Aug

13

Case study: Bell Atlantic and AT&T’s vendor lock-in battle

Filed Under business, cloud computing, paas, product management, saas, web 2.0 

One of the reasons I really hesitated in getting the eyePhone is because among other things, I truly dreaded the 2-year mandatory contract. I hated the idea of guaranteeing someone a consistent revenue stream and possibly be locked-in to their demands should they raise their prices.

Case study: Bell Atlantic and AT&T vendor lock-in battle.

In the 80’s, Bell Atlantic spent $3 Bil on AT&T 5ESS switches for Bell’s telephone network. AT&T’s switches were much more superior to Northern Telecom and Siemens at that time.

However, Bell didn’t properly size the vendor lock-in.

The 5ESS switches ran an operating system proprietary to AT&T, so whenever Bell wanted upgrades or new features, it was pretty much at the mercy of AT&T’s pricing weather.

Case in point: Bell Atlantic wanted its systems the ability to identify toll-free “1-800″ calls. AT&T didn’t provide (of course they didn’t!) any documentation or API for Bell to develop this feature themselves, and quoted Bell $8 Mil for a software upgrade just to do that. Bell had no choice and bent over. Voice dialing? $10 Mil! (really)

This extortion was a fat consistent revenue stream for AT&T, and made up 30-40% of AT&T’s switch revenues. AT&T’s position was further solidified by using its proprietary OS to prevent others from developing compatible equipment that may cannibalize sales from AT&T’s product line.

Bell Atlantic could not just throw AT&T out because (1) the switches had a lifespan of over a decade (2) removing and installing was expensive (3) the used switches had low re-sale value, because nobody not already locked-in would want to be locked-in ;)

In other words, the switching costs were astronomous, and Bell was hurting real bad in the wallet. It sued AT&T in 1995 for monopoly.

Shifting gears. To draw a parallel, in many ways, traditional on-premise software vendors use such tactics to .. well, play their hand.

With SaaS, this problem goes away. The customer can switch vendors on a dime; without the safety net of a perpetual licensing scheme, vendors have to constantly prove themselves by continuously delivering innovation and value to their customers — or risk losing them to the competition.

A flat world combined with fierce competition to innovate can only mean more and better options to the consumer :)

Unlike traditional on-premise vendors, SaaS vendors can’t rely on their own product development “baggage” to milk a drying revenue stream.

Share and Enjoy:These icons link to social bookmarking sites where readers can share and discover new web pages.
  • del.icio.us
  • digg
  • Reddit
  • YahooMyWeb

Comments

Leave a Reply