Furthermore, the additional storage usage of each segment determines the customer set for that segment. Users buy storage devices because they have specific storage needs. Users do not want to pay for services that they do not need. Therefore, the segment whose characteristic capacity satisfies the most popular or common storage needs will be the one whose market size will grow to be the largest. Additionally, the consumer can buy the lower capacity technologies for a lower cost. Given that the future will follow similar trends as the past, we can assume two things; (1) the technically superior product does not always win; and (2) price is important.[1]

Consequently we have the following relationships;

1. the capacity associated with each segment determines the additional storage usage of the technologies in that segment which in turn determines the customer set for that segment;
2. the popularity of the additional storage usage associated with each segment partially determines the market size of that segment relative to the entire market;
3. the capacity associated with each segment determines the price range of the individual technologies within that segment which in turn also partially determines that segment's market size relative to the entire market.

For the above reasons we have divided the technologies into four capacity/usage segments. The first, which we will call the Low End capacity segment, is comprised of the 100-150MB capacity technologies. The Iomega Zip and ZipPlus drives (100MB) and the Imation SuperDisk (120MB) are in this category. With this capacity several entire software applications and PowerPoint presentations will fit on the media thus making file sharing, file transfer, and file backup the primary storage usage of this Low End capacity segment technology.

Clearly the Low End capacity segment technologies today provide a similar usage to that of the 1.44MB floppies of the past, and therefore the technologies that comprise this segment are good candidates for replacing the 1.44MB floppy technology. The customer set for this Low End capacity segment, being identical to the 1.44MB floppy's customer set, is comprised of individual end users (sometimes referred to as the retail market) who use the external versions of these disks, as well as Original Equipment Manufacturers (OEMs) who install the internal versions of these disk technologies into their packaged computer systems.

The second segment, the Mid-Range capacity segment, is comprised of the 200-250MB capacity technologies. Sony's HiFD (200MB), Iomega's Zip drive (250MB), SyQuest's EZFlyer (230MB), and Avitar's Shark Mobile Hard Drive (250MB) are in this category. This Mid-Range segment's larger capacity technologies have an additional storage usage which expands the Low End capacity segment's primary usage of file sharing, file transfer, and file backup to include the storage of very large files such as photography files, desktop publishing files, complex graphics files, and multimedia files (i.e. video and audio files). This latter list of very large files would not easily fit onto the media of the Low End capacity segment (much less onto a 1.44MB floppy disk).

Clearly these Mid-Range capacity segment technologies provide a wider range of storage services than both the Low End capacity segment and the 1.44MB floppy technology. The customer set for this segment consists basically of individual end users. However, with ever-increasing file sizes the extra capacity of the Mid-Range segment technologies may soon be required just to achieve the basic functionality that the 1.44 MB floppy technology achieved in the past. Should this be the case, the Low End capacity segment technologies would fall short of meeting the popular or most common storage needs of the end users. In this case it is entirely possible that the OEMs would opt for installing the Mid-Range capacity segment technologies into their systems instead of the 1.44MB floppies and/or the Low End capacity segment technologies. Given this scenario, the OEMs would then become Mid-Range capacity segment technology customers as well, and one of the technologies that comprise this Mid-Range capacity segment might very well be the better choice candidate for replacing the functionality of the 1.44MB floppy technology.

However, in order for it to be economical for the OEMs to install the internal versions of either the Low End or the Mid-Range capacity technologies into their systems, the current costs^[2] for the technologies in both capacity segments must come down. It is assumed that in the near future these costs will naturally lower as the experience learning curve is exploited and as production of these technologies hits higher volumes,^[3] but unless this happens the OEMs will not be part of either capacity segment's customer set. In this case, it would be highly unlikely that any one of the technologies in either of these capacity segments would win the standards war since internal installation by the OEMs is one of the most important criteria for replacing the 1.44MB floppy technology and thereby winning the standards war.

The third segment, the High End capacity segment, is comprised of the 1-2GB capacity technologies. SyQuest's SparQ (1.0GB) and SyJet (1.5GB), Iomega's Jaz drives (1.0GB and 2.0GB), and Summatic's MobileDrive (2.1GB) are in this category. These capacities are an order of magnitude greater than the capacities offered in the Low End and Mid-Range capacity segments. Consequently the additional storage usage of this High End capacity segment expands the usage of the previous two segments accordingly and thus it includes backup and system recovery, security, entire multimedia downloads, complete video storage and playback (50 to 100 minutes worth), entire environment sharing, mobile, highly flashy multimedia applications, laptop portability, and multiple Operating System environments. The higher capacity of these High End capacity segment technologies dictates a higher price for both the drives ($229-$299 in today's economy) and the media ($50 to $150 again in today's economy). Unless the cost of these higher capacity technologies significantly drops, it is almost certain that the OEMs could not afford to internalize these technologies into their systems as standard equipment. In this case, therefore, for the foreseeable future, the major customer set for this High End capacity segment will almost certainly be limited to the end users (i.e. the retail market).

The fourth and final of our segments, the Very High End capacity segment, is comprised of the technologies that have a capacity greater or equal to 3GB. The Summatec Mobile Drives (3GB, 4GB, and 5GB) are in this category. As with the other segments, this Very High End capacity segment further expands the usages of the previous three lower capacity segments. The additional storage usage of this Very High End capacity segment includes total replacement or total backup of the installed hard disk, a removable second hard disk, and portability of entire environments including the Operating System. As with the High End capacity segment, the technologies of this Very High End capacity segment are quite costly due to the higher capacity being offered, ($299 for the external drive station, plus $399, $499, and $799 for the 3GB, 4GB and 5GB cartridges respectively). Consequently it is also very unlikely that any of these technologies would ever be affordable enough for the OEMs to install internally into their systems as standard equipment. For this reason, and probably for some time into the future, the customer set of this Very High End capacity segment is confined to special needs end users. Consequently, like the High End capacity segment, the technologies that comprise this Very High End capacity segment are likewise not good candidates for replacing the 1.44GB floppy technology nor for winning the standards war.

Since both the High End and the Very High End capacity segments are not good candidates for replacing the 1.44MB floppy technology and therefore very unlikely to win the standard's war, we will not be analyzing these two segments any further in this paper.

More detailed information can be found in the following three Appendices:

1. Appendix I gives a summary of the specifications which are characteristic to each capacity segment.

2. Appendix II is a specification table by vendor for High Density Removable Storage for the Low End and Mid Range capacity segments.

3. Appendix III is a specification table by vendor for High Density Removable Storage for the High End capacity segments.

• Iomega

  In 1994, Iomega was a company in trouble. Iomega could only sell about 100 thousand units a year of its principle product, a removable hard disk called a Bernoulli Drive. After conducting elaborate focus groups with thousands of consumers, the company decided that there was a need for a lower end storage device of approximately 100MB with media costing less than $20. The company went through several design iterations with consumers, and finally settled on a drive geared for after-market retail sales. The final design was front loading, had an attractive cobalt blue case the size of a paper back book, and could only read and write to proprietary Iomega 100MB disks. The drive enjoyed explosive sales after its introduction in March 1995, selling more than 1 million units in less than a year.

  Iomega later introduced an internal version of its Zip drive, and since then it has been aggressively marketing this drive to OEMs. Most of the largest OEMs now offer Zip drives as optional equipment on their computers, and some even offer it as standard equipment on their higher-end models. In addition, Iomega's success in the retail market has helped create consumer demand for OEMs to offer Zip drives in their PCs. These strategies are analyzed in more detail later in the Strategy Section below.

  The Zip drives have been making Iomega money using what is referred to as a "Razor and Blades" strategy – selling the drives for a modest 15% margin, while selling the disks at an 80% margin.[4] The motivations, benefits, and risks of this strategy will be analyzed in more detail in a later section below.

  Iomega has recently introduced a higher capacity, 250MB version of its Zip drive called Zip250. The Zip250 drives are backward compatible with Iomega's 100MB disks. To date, Iomega has only released an external version of Zip250 with the drive costing about $200 and with disks selling for approximately $20.

• Imation

  Competing with Iomega Zip is the Imation SuperDisk. Imation, a spin off from 3M Corp, and its partners Compaq, Matsushita Kotobuki Electronics Industries, and others have bet that backwards compatibility with 1.44MB floppies is the key to becoming the next removable storage standard. The LS120, since renamed SuperDisk, was released in spring 1996. The drive has a capacity of 120MB, can read and write 1.44MB floppies, and has a read speed of 290KB/s – too slow for video playback. The drive has suffered slow sales, being outsold by Zip 10 to 1.

  Iomega was an early partner in developing the LS120 in 1994, but left the group to develop its Zip drive. By being incompatible with the 1.44MB floppies, the Zip drive is less complicated than SuperDisk, which may be why Iomega succeeded in getting its product to market faster than Imation. (See Strategy section for a discussion of Performance Play vs. Controlled Migration)

  Like Iomega, Imation has been aggressively marketing its drive to OEMs, and many now do offer the drive as optional equipment. However no OEM, not even Imation partner Compaq, offers the drive as standard equipment.

• Sony

  The Sony HiFD drive is the other major player in the floppy disk replacement war that is actually compatible with the old 1.44MB disks. Like Imation, Sony believes that backwards compatibility with the 70 million floppy disk drives and 3 billion floppy disks that are now sold each year is essential to winning this standards war. Sony partnered with Fuji Film to develop a higher capacity disk media and a read/write head that can read both 1.44MB floppies and the much denser, new 200MB HiFD disks. The Sony HiFD, with its 200MB capacity, can store more than both SuperDisk and Zip, and also has a faster speed allowing it to play full motion video. (See Appendix II for specific performance details.)

  Though technically superior to SuperDisk, and Zip, HiFD has disadvantages. The unit is priced at $199, which is higher than the $150 price of both the Zip and SuperDisk. But perhaps most importantly the Sony HiFD has been late to the market, with the external version of the drive just being released, and the internal version still to come. Thus Sony is lagging far behind in the race to get OEMs to sell their products.

• Other Players

  For a time, SyQuest was a player in the Mid Range segment of the market with its 230MB EzFlyer drive, but, as mentioned above, SyQuest went bankrupt and is now out of the race. Another player, Avatar, sells a 250 MB removable hard drive, called a Shark drive, that has gained some popularity in the notebook PC market.

  Two small start-up companies, Swan Instruments and Caleb Technologies are entering the race with their own drives which have a capacity of 144MB and 130MB respectively. Both are backwards compatible with the 1.44MB disks, and are not compatible with each other or any of the drives discussed above. In such a crowded field, few think these companies have much chance in the market. Samsung also plans to offer a drive that is backward compatible with 1.44MB disks. The drive will have a 123MB capacity – similar to that of SuperDisk. All of these smaller players have had such a small presence in the market that it is highly unlikely that they will have any impact in the standards war.

Switching Costs and Lock in

A customer is locked-in to a product when the cost of switching to a competitive product is so high that switching is discouraged. Some switching costs are incidental and cannot even be quantified, while others are monumental and can add up to millions of dollars and thousand of hours of re-work. The bottom line is that lock-in is a powerful tool for a producer when used strategically, and can be a dangerous trap for a consumer when not fully considered.

In addition, Iomega uses its first mover advantage in the retail market to improve its position in the OEM market with what we call an end-user pull strategy. The idea of a pull strategy is that success in the retail market builds up brand identity and establishes a large enough user base that network effects and positive feedback kick-in, creating such strong consumer demand for the product that OEMs are compelled to bundle the product with their PCs. [5]

Indeed Iomega's installed base has influenced many OEMs to offer the Zip drive as optional equipment, but virtually no OEMs offer the Zip drive as standard equipment. According to a senior analyst at IDC, Iomega would need to lower the cost of its drives to OEMs from about $50 to $30 for OEMs to make the drive standard. Again first mover advantages play a role. By having now produced 20 million Zip drives, Iomega is much further down the experience curve than its competitors, and thus much more likely to produce a low enough cost drive to meet this $30 threshold.

As we have said, being the first mover usually means having the largest installed base. The key for first movers to maintain their edge is to defend their base, and it seems that Iomega is already in defense mode. For example, Iomega recently bought the assets of SyQuest who had threatened Iomega with its technically superior EzFlyer and SparQ products. It seems that rather than incorporate and promote this technology, they are just sitting on it for the moment. Iomega even makes it clear on its WebPages that it does not support any SyQuest products. It might be too early to tell, but thus far, we believe that Iomega bought SyQuest to protect its own installed base against SyQuest's superior technology.

Penetration pricing, the practice of pricing aggressively (low) to grow market share, is a close cousin to first mover advantage, and has three effects that may result in an advantage for the practitioner. First, by pricing aggressively, the first mover is more likely to sell enough units to achieve critical mass and positive feedback more quickly. Furthermore, at lower prices, the first mover should be able to move more volume, increasing its lead on the experience curve, making entry even more daunting for potential competitors.

The second effect is closely related to the first. In the disk drive industry, due to the razor and blade revenue model, a large installed base also means a greater profit stream. So firms in this industry will price the drives aggressively (low) while extracting larger profits from the aftermarket (higher priced) media sales.

The last effect of penetration pricing is that it signals to potential entrants that few profits are to be made in the market. As can be seen, the incumbent firm can use penetration pricing to fortify its own position while simultaneously discouraging competitors from challenging.

Compatibility, both backward and horizontal, is a crucial issue in this industry. By backward compatible we mean that a new disk drive is compatible with previous generation's technology, in this case the 1.44MB drives. Horizontally compatible means that drives are compatible with each other across the different manufacturers. But, of course, we have a standards war just because there exists no such compatibility across manufacturers or consortiums.

Varian and Shapiro claim there are four basic strategies that can be used to win in a networked environment. (See table below) These strategies are derived from the matrix of four factors relating to the technology: compatibility, performance, control and openness. The theory assumes that tradeoffs exist between compatibility and performance, as well as between control and openness. For example, to achieve backward compatibility, a firm must sacrifice some amount of performance. To achieve an open standard, a firm must sacrifice the control it might have over how consumers migrate to the new technology.^[6] By putting these trade-off couplings in a matrix we are left with four strategies, as is seen in the table below.

Using these four strategic options as a framework, we will analyze the way each company has played in the fight over the removable drive market.

Iomega: Because Iomega was a new player, the first mover, and because switching costs among consumers were low, the performance play was a wise move. Iomega had no presence in the 1.44MB drive market and so was not in any danger of cannabilizing its own sales with their new incompatible drives. Furthermore, as the first mover with a proprietary technology, Iomega was able to build its customer base early, taking advantage of the lock-in and positive feedback effects described in detail above.

The success of Iomega's performance play may have been contingent on the way customers used disk drives when they were first introduced. Although Zip drives are now frequently used to transfer files, when Iomega first introduced them customers perceived them as a way to augment their current storage capabilities. This has important implications for the adoption/switching costs new customers faced. Customers did not view purchasing a Zip drive as switching away from the current technology of 3.5" drives, but rather as an alternative to buying either additional hard drives or a whole new CPU, alternatives that were all greatly more expensive than a Zip drive. Therefore, the adoption costs of Zip drives by customers were very low, relative to the alternatives. Of course, as more customers adopted Zip drives, the more useful they became for sharing files, so that they evolved into being considered as substitutes for 3.5" floppy drives. Among today's consumers seeking a substitute for 3.5" floppy drives, Iomega's lack of backward compatibility may slightly increase their switching costs, but this switching cost may be more than offset by the advantages of owning a drive with a comparatively large base of other users.

Imation: Imation is pursuing a controlled migration strategy in hopes of making it easy and cheap for customers to switch from 1.44MB floppy drives to Imation's next generation technology. However, as the aftermarket peripherals (diskettes) of the floppy drive market are essentially free and the drives themselves are incredibly cheap ($15) and always bundled with PCs, we believe Imation is overestimating the importance of the installed base of 3.5" floppy drives. In other words, it is overestimating customer lock-in to floppy drives. (See the OEM section that follows for a more complete discussion on the value of backward compatibility.)

Sony: Sony is pursuing a similar strategy to that of Imation, but with two twists. Like Imation, Sony's HiFD provides backward compatibility but in addition it also provides a lot more performance and speed than Imation's SuperDisk. By combining backward compatibility with performance, Sony seems to have defied the 4 strategy model we are using to analyze the market. However, this is really not the case. Because of the complications of trying to achieve both high performance and backward compatibility, Sony has been very late to market, and in addition the HiFD is priced much higher than its competitors. The HiFD appears to be a premium product targeted not at those looking to port or back up files, but at those individuals who give many multimedia rich presentations. This might be a viable market, but it is a niche play, at best, especially since Sony has been unsuccessful at putting out a drive for OEMs as of yet.

SyQuest: Before folding its tent, SyQuest appeared to be making a performance play along with Iomega. Its technology, the EzFlyer, is backward compatible and a vast improvement over the floppy drive, offering nearly 200 times the storage capacity. The EzFlyer is also technologically superior to its closest rival the Zip, with better seek and access times. (See Appendix II) However, unlike Iomega, SyQuest did not have a first mover advantage and found it difficult to increase the size of its installed base. In fact, SyQuest's efforts were very likely hindered by the positive feedback cycle aiding the Zip drive. Ultimately, network externalities were more compelling than EzFlyer's superior technology, and Iomega eventually beat SyQuest and bought their assets.

Managing expectations is an important tool used to win in markets with network effects and lock-in. Customers don't want to get stuck with an obsolete technology. They want assurances that a technology will be useful well into the future. Imation has on its website a survey supporting this very fact, with over 80% of respondents expressing anxiety over getting stuck with obsolescence. What is a shopper to infer but that Imation empathizes with this sentiment and would never leave its customers in such an undesirable position. Imation is not alone. Go to any disk drive website and you will be confronted with lists and lists of prominent partners, customers, and awards from magazines and trade shows. Of course, if every manufacturer is doing this, then it all becomes noise and the consumer is left to consider something more reliable: the buying habits of their friends and colleagues. And considering the present industry, it is probably the case that those friends and colleagues have already purchased a Zip drive. Welcome to the positive feedback cycle.

As we stated above, Iomega has been the most successful company in the OEM market. The SuperDisk, co-created by Compaq, an OEM, and promoted by Imation to other OEMs as well, is, in an ironic twist, losing out to Iomega in the OEM channel. In fact, more OEMs offer Zip drives than SuperDisks, which were co-developed by Compaq and initially introduced to win in the OEM market. This improbable situation exists as a result of Iomega's pull strategy we discussed earlier in the First Mover Advantage section. Because of Iomega's retail success, customers demand Zip drives, the product with which they are familiar. And with the popularity of Dell's configure to order model, more consumers are getting their way. Even Compaq admits to following Dell's lead by allowing consumers to choose the drives they want, which, more often than not, is a Zip drive. However, even though Iomega has a sizable lead, the war is far from over, as no OEM has committed exclusively to any particular technology.

So, how should a company go about winning in the OEM channel? Apparently strong customer demand for a particular brand, in this case Iomega, doesn't hurt and may begin to help even more as OEMS -- from HP to IBM -- are moving to a configure-to-order sales model. On the other hand, Imation employed a push strategy, by lobbying big OEMs to lock-in to the SuperDisk technology. On its WebPage Imation boasts about having partnerships with over 40 OEMs that offer the SuperDisk. Imation's desire to land a deal with a high profile OEM is completely understandable. Imation would garner a huge victory if, say IBM, announced that it was offering its computers with only SuperDisks. Aside from the sales volume it would bring, this kind of high profile deal would serve as a guarantee for many that SuperDisk would prevail and be the standard. However, as we have said, this kind of exclusive deal has been elusive for all players. No OEM, not even Compaq, is willing to bet on any one standard, indicating that the war remains nascent and far from converging on a standard.

Another tact to win the OEM war is to be the low cost supplier. As PC prices plummet, component costs become increasingly crucial. Floppy disks currently cost about $15 to a manufacturer, probably less than the cost of reconfiguring the box to eliminate the floppy. According to Bob Amatruda, a senior analyst at IDC, "no drive will have a chance at becoming a standard until its OEM price drops below $30."^[7] Of course, Iomega, as the first mover, has an edge over its rivals on this dimension as well. However, while it must drive costs to $30, its rivals, Imation and Sony, may only have to drive cost to $45 thanks to backward compatibility. See below.

In 1994, Iomega was a member of the coalition that comprised Imation and Compaq, among others, that was attempting to arrive at a standard for a new generation of backward compatible storage devices. Iomega left the group and launched its own product, the Zip drive, which was not backward compatible. It appears, in hindsight, that Iomega chose to be first to market rather than to wait and be backward compatible. Did Iomega do the right thing? Does the value of being first outweigh the value of backward compatibility?

Let's use an example to quantify the difference in value between the two. Let's start by detailing what we know. We have already said that to become a standard in the OEM channel, a removable disk drive needs to reach the price of $30. A floppy drive costs an OEM $15. Because Zip drives are not compatible with floppies, an OEM would have to offer both. However, because the SuperDisk is backward compatible, an OEM would only have to offer the SuperDisk. This means that, even if Iomega drove its price down to $30 per drive, an OEM would have to outlay $45 per computer. ($30 for Zip + $15 for the floppy) So, to be equally competitive with Iomega, Imation would only have to drive the price of SuperDisk down to $45. In this case backward compatibility provides Imation with an advantage: it doesn't have to travel as far on the experience curve. However, Iomega, as we have stated repeatedly, has a head start on the experience curve and still may get to $30 before Imation can get to $45. See Graph 1. If we also consider network effects, then Iomega may have even a bigger advantage, as the increased volume resulting from the network externalities will enable it to drive its disk costs down even quicker, while flattening Imation's experience curve. See Graph 2.

Fred Forsyth, President of Iomega's professional products division, asserts, "the theme for [Iomega's] efforts now is: 'Do these things sell media?'"^[8] The model being referenced here is not new. One can also think of Gillette razors and blades and HP's printers and cartridges. Once the customer is locked in through the purchase of a razor, printer or disk drive, then the manufacturer takes advantage by selling that locked in customer its proprietary, high margin blades, cartridges or media.

But how did the customer get locked in? As explained above (see lock-in and switching costs referenced above in the Basic Forces section), once a consumer buys a product, he or she will incur costs to switch. If the product is proprietary in any way and the consumer has already purchased proprietary complementary products, then the switching costs increase. The supplier of the proprietary product can then extract profits from this consumer equal to but probably not more than the switching costs.

Recall, that in the Basic Forces section, we explained that a firm could extract profits from its locked-in customer base equal to the total switching costs faced by that customer base. However, due to special circumstances and user preferences that characterize the disk drive market, a firm may not be able to extract full profits from its locked-in customers. We use the following example to illustrate the lock-in dynamic working within Iomega's installed base. Iomega has an installed base of 20 million zip drives. This installed base allows Iomega to demand higher prices for its media, because the only alternative for its customers would be to pay the switching costs to switch to an alternative drive. This is analogous to how razor manufacturers sell their razors at a low margin to lock customers in to regularly buying high margin blades. However, one important difference between razor blades and computer disks is that razor blades are consumable where computer disks are durable. If Iomega tries to command too high a price for its media, many users will be inclined to recycle old disks. We think that this effect reduces Iomega's ability to capitalize on the value of its installed base, and we try to illustrate this with a quantitative model.

Suppose we have two types of users of Zip disks, heavy users who will buy 25 disks over the lifetime of the drive and recycling users who recycle the same 5 disks over and over. Now suppose Imation is selling its SuperDisk Drive for $120, it costs $30 in user hassle to physically change the disk drive from the Zip drive to the SuperDisk, and Imation sells its disks at $10 each. The question is at what price, $P, can Iomega charge for its disks, and how much extra revenue can it obtain from its media sales because of its lock-in advantage.

We assume that Iomega will choose a price at or below both the heavy user's and light user's switching threshold so that it will not lose any of its installed base. The constraint ends up being the heavy user's threshold, leading to a price of $16. Having an installed base allows Iomega to charge $6 more than Imation charges for its disks. Thus, Iomega can extract an extra $150 (25 X $6) from its heavy user's by charging $6 more than Imation for its disks -- as we might expect this number exactly equals the switching costs of the heavy user. However, Iomega only extracts an extra $30 (5 X $6) from the disk recyclers, far below their switching costs. Of course, one way Iomega can get more revenue from the disk recyclers is to have nonlinear pricing of disk bundles -- say $16 per disk for a bundle of 10, and a higher price per disk for a bundle of 5. This should help Iomega extract something closer to the switching costs of the disk recycler group, but since perfect price discrimination is impossible, there will still be some gap.

According to^[9] the ratio of disks to drives sold by Iomega is in the high single digits, so apparently there are more recyclers than heavy users. Suppose 3/4 of Iomega's base of 20 million users are recyclers and the other 1/4 are heavy users. Then using our model, we can estimate the value of Iomega's installed base as $1.2 billion (15 million X $30 + 5 million X $150). Compare this to a value of $3.0 billion if we had simply added up each user's switching costs. We can conclude that the fact that so many Zip drive users recycle their disks significantly reduces Iomega's advantage of having an installed base. But even so, having a $1.2 billion advantage over its competitors from its base will play an enormous factor in this standards war.

Licensing offers several advantages to a firm in exchange for that firm sharing a piece of its hitherto proprietary pie. By licensing its technology to other manufacturers, a firm can hope to increase the installed base of its technology more quickly, thus actualizing lock-in and network effects more quickly. A second advantage to licensing is that it often placates OEMs who are concerned about the availability of second sourcing of a technology.

When deciding whether to license, a firm must first determine if it is capable of selling enough volume on its own to trigger positive feedback. For example, Iomega is in the lead but still seems far from hitting critical mass. In 1997 Iomega decided to license out its drive technology to Matsushita and NEC, while maintaining control over its disks. Although the ramp-up of production for those two companies has been slow, production is supposed to hit 150,000 units a month. By licensing, Iomega is hoping to realize the benefits described above. Namely, it is addressing concerns of OEMs who have demanded a second source for its technology. Furthermore, Iomega is extending its razor and blade strategy by using licensing to build the installed base of drives that will accept its proprietary and profitable media. This strategy follows the one outlined by Varian and Shapiro in which a producer commoditizes the products that are complementary to its proprietary high margin products.

Sony has also licensed its technology probably for many of the same reasons as Iomega. Sony has given permission to Teac and Alps Electronic, two well-known hardware manufacturers, to produce the drives for HiFD media. Sony may also be licensing to make up for its late entry in an attempt to quickly build an installed base to rival that of Iomega.

Since removable disk technology is being marketed in a very fast moving, volatile, high technology industry, it is almost a given that the future will bring unforeseen paradigm shifts in the way storage needs are handled. Therefore, there is a finite window of time within which our analysis and prediction will be valid. We think this window is two to three years. Either during this window of time or not too long after, it is possible, for instance, for the network bandwidth bottleneck to be solved making Internet storage a popular way to store data. Another possibility is that infrared technology becomes readily available for memory to memory file transfer between two PCs, completely avoiding the need for any storage media at all. Should either of these technologies become commonly used, either or both could seriously cut into the entire removable disk market. Jane Morrissey has stated that the removable disk market will hit $10 Billion by 2000,[10] so there is definitely a market opportunity currently afoot for this technology. Therefore the players in this standards war need to move quickly because it is not certain that this will be a lucrative market beyond a two to three year window.

The best way for any one player to seize this current available market opportunity is for that player to win the removable storage standards war, where we define winning as replacing 1.44MB floppy technology. This implies that the winner's technology be as ubiquitous as the 1.44MB floppy technology has been to date.

To facilitate us in predicting a winner of this standards war we have composed a Strength/Weakness/Opportunities/Threats (SWOT) analysis table (see below). This is a common tool used to compare competitive firms in order to assess each firm's chances of success. The strengths and weaknesses are internal to the firm and therefore can be controlled by the firm. On the other hand, opportunities and threats are exogenous to the firm meaning they are forces over which the firm has no real control. Should any of the events listed under opportunities and threats occur, said events will provide either the indicated opportunity or the indicated threat.

As we discussed in our Market Analysis section, we feel that only technologies from the Low End and Mid Range capacity segment are likely to win the standards war to replace the 1.44MB drives. In addition we have distilled the field of players down to three possibilities from these two segments: Iomega which offers drives in both capacity segments (100MB and 250MB), Sony (200MB) in the Mid Range capacity segment, and Imation (120MB) in the Low End capacity segment.

The other players in the field are individually too small to compete for winning the standards war. The only way that these smaller players could possibly have an influence in this war would be if they formed a consortium and banned together, thereby forming a bigger single force, or by licensing one of their technologies in order to spread it horizontally. Either of these actions on the part of the entire group of smaller players could have an effect on the outcome of the standards war but both possibilities are highly unlikely given the current state of affairs. Consequently we are not seriously considering any of these smaller players as contenders.

 SWOT TABLE:

Examining the table we see that Iomega's strengths outnumber and outweigh Sony's and Imation's. Iomega has first mover advantage, consequently it has an established installed base and is reaping and will continue to reap the benefits of its fabrication experience curve. This is clearly a big advantage since price is an important factor in shaping the market share both in the retail and OEM channels. Additionally, Iomega has been steadily increasing its relationships with OEMs directly (pushing) as well as indirectly (pulling). With the current trend of "customizing your own system" more and more end users are doing the pulling by specifying they want their OEM to install Iomega's Zip drives into their new system.

Furthermore, Iomega has a more complete product line than Sony or Imation. Iomega offers the 100MB Zip and ZipPlus drives as well as the 250MB Zip drive, which is backward compatible with the 100MB Zip drive. Thus if demand for the 200MB segment were to explode in the next two years at the expense of the 100MB segment, Iomega has a product to capture the demand. Similarly, if the 100MB segment were to remain the largest, Iomega obviously has a strong product in that segment as well. In contrast, Sony just offers the Mid Range 200MB capacity while Imation just offers the Low End 120MB capacity.

Both Sony and Imation support backward compatibility with the 1.44MB floppy technology. Consequently both have a slight advantage over Iomega in that the OEMs have an extra $15 margin leeway that can be applied towards the cost of installing one of these removable disks into the system since there is no need to install a 1.44MB floppy. But it seems that this cost advantage to Sony and Imation is offset by the cheaper cost of Iomega's internal drives due to their cheaper manufacturing costs as explained above.

Sony has already established licensing agreements with Teac and Alps Electric. Although Iomega was slower in doing so, it has finally initiated licensing agreements as well with Matsushita and NEC. By horizontally expanding in this fashion, Iomega will increase its customer base and therefore its media sales. By retaining all control over their media, Iomega will significantly increase their margin of profit since their media is their high priced ticket item. Sony has barely made it to market and although its relationships with its licensees may be a little more mature than Iomega's, Sony probably cannot build a customer base that will rival Iomega's in the window of time available. Therefore Sony will most likely not be able to fully take advantage of the market opportunities due to its late entry.

Moreover, given that it has missed several launch dates, Sony's reputation has probably been somewhat compromised with the OEMs and possibly even with its potential retail end users, notwithstanding its brand name recognition. Given that Sony already has a history of weak relationships with OEMs, and that Sony's technology has such a high associated cost, it is unlikely that their disks will find their way into OEM installations as a standard component. Therefore, as long as Iomega does not compromise its current position or forward movement in any way, it is likely that Iomega will win the standards war over Sony.

On the other hand, Imation has established relationships with OEMs, one of which is Compaq. It is doubtful that these OEM (pushing) relationships will serve Imation any better than Iomega's OEM (pulling) relationships serves it. Considering Imation's inferior technology, late entry followed by its slow start, lack of consumer brand and smaller, potentially limiting capacity (120MB) it is very unlikely that Imation could ever achieve what would be necessary in order to win the standards war over Iomega. As with Sony, as long as Iomega does not compromise its current position or forward movement in any way, it is likely that Iomega will beat out Imation in the standards war as well.

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1. Howard, Bill. "The Floppy Disk Paradigm Shift," PC Magazine, Sept. 22, 1998

2. For the Low End capacity segment the drive costs $80 to $150, the cartridges cost $10 to $12 each. For the Mid-Range capacity segment the drive costs $99 to $200, the cartridges cost $15 to $25 each.

3. The combined market for the Low End and the Mid-Range capacity segments is expected to grow to $10 Billion by the year 2000 (Morrissey, Jane. "Iomega's wild ride," Upside, Aug 1998)

4. Morrissey, Jane. "Iomega's wild ride," Upside, Aug. 1998

5. Glatzer, Hal. "Will Zip go the way of Kleenex?" Emedia Professional, Jul 1998

6. Shapiro, Carl; Varian, Hal. "Information Rules," HBS Press

7. Fritz, Mark. "Beyond the floppyD," Presentations, Feb 1999

8. Glatzer, Hal. "Iomega's business model for '99: Lots of media sales," Presentations, Feb. 1999

9. Morrissey, Jane. "Iomega's wild ride," Upside, Aug. 1998

10. Morrissey, Jane. "Iomega's wild ride," Upside, Aug. 1998