Exclusive Licensing in Complementary Network Industries

1
Exclusive Licensing in Complementary Network
Industries

• Ravi Mantena U. Rochester
• Ramesh Sankaranarayanan U. Connecticut
• Siva Viswanathan U. Maryland

2
Motivation for exclusivity

• Industries with indirect network effects
• Platforms and complements/content
• E.g. Video game consoles and games DVD formats
  and DVDs Cable / satellite and program channels
  etc.
• Complement exclusivity is often important to
• Acquire new customers
• GTA III (Rockstar) released October 2001 for
  PlayStation 2 totally blew away gamers around
  the world and almost single-handedly made the PS2
  a must-buy. NY Times Oct, 05
• Sony's PlayStation 2 dominates the videogame
  industry, largely because many of the most
  popular games work only on the Sony console.
  Wall St. Journal May, 05
• Differentiate from competing platforms

3
Salient Characteristics of the Context

• Customers in this industry
• Mainly interested in complements
• Prefer variety more is better!
• Join one platform, buy multiple complements
• Platforms
• Are typically incompatible
• Control access to their members by complements
• Complements usually have
• High fixed costs, some porting costs
• Negligible marginal costs
• Availability on multiple platforms desired,
  efficient

4
Research questions

• Under what conditions are complements supplied
  exclusively, and for which platform?
• Impact of permitting exclusivity on industry
  outcomes compared to when exclusivity is not
  permitted.

5
Set-up Players

• Platforms
• Two platforms A and B with members nA, nB. (nA gt
  nB)
• New customers (nN)
• Complements
• Many available for each platform
• Number depends on size of membership network
  (indirect network effects)
• Only a single developer behaves strategically
• Consumers
• New customers buy a platform and some associated
  complements
• Current members of platforms buy only complements

6
Set-up Game Structure
7
Set up A few more details

• Each customer segment has a representative
  consumer with utility U(xg, xh)
• G Strategic complement developer
• Pays license fee lkr to platforms per copy of
  complement sold
• H Composite commodity representing set of
  non-strategic complements
• Whose quality is increasing in number of
  varieties available
• Pay a fixed license fee L per copy
• U(xg, xh) is increasing in quantity and displays
  some desire for variety

8
Complement Trade-offs

• Strategic complement
• Increases consumer spending on complements
• However, some cannibalization
• Trade-off for complement developer
• Smaller platform has higher incremental value,
  provides higher demand
• Larger platform has more customers, but is more
  competitive
• Overall Unclear which way to go

9
Factors Driving Outcomes

• Additional benefit to a platform from complement
  exclusivity as compared to a situation where the
  complement is exclusive to the other platforms
  (?A, ?B)
• This depends on
• Impact of complement on platform sales to new
  customers
• Impact on profits from complement sales
• Impact on platform prices via differentiation

10
Exclusive Non-exclusive Outcomes
11
Share of Profits as Market Matures
12
Share of Profits as Market Matures
13
Summing Up

• Larger platform generally has an upper hand
• But may be caught in a prisoners dilemma
• Smaller platform can garner exclusivity in later
  stages.
• Complements are much more likely to be exclusive
  in the early stages of a platform adoption
• Complements Profitability decreases with market
  maturity
• More competition from existing bundle of
  complements
• Complement ceases to be a strategic necessity
• Quality of Complements
• Later complements would need to be of higher
  quality.
• However, higher quality complements are more
  valuable in the early stages of platform
  competition.

14
Platform price rises as market matures
15
Profits of Platforms Strategic Complement
16
Profit-shares of Platforms Strategic Complement
17
Share of incremental surplus for larger platform,
complement