Co-Opetition - Adam M. Brandenburger [87]
Healthy Imitation Far from being undermined by imitation, a meet-the-competition clause is actually enhanced by it. An individual producer benefits unilaterally from inclusion of MCCs in its contracts with buyers. There’s an added benefit when other producers also put in MCCs. Their MCCs allow them to push prices up some more, so they now have even more to lose from starting a share war. As MCCs become more widespread in an industry, everyone has less prospect of gaining share. With even more at risk and even less to gain, producers refrain from going after one another’s customers. Now everyone is firmly ensconced in a glass house.
Without things like MCCs, competition in the marketplace is a bit of a free-for-all. One seller can come in and try to take away another’s customer. In this game, there aren’t any rules of engagement. The customer doesn’t have to go to his incumbent supplier and give it an opportunity to match. Even if the incumbent gets that opportunity, the customer may not tell him what number he has to beat. In this case, the incumbent may end up bidding lower than he’d have had to in order to keep the business.
An MCC changes the game by creating rules of engagement. A rival can still make a bid, but now the incumbent has the final move. The customer can’t switch without first revealing the rival’s bid and giving the incumbent a chance to match it. If the incumbent matches the rival’s bid, he’s guaranteed to keep the customer. Knowing that the incumbent will get the last look, the rival has much less incentive to play the game in the first place. That’s why MCCs put an incumbent seller in a powerful position.
Like most-favored-customer clauses, meet-the-competition clauses aren’t a panacea for sellers. They create a vulnerability if you face a rival whose main objective in life appears to be hurting you rather than doing well for himself. Normally, if a rival comes in with a low price, he’d better be prepared to deliver. If you have an MCC, however, your rival can make a low bid, fully expecting that you’ll match and he won’t have to make good on his offer. He can lower your profits without having to put himself on the line. We don’t think this strategy would be in your rival’s self-interest, but you can’t assume that your rivals will always see their self-interest the way you do.
Meet-the-Competition Clause
PROS
1. Reduces the incentive for competitors to bid.
2. Takes the guesswork out of bidding—you know what bid you have to beat.
3. Lets you decide whether to keep the customer.
CON
1. Allows competitors to bid without having to deliver.
There’s a buyer’s counterpart to an MCC. A buyer would like a guarantee that the seller will sell to him provided he matches the highest price anyone else offers the seller. Used this way, the rule is typically called a right of first refusal. But conceptually, it’s exactly the same as an MCC. Both entitle the person to a last look. That’s the key. And, given what you’ve just seen with MCCs, you won’t be surprised to learn that a right of first refusal puts the buyer in a powerful position.
Blocked Bidders In January 1994 the Miami Dolphins football team was sold for $138 million to H. Wayne Huizenga, founder of Blockbuster Video. A pretty good buy—almost a steal. By contrast, the New England Patriots were sold for $160 million around the same time. The price the Miami Dolphins fetched was even below what the NFL charges people for the right to create an expansion team—a new team with no track record, no coach, nothing. The Miami Dolphins was a team with five American Conference titles, two Super Bowl victories, pro football’s best record since 1970, and legendary coach Don Shula, to boot.
Why was the price so low? Partly, it was a distress