This lecture describes some of the theory associated with competition in platform businesses and then looks at several examples of competition involving free products.
2. COMPETING WITH FREE
“There’s no business model ever struck off by the hand
and grain of man that can compete with free. It can’t
be done. If I have a Pizza Hut and I’m selling pizzas at
$1.50. Somebody puts up a pizza hut next to me and
gives them away, who do you think will get the
business?”
- Jack Valentini,
Motion Picture Association of America
3. Competing with Free
Concepts
- Winner takes all
- Envelopment
- Find the scarcity
Case Studies
- Microsoft vs. Piracy
- Microsoft vs. Netscape
- Microsoft vs. Linux
- Yahoo vs. Google
4. Winner-takes-all
Free markets can be
intensely competitive
Network effects
- Success -> more success
Examples
- Windows at the turn of the
century
- Xbox and PS
- Betamax vs. VHS standards
battle
- DVDs
5. To win the battle
Require differentiation or cost advantage
Plus three other factors:
1. Preexisting relationships with market side(s)
2. Reputation for winning
3. Deep pockets
First-movers can have an advantage
But so can late-movers
- Learn from mistakes of others
Move fast, but not too fast
- Don’t grow user base faster than you can scale
- Manage cash carefully
6. Envelopment
Rival platform with same
users offers your
functionality
- Bundled as part of a bigger
offer
- Blurs market boundaries
=> convergence
Examples
- Netscape vs Internet
Explorer
- Real Player vs Windows
Media Player
7. Defenses against
envelopment
Change business model
- Real changed subsidy market
- Charged consumers and provided content “Rhapsody”
Find a “bigger brother”
- Real partnered with broadband TV, cellphone co.
Sue
- Anti-trust law still open in this area
- Real sued Microsoft for $760M
- Time-Warner (Netscape) similar awards
8. Find the scarcity
Do something different
Go up market
- $4 latte vs. free coffee at work
Move past the commodity to find the scarcity
- Software is free -> sell support
- Phone calls are free sell the distant labor and talent
(Indian outsourcing)
Skills are being turned into a commodity
- Travel agents, stock brokers, realtors
- Move upstream
10. Piracy at home
1975, Bill Gates, Open Letter to Hobbyists
..most of you steal your software. Hardware must be paid for,
but software is something to share. Who cares if the people
who worked on it get paid?
As the PC grew up, people started to pay
Law suits, PR, license codes
- kept piracy in check
- …in the developed world
11. Piracy in the developing
world
…ran riot
Officially Microsoft took a hard line
In practice, realistic
- Real prevention expensive & painful for real users
- 1998 Gates:
- 3M computers sold in China – but they don’t pay for software
- One day they will
- If they are going to steal it we want them to steal ours
2009 Microsoft earned $1.25B in China
13. 1995 Netscape: over 80% browser market
Companies licensed Netscape to produce
branded Browsers
- IE 1.0 licensed by Microsoft from Netscape
- Windows 95 Plus Pack only
- 3 months later Microsoft launched IE 2.0
- Free to everyone
1997 Oct - IE 4.0 – turned the tide
16. Why did Microsoft win
Deep pockets
- Netscape’s total revenue never exceeded the interest
income of MS cash-on-hand.
- Once ramped up they could innovate faster
Microsoft owned the desktop
- 90% of machines ran windows
- Consolidated the browser into the OS
- Standard envelopment strategy
- "cut off Netscape's air supply” (Steve McGeady Intel)
18. Linux
Linus Torvalds
- Linux a simplified variation of UNIX
- Linux was the poster child for this new software
Initially developed by enthusiasts
Today represents a $30B market
- And its still free
19. The Penguin
Attacks
Initially Linux mostly competing with Unix
Eventually its success started to register in Redmond
Chris Anderson described the reaction by referencing
the classing 5 stages of grief
1. Denial
2. Anger
3. Bargaining
4. Depression
5. Acceptance
20. Stage 1:
Denial
Mostly for UNIX users
MS couldn’t understand: who would go for free?
- Headaches and costs of an unpolished solution
The problem
- Quality of a community supported Open Source product
increases rapidly
Oct 1998 the leaked “Haloween Memo”
- OS a “direct revenue and platform threat to MS”
- “free exchange of ideas…longterm mindshare threat”
Public executive dismisalls
- “Complex future projects…are things that Robin Hood and is
merry band…aren’t well attuned to do”
21. Stage 2:
Anger
In 1999the gloves came off
Linux is free?...like a puppy.
Five Linux myths
- Technical deficiencies
- High cost of administration
- Licensing cost is only a small part of the decision
Considered FUD – more effective strategy needed
http://web.archive.org/web/19991013044932/http://microsoft.com/ntserver/nts/news/msnw/LinuxM
yths.asp
22. Stage 3:
Barganing
Linux World 2002
By this time IBM had a whole Linux division
“We realized that we have to take the emotion out of it”
At Linux World Microsoft T-Shirts:”Lets Talk”
Proof of higher cost of ownership needed
- So they commissioned an independent study IDC
- Found MS was indeed cheaper (though not for webserving)
- Counter study commissioned by IBM
Transparency: MS shared source program
- A few government buyers went through the process but no real
impact
23. Stage 4:
Depression
Microsoft hired Bill Hilf
- Ran IBM Linux
Microsoft didn’t understand Open Source
- Considered purely a threat
- Fear of GPL contamination
Open Source lab
- Treated like a Biohazard
- No funding
- “The loneliest man in Redmond”
24. Stage 5:
Acceptance
Today the Open Source lab is thriving
Microsoft adopted the new reality
- Interoperate with free
Today there is a place for all three models
- Free
- Free + paid support
- Paid
By revenue MS dwarfs free models
By users its much closers
- If you include mobile and consider Android as Linux
- Then Linux has 2x the number of users that Microsoft does
26. 1 Gb of free storage
April 1st 2004 Google announced Gmail
- With 1 Gb of storage
Yahoo had been expecting this for years
- Yahoo dominant email provider
- 10 Mb storage for free
- 25+ Mb paid
- Business was profitable and brought traffic to Yahoo
Much easier for newcomer to offer more storage
- They had no users
- Yahoo had a massive install base – how would they
behave?
27. Yahoo responds
May 15th Rosenweig, Yahoo COO pulled the trigger:
- Purchased tens of millions of $ of servers
- Free storage 10Mb to 100 Mb soon go higher
- Premium users would get a refund
- By the end of the year they matched Google 1 Gb
- 2007 announced unlimited storage
- Limited rate of increase – drive as far as you like, not as fast
- 2013 reduced to 1 Tb for marketing reasons
Gmail gradually increased storage
- now 15 Gb shared with Google Drive
Yahoo was surprised by user behavior
- Didn’t leave in droves
- Email behavior didn’t change radically