Vendor lock-in

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.

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

Vendor lock-in is often used in the computer industry to describe the effects of a lack of compatibility between different systems.

Different companies, or a single company, may create different versions of the same system architecture that cannot interoperate. Manufacturers may design their products so that replacement parts or add-on enhancements must be purchased from the same manufacturer, rather than from a third party (connector conspiracy). The purpose is to make it difficult for users to switch to competing systems. Examples include the several slightly different implementations of various open standards, the many variations of Unix, Microsoft Office's file formats, and also Microsoft's software in general.

This approach is not limited to the computer industry, however. For example, as of 2004, 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. Vendor lock-in for higher-end cameras takes the form of incompatible systems of lens mountings: a photographer who has purchased lens and other equipment from one manufacturer may find switching to a rival brand prohibitively expensive.

Additionally, computer printers suffer from vendor lock-in to an extent, with cheap printers often having high fees for consumables such as cartridges and print heads. While low-cost generic brand supplies are generally available, these are often of low quality and invalidate warranties.

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.

One way to create artificial lock-in for items without it is to create loyalty schemes. For example, frequent flyer miles that can only be used with one airline create a perceived cost of switching airlines, as do supermarket "discount" cards.

Microsoft

Microsoft software carries a high level of vendor lock-in, based on its extensive set of proprietary APIs.

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."

Apple Computer, Inc.

Apple Computer, Inc. is also sometimes accused of lock-in practices. Apple uses proprietary hardware that often cannot be replaced by 3rd party hardware of the same functionality. For example, Apple's software from the earliest version of MacWrite and MacDraw to the latest version of iLife all use proprietary formats that are not readable outside of Apple's hardware/software combination. With a small market share in computer hardware and software, there had not been any regulatory actions taken against Apple for lock-in for much of the company's history.

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 "iTunes user sues Apple over iPod" from the BBC. Accessed January 6, 2005 from [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 "Antitrust Suit Against Apple Over iPod, iTunes to Proceed" from findlaw. Accessed September 22, 2005 from [2].

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

Combatting vendor lock-in

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 obsolete the standard.

Since the late nineties, 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. This is interesting, not only because IBM was once one of the biggest users of the vendor lock-in tactic, but also because IBM is simultaneously funding and promoting software patentability and Trusted Computing", two of the currently biggest impediments to FOSS development.

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.

External links

*Vendor Lock-In (AntiPattern), which provides examples and notes alternative names such as "Pottersville".

Vendor lock-in: Encyclopedia BETA

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