Cutting the Resistor

Way way back in the 1960s the university where I used to punch cards and hand them thru the little window to run my batch jobs bought a new computer. The disk drive was so massive that when they brought it into the building the drive grazed the edge of the door way knocking off the frame and a few rows of concrete block. The drive was undamaged.

Shortly after that machine arrived a guy showed up. An hour later the machine ran much faster. Apparently the salesman had recommended him. The machine was the low end model and if you wanted it to behave like the high end model all you needed to do was cut a resistor or something.

Apple segments their market for the MacOS into three bundles: Darwin, MacOS (client), and MacOS (server). The function of segmented marketing for a vendor is to capture more of the revenue/benefit available below the willingness to pay curve. Given that most markets have a few customers who will pay a lot (desperate customers, rich customers, etc.) you want to have a product variant that you can sell them.

At the other end of the spectrum you get customers who have little willingness to pay; a cheap product offering may capture some value even from those guys. Network effects make things more complex. The customers willing to pay nothing may still add value for the vendor; by increasing his network and thus attracting other customers with deeper pockets. This creates the curious effect that some markets the right price point for the low end product is free – it’s not actually free the customer is bringing himself to the party as payment.

The practical advice given to vendors about segmenting a product line is to be very careful to watch costs. If your lucky the expensive product should cost little more to make and distribute than the mid-priced product. That advise leads to the common stories folks tell about computers who’s speed could be doubled by cutting a resistor. Back at the vendor the discussions about what to bundle with each version of a segmented product are painful for people with ethics. Once you work thru the ethical puzzles there is actually a very interesting design puzzle in designing segmented products – i.e. how to assure that you capture the maximum network effects across the whole product line. If you get it wrong the segmented products start evolve into distinct specie and you get three separate markets. That’s already happened to Apple between Darwin and MacOS(client).

Another problem, though generally a small one, is that some clever user discovers how to cut the resistor. Suddenly their expensive product is just as good as the mid-priced offering. This tends to be more an embarrassment than a revenue problem. I own a big fat phone, a Treo, and the geek community around it keeps working around all the functionally limits that it’s vendor was forced to stick into because his real customer are the phone companies, not the end users.

The story from my youth has another chapter. At the time I was told that the reason for resistor cutting guy was that early customers of that line of machines had written into their purchase contracts a clause along these lines. Sure we will pay a huge amount for the first few of this machine, but latter if you succeed in selling a large number and your prices fall we require you to give us a refund of the price difference. The vendor was dodging the clause in the contract by creating a lower price segment in his market and then leaking the recipe to enhance the model back toward the original model.

Recent events in the around the Treo (a hack to enable bluetooth data, and a hack to enable wifi support) reminded me of that story; and then this morning I say this neat trick to let me get some of the features of MacOS(server) to work on my MacOS(client).

When these hacks for breaking down the barriers between a vendor’s segmented market emerge it’s always interesting to think thru what might be the motivation. Is it just some hacker having a good time? Maybe it’s the vendor trying trying to assure he gets the maximum network to emerge around his product. Maybe it arose out of the vendor’s cost saving. Maybe the vendor is trying to work around customers who’s goals are not in synch with your best interests (as in the two examples above). All these and other reasons are likely in play which makes the stories more interesting, but harder to tell.

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