Tunneling through a competitor’s pricing walls is a very effective strategy
Tunneling is one of the best offensive market strategies. First, you must carefully examine the existing market structure to establish price and performance breaks. Then you dynamite a tunnel right through the pricing wall by positioning your product with the same or more benefits for a lower or similar price.
A classic example comes from the CVD wars of the eighties. Back then, most CVD was done in a furnace. Problem was, it could not get the uniformity or control needed for coming nodes. Applied Materials introduced its P5000™ CVD to address these needs. Priced at $1.2M, it cost roughly three times as much and had a third the throughput of a furnace. Furnaces had an effective cost-of-ownership advantage of nine times and they still could not compete, because Applied’s P5000 was so enabling. The huge price/performance difference communicated this value quite effectively. They had created a pricing wall of mountainous proportions. Within a few quarters, Applied went from no presence to total domination of the CVD market, with price/performance driving their share.
Then Novellus came after them with its Concept One™. In most cases, the Concept One could provide the same film with higher throughput and it was priced at $0.8M. It was simpler as well, which lent it more reliability and made it far less expensive to build. Novellus implemented both strategies here: they tunneled through the wall that Applied had built between the P5000 and furnaces, while building a new wall between them and Applied that could not be easily penetrated due to cost. Applied still held the highest share because they had the highest price (see my maxim on high price equating to high market share). But, Novellus carved out a strong number two spot with this tunneling and wall strategy. Those who didn’t figure it out – lost out.
AMD did this with its Opteron™ 64-bit processor. Intel had successfully built pricing walls between its 32-bit Pentium™ PC processors, its 32-bit PC-based Xeon™ server processors, and its high-end 64-bit Itanium™ processors. By taking its relatively low cost PC-based processor to 64-bit, AMD created an effective tunnel through the existing market’s pricing. This made Operton an instant hit. I could go on all day with examples to show how well this principle works. Agilent’s 93000 SOC tester, broke through the walls that Teradyne had established in the maxim above. The 93K was architected to be a single-scalable-platform. This unified all the SOC tiers; plus, once a customer had bought a low-end 93K, they had to buy upgrades from Agilent (now Verigy). This was so profitable and powerful that it led customers to create the STC to crack open the architecture. Mercedes and BMW built a wall above Cadillac and Toyota tunneled through it with Lexus; and so on.
Effectively done, tunneling creates instantaneous market gains. These gains will grow until competitors can respond. If someone tunnels you, you had better respond fast, because the market share clock starts ticking once their assault is launched.
By G Dan Hutcheson
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