What it means for tech entrepreneurs
While the term “lock-in” might be unfamiliar to many, almost everyone has experienced its effects. From the use of the qwerty keyboard to the consumption of fossil-fuel-based electricity, society is dependent on previously adopted technologies without many alternatives, thus being locked-in.
It occurs when actors are stuck with a potentially inferior technology, because of the dependence on previous events or technological use, also known as path dependency. The prevalence of lock-in and path dependency is critical for tech entrepreneurs, since these can foster long-term competitive advantage and open up new opportunities.
From a tech entrepreneur’s perspective, creating a lock-in for its product or service is a strategic achievement for multiple reasons. Having a lock-in signifies greater adoption of technology, economies of scale, maximization of profit, and enhancement of brand identity. With a larger installed base, additional complementary goods can be produced for the users. These will create quasi-irreversibility, also considered a higher switching cost for the user, building an invisible barrier for competition. Given its market dominance, it may enjoy the privilege of setting “de facto” market standards.
Microsoft is a pertinent example for lock-in. Windows has been dominating the operating system market with 82% shares, and thousands of complementary goods (such as MS-Office Suite, Adobe Creative Suite, among others) were developed, which deepened the lock-in for Windows. Similarly, the MS-Office Suite enjoyed a monopoly for decades, setting standards for word-processing, computation, and database. New entrants like Google Suite followed Microsoft’s structure.
However, lock-in does not end the risk of competition. The quest for better technology and commercial gain will attract innovators to exploit the inefficiencies of the existing technologies. Although new entrants often focus on niche areas so that they can provide better services to the specific needs of the customers, often technological breakthroughs can disrupt the existing market. It is important to emphasize that better technology does not guarantee mass diffusion and adoption, but it is the switching cost and utility for the users which are keys to success.
Once dominated by Netscape (89% market share) in the early 90s, Microsoft’s Internet Explorer seized the internet browsing market (99% market share) by the end of the same decade. New players such as Mozilla and Chrome took over, and now Internet Explorer and Edge (new browser from Microsoft) consist of less than 5% of the market.
Similarly, Skype has completely disrupted the telecommunication market, and resulted in more than 350 billion pounds in lost revenue for the telecommunication companies. While Skype has largely focused on Voice over Internet Protocol Technology (audio and video call), a new competitor like WhatsApp initially focused on a niche market of instant messaging, and later clutched the major market share. Such takeovers were possible with a better technological solution, and no switching cost.
Despite the risk of competition, lock-in might fail to produce the envisaged benefit for the entrepreneur since such monopolistic ventures will bring forth scrutiny from the government and watchdog organizations, and push for changes. Rigorous scrutiny has been imposed by the government for tech-giants like Facebook and Google to explore potential meddling during the 2016 US presidential election.
Meanwhile, Facebook was fined 500,000 pounds for data breaching and manipulation in the UK, and Germany’s antitrust watchdog organization plans to bring similar charges.
Recently, Uber faced legal challenges in the UK when its license was rebuked due to concerns over public safety and operational negligence. Although granted with a short-term license after a court hearing, it cost Uber 425,000 pounds in legal fees, and was forced to make a significant alteration in business operations.
The Janus-faced nature of lock-in is important for tech entrepreneurs, since it can cause both economic benefits and external risks (from competitors or other stakeholders). While fostering lock-in can be a preferred strategy to sustain a competitive edge, it will fail to maximize value for the entrepreneur if continued innovation and ethical business practices are not maintained.
Thus, tech entrepreneurs should focus on both existing and emerging technologies, and take stock of socio-political and legal milieu to stay ahead of the curve by offering better and more innovative solutions to customers. Investing in technology, recruiting talents, broadening and deepening networks, and keeping liaison with the government and interest groups are some of the key aspects that tech entrepreneurs should prioritize to maintain market share.
Makshudul Alom Mokul Mondal is a graduate student at University of Manchester, and a Global Shaper at the World Economic Forum. He writes on multi-disciplinary socio-economic issues, and international affairs.