(Stanford BUS-21)
Martin Westhead
Mastering Marketing
Competing with Free
How to make money
by giving things away
COMPETING WITH FREE
“There’s no business model ever struck off by the hand
and grain of man that can compete with free. It...
Competing with Free
 Concepts
- Winner takes all
- Envelopment
- Find the scarcity
 Case Studies
- Microsoft vs. Piracy
...
Winner-takes-all
 Free markets can be
intensely competitive
 Network effects
- Success -> more success
 Examples
- Wind...
To win the battle
 Require differentiation or cost advantage
 Plus three other factors:
1. Preexisting relationships wit...
Envelopment
 Rival platform with same
users offers your
functionality
- Bundled as part of a bigger
offer
- Blurs market ...
Defenses against
envelopment
 Change business model
- Real changed subsidy market
- Charged consumers and provided conten...
Find the scarcity
 Do something different
 Go up market
- $4 latte vs. free coffee at work
 Move past the commodity to ...
MICROSOFT VS PIRACY
Piracy at home
 1975, Bill Gates, Open Letter to Hobbyists
..most of you steal your software. Hardware must be paid for,
...
Piracy in the developing
world
 …ran riot
 Officially Microsoft took a hard line
 In practice, realistic
- Real prevent...
MICROSOFT VS NETSCAPE
http://en.wikipedia.org/wiki/Browser_wars
 1995 Netscape: over 80% browser market
 Companies licensed Netscape to produce
branded Browsers
- IE 1.0 licensed by Mi...
Netscape 72 : Microsoft 18
Why did Microsoft win
 Deep pockets
- Netscape’s total revenue never exceeded the interest
income of MS cash-on-hand.
- O...
MICROSOFT VS LINUX
Linux
 Linus Torvalds
- Linux a simplified variation of UNIX
- Linux was the poster child for this new software
 Initial...
The Penguin
Attacks
 Initially Linux mostly competing with Unix
 Eventually its success started to register in Redmond
...
Stage 1:
Denial
 Mostly for UNIX users
 MS couldn’t understand: who would go for free?
- Headaches and costs of an unpol...
Stage 2:
Anger
 In 1999the gloves came off
 Linux is free?...like a puppy.
 Five Linux myths
- Technical deficiencies
-...
Stage 3:
Barganing
 Linux World 2002
 By this time IBM had a whole Linux division
“We realized that we have to take the ...
Stage 4:
Depression
 Microsoft hired Bill Hilf
- Ran IBM Linux
 Microsoft didn’t understand Open Source
- Considered pur...
Stage 5:
Acceptance
 Today the Open Source lab is thriving
 Microsoft adopted the new reality
- Interoperate with free
...
Battle of the Internet
Giants
1 Gb of free storage
 April 1st 2004 Google announced Gmail
- With 1 Gb of storage
 Yahoo had been expecting this for ye...
Yahoo responds
 May 15th Rosenweig, Yahoo COO pulled the trigger:
- Purchased tens of millions of $ of servers
- Free sto...
How to compete with free products
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How to compete with free products

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This lecture describes some of the theory associated with competition in platform businesses and then looks at several examples of competition involving free products.

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How to compete with free products

  1. 1. (Stanford BUS-21) Martin Westhead Mastering Marketing Competing with Free How to make money by giving things away
  2. 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. 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. 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. 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. 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. 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. 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
  9. 9. MICROSOFT VS PIRACY
  10. 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. 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
  12. 12. MICROSOFT VS NETSCAPE http://en.wikipedia.org/wiki/Browser_wars
  13. 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
  14. 14. Netscape 72 : Microsoft 18
  15. 15. 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)
  16. 16. MICROSOFT VS LINUX
  17. 17. 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
  18. 18. 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
  19. 19. 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”
  20. 20. 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
  21. 21. 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
  22. 22. 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”
  23. 23. 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
  24. 24. Battle of the Internet Giants
  25. 25. 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?
  26. 26. 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
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