com/pr/library/2009/01/06Changes-Coming-to-the-iTunes-Store.html. Retrieved August 30, 2011. 
9. ^ "connector conspiracy". Jargon File. December 29, 2003. http://catb.org/jargon/html/C/connector-conspiracy.html. Retrieved June 17, 2009. 
10. ^ http://www.reedlearning.co.uk/learn-about/1/ll-open-standards

References

• Arthur, W. B. (1989). "Competing technologies, increasing returns, and lock-in by historical events". Economic Journal 97: 642–665. 
• David, P. A. (1985). "Clio and the economics of QWERTY.". American Economic Review 75: 332–337. 
• Liebowitz, S. J.; Margolis, Stephen E. (1995). "Path dependence, lock-in and history". Journal of Law, Economics, and Organization 11: 205–226. http://www.utdallas.edu/~liebowit/paths.html. 
• Liebowitz, S. J.; Margolis, Stephen E. (1998). "Path Dependence" entry". The New Palgraves Dictionary of Economics and the Law (MacMillan). http://www.utdallas.edu/~liebowit/palgrave/palpd.html. 
• Liebowitz, S. J.; Margolis, Stephen E. (1990). "The Fable of the Keys". Journal of Law and Economics 22: 1–26. http://wwwpub.utdallas.edu/~liebowit/keys1.html. 

External links

• Lessons from Format Wars has a section on Sony
• Vendor Lock-in Definition - by The Linux Information Project
• The Intertemporal Dynamics of Consumer Lock-In - by Gal ZAUBERMAN