A Leauki's Writings
The Fourth Strategy
Published on April 7, 2004 By Leauki In Consumer Issues
First Impressions

When I first tried to understand the market, apart from (what seems like the) basics like supply and demand and their immediate influence, I very quickly realised that the number one strategy to succeed was using, sorry: utilising, the services of government in the form of patents, land titles, corruption, and as a customer.

I later learned, and I was happy about it too, that not all companies rely solely on such mechanisms. I learned about two further strategies that are both interesting and very neat. And they are both a lot more clever than one would assume.

The Two Tricks

The first of these is working with the fact that a bit more is a lot more. Economics of scale and the network effect are the common incarnations. Economics of scale is the realisation that production of a greater number of identical or similar goods costs less per unit than production of only a few. The "network effect" is the phenomenon that for some products the value of the individual unit for one customer depends on the number of units in use by other customers or the number of such customers.

Mass production of any kind of goods is the textbook example for the first, the telephone is for the second.
It is obvious that the cheaper the production of subsequent instances of a product already produced once the more the product can profit from the impact of economics of scale. What is also obvious is that copyright offers companies an artificial mechanism to use that fact for ever-increasing profits. There is nothing cheaper than producing another copy of a written work already finished and waiting to be sold.

Combining the strategies seems to be of paramount importance. Perhaps if it was possible to find a third strategy that works with that fact...

Combination Paramount

The third strategy is, and this is surprisingly simple and yet shockingly complicated, to commodotize the complements. The cheaper it is for customers to buy other products that work with or require the original good, the more valuable the good becomes. This sounds easy, but it seems that implementation of the strategy is a very difficult task indeed. Not only need other vendors encouragement to even produce products that complement our good, but we also have to thwart their attempt to do to us what we want to do to them.

And here lies the problem with the third strategy. To encourage a vendor to make a product, the vendor has to believe not only that there is (or will be) demand for the product but also that supply will be low, so as to make it possible for the vendor to make a lot of money. The vendor can also sometimes be tricked into thinking that he can manage to commodotize his products' complements, of course, but this is going too far for our purposes here.

Microsoft tricked IBM into thinking that the IBM PC's complement, the operating system, would be a commodity. IBM wanted add-on cards to be a commodity from the very beginning. What in fact happened was that the IBM PC became a commodity. Microsoft had won.

System software enjoys supreme advantages from economics of scale (since a copy costs nothing), a rapid increase in value as more people use it (a feature commonly referred to as "compatibility"), and is required by a huge number of other products ranging from computer hardware to computer games.

Novellty Business

And it occurred to me, when Novell bought Ximian and SuSE and tried everything to befriend the Free Software community, that Novell might be trying to convince people to buy from Novell because Novell is a friendly company. Novell's first attempts last year seemed clumsy. They didn't seem to know how to be friendly, how to behave among those who have come to be suspicious of any company's motives, how to convince the community that they really mean well.

But I believe they do mean well and have convinced many. But this is new. Novell seem to have found a fourth way to succeed, or at least Novell think they have found a way and have decided to see where it will lead. They offer customers a choice and a few good wishes. The choice has been there before but the way is new in this market, at least as a primary strategy.

The Free Software community also take advantage of economics of scale and the network effect. But where Microsoft use the network effect to make Windows more valuable, the community use it to increase production (as one of the uses of open source software is modifying it, and the more people do that, the more people want to do it), and while Microsoft use economics of scale to produce identical copies of their software for zilch, the community, using software that is more difficult to use, enjoy the fact that the more often their software is being installed, the easier it is to install even more of it.

And if it wasn't for companies like SCO trying to use strategy one to make possible what the market doesn't seem to want to happen, the whole battle would be quite interesting and fair. So it remains interesting.

Novell are bound to add another strategy; maybe Microsoft will be in trouble, at last.

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