Nov 9, 2008

Case Study: Retail "Free Riding" Hurts Technology Adoption

Back to the Future:
Color Television Retailing Slows Adoption

In January, 1954 RCA introduced the first color television set with a striking color telecast of the Tournament of Roses parade. In today’s dollars, the revolutionary new technology represented a $7,000 upgrade over a consumer’s black & white set. Even so, initial demand surged, and within ten years was approaching one and a half million units per year. By 1962, hundreds of color television manufacturers were emerging, with Sylvania achieving a 1-2% share of the national market through a vast and loosely managed network of independent local television retailers.

Yet by 1966, color technology had still only penetrated 17% of all TV households, and evidence was mounting that the traditional black & white television retailing system was hindering adoption of color. With over 350 models on the market, upgrading to color televisions was seen as an increasingly confusing process and consumer word-of-mouth was becoming a problem. Indeed, families were finding that a color television repair would be 50% more expensive than with black & white, a new set might not get quality reception in their particular home, and the products were extremely fickle and sensitive to careful placement and tuning when delivered. There were also signs that while traditional black and white TV dealers would sell color, most could not repair the new products, and were unwilling to provide no-obligation in-home trials.

After careful review, Sylvania determined that accelerated growth would require a dramatic change to it retail distribution system, if it hoped to get beyond a national market share hovering at 1-2%. As a result, the company moved away from loosely managed, saturation retailing to a more selective franchising approach involving only approved retailers willing to rigidly adhere to performance specifications for every element of an exceptional new consumer buying experience.

Territory protection was an essential element of the franchise strategy. Without it, a Sylvania retailer in one geographic area might free ride on a franchised retailer in an adjacent geographic area, by using lower prices to steal consumer sales away from the local franchised retailer (who would presumably have higher costs from investing in the new consumer experience in areas such as product education, in-home trial, repair service, etc.). Within three years, Sylvanias’ national share had doubled, with share in high priority geographic areas reaching as high as 15%.

But in 1977, a renegade Sylvania retailer entered an adjacent territory in which it was not authorized to conduct business, advertising significantly lower prices to those offered by the local Sylvania retailer. Sylvania promptly terminated its entire business relationship with the offending retailer, who sued on antitrust grounds.

In one of the most discussed and debated antitrust cases in history, the U.S. Supreme Court upheld Sylvania’s right to protect its products against intra-brand price competition. The court found that competition between brands – its primary concern – could actually be lessened when consumers lacked the retail experience required to discriminate between manufacturers. Put positively, the court determined that by offering a differentiated retail experience, consumers would be in a stronger position to make informed choices, and inter-brand competition would increase.

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