Locked-in

Lock-in as a marketing strategy is alive, well, and unfortunately growing.

For dot-communists and those raised in the era of Linux, vendor lock-in is the art of keeping customers captive. By making people commit to a technology, and thus raising the pain of switching away from said technology, vendors cause customers to linger even when they do not want to. I know CIOs who for decades have blustered against Cognos and being locked into stiff annual license fees for PowerHouse, Cognos’ ancient 4GL.

Yet they pay the fee every year knowing that rewriting thousands of lines of PowerHouse code is pretty pricy too.

Another variation of vendor lock-in is commonly called upgrade robbery. I encountered such a scam this week when I noticed my ancient (circa 2003) smartphone buttons started to stick. In order to upgrade to a newer smartphone, AT&T insists that I buy $720 worth of wireless data that I do not need or want. My options are to switch carriers (who currently require the same data plans), or buy an unlocked phone for which AT&T may or may not automatically add a data plan for using. More maniacal still is that mandatory data plans are designed to condition cellular subscribers into using data services. Thus, at the end of a two year data engagement, the luxury of wireless data will have become and necessity.

Pretty pricy phones.

Amazon also has a bit of a lock-in with their popular Kindle ebook reader, though their version of lock-in is somewhat friendlier. The data format for Kindle books is proprietary, and Amazon is in no hurry to openly license the format to competing hardware makers. Buying an Amazon ebook means only owning Kindles for reading it, which if you are a typical bibliophile or literary pack rat means you have one and only one upgrade and replacement path – Amazon lock-in.

Pretty pricy e-paper.

Oddly, lock-in rarely lives long, with Cognos being an obvious exception. Customer lock-in is a strategy that invites competition, either with competing proprietary products, or more insidiously with open technology. Just ask Steve Balmer if Linux has caused Microsoft any problems in the market (and if you want to see Steve toss another chair, ask him if Vista caused Microsoft any problems in the market).

Already we see cracks in the each of the lock-in strategies. AT&T and their enabler Apple are repeatedly prodding Google to go nuclear, and recent rumors indicate Google may break the upgrade lock-in mechanism. Google is allegedly entering the hardware business and launching their own phones, to be available unlocked and at retail. Since G-phones are just as slick as iPhones, and since their open source souls allow for a broader range of potential applications, this is a market changing event. In the short term AT&T, Verizon and other lock-in experts will likely gouge customers slipping an unlocked G-phone onto their networks.

And that will be a mistake.

Smaller and hungrier carriers have already adjusted their voice plans to compete with the confusing and costly packages offered by the likes of AT&T and Verizon. Smaller carriers already offer flat-rate, unlimited voice plans and are earning sufficient revenues to expand their coverage maps (the chief differentiator of the major carriers). With over 70 GSM carriers in the U.S., the potential for competition is huge – vendor lock-in is thus a poor long term strategy.

This is where Google aggravates this situation. Currently, unlocked phones are a small business (albeit growing). Amazon sells unlocked phones, but has a special FAQ page due to the confusion factor and a general lack of iPhone-level lust for unlocked gizmos. A Google phone on Wal-Mart shelves with Google-simple instructions for swapping SIM cards will change the demand side of the equation. This will help the smaller carriers and tempt one of the major carriers to drop the data plan requirement.

Likewise, Barnes and Noble is teaming up with Adobe to promote open standards in ebook data formats, directly attacking Amazon’s Kindle lock-in and opening the ebook reader market to manufactures everywhere.

So when should a vendor employ a lock-in strategy? It depends on how much of your soul you are willing to give the Devil, but it does have a place in growth strategies. In new markets where you are taking large risks by inventing and promoting new product concepts, lock-in may be necessary to temporarily forestall competition and to guarantee some degree of recurring revenue. Amazon’s Kindle is a good example. Though not a new concept, Amazon was attempting to popularize ebooks and needed to assure that consumers would come to Amazon to buy the books as well as the reader. Publishers also need some assurance that the market would not be confused by too many products spread over too many vendors.

But lock-in is short lived – aside from mainframes and Cognos PowerHouse – and should not be a strategy on which to pin all future hopes. Amazon should have moved toward an open document format with the Kindle II, which in the short run would have cannibalized hardware sales while solidifying Amazon as the place for ebooks and growing the ebook market.

I’d have more to say, but I want to spend some time browsing unlocked phones on Amazon.


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