COLLECTIVE SWITCHING COSTS

Network externalities make it virtually impossible for a small network to thrive. But every new network has to start from scratch. The challenge to companies seeking to introduce new but incompatible technology into the market is to build network size by overcoming the collective switching costs—that is, the combined switching costs of all users.
As we emphasized in Chapter 5, switching costs often stem from durable complementary assets, such as LPs and phonographs, hardware and software, or information systems and the training to use them. With network effects, one person's investment in a network is complementary to another person's similar investments, vastly expanding the number of complementary assets. When I invest by learning to write programs for the Access database language, then Access software, and investments in that language, become more valuable for you.
In many information industries, collective switching costs are the biggest single force working in favor of incumbents. Worse yet for would-be entrants and innovators, switching costs work in a nonlinear way: convincing ten people connected in a network to switch to your incompatible network is more than ten times as hard as getting one customer to switch. But you need all ten, or most of them: no one will want to be the first to give up the network externalities and risk being stranded. Precisely because various users find it so difficult to coordinate to switch to an incompatible technology, control over a large installed base of users can be the greatest asset you can have.
The layout of the typewriter keyboard offers a fascinating example of collective switching costs and the difficulties of coordinating a move to superior technology. The now-standard keyboard configuration is known as the QWERTY keyboard, since the top row starts with letters QWERTY. According to many reports, early promoters of the Type Writer brand of machine in the 1870s intentionally picked this awkward configuration to slow down typists and thus reduce the incidence of jamming, to which their machines were prone. This was a sensible solution to the commercial problem faced by these pioneers: to develop a machine that would reliably be faster than a copyist could write. QWERTY also allowed salesmen to impress customers by typing their brand name, Type Writer, rapidly, using keys only from the top row.
Very soon after QWERTY was introduced, however, the problem of jamming was greatly reduced through advances in typewriter design. Certainly, today, the jamming of computer keyboards is rare indeed! And sure enough, alternative keyboards developed early in the twentieth century were reputed to be superior. The Dvorak layout, patented in 1932 with a home row of AOEUIDHTNS that includes all five vowels, has long been used by speed typists. All this would suggest that QWERTY should by now have given way to more efficient keyboard layouts.
Why, then, are we all still using QWERTY keyboards? One answer is straightforward: the costs we all would bear to learn a new keyboard are simply too high to make the transition worthwhile. Some scholars assert that there is nothing more than this to the QWERTY story. Under this story, Dvorak is just not good enough to overcome the individual switching eosts of learning it. Other scholars claim, however, that we would collectively be better off switching to the Dvorak layout (this calculation should include our children, who have yet to be trained on QWERTY), but no one is willing to lead the move to Dvorak. Under this interpretation, the collective switching costs are far higher than all of our individual switching costs, because coordination is so difficult.
Coordination costs were indeed significant in the age of the typewriter. Ask yourself this question: in buying a typewriter for your office, why pick the leading layout, QWERTY, if other layouts are more efficient? Two reasons stand out. Both are based on the fact that the typewriter keyboard system has two elements: the keyboard layout and the human component of the system, namely, the typist. First, trained typists you plan, to hire already know QWERTY. Second, untrained typists you plan to hire will prefer to train on a QWERTY keyboard so as to acquire marketable skills. Human capital (training) is specific to the keyboard layout, giving rise to network effects. In a flat market consisting mostly of replacement sales, buyers will have a strong preference to replace old QWERTY typewriters with new ones. And in a growing market, new sales will be tilted toward the layout with the larger installed base. Either way, positive feedback rules. We find these coordination costs less compelling now, however. Typists who develop proficiency on the Dvorak layout can use those skills in a new job simply by reprogramming their computer keyboard. Thus, we find the ongoing persistence of the QWERTY keyboard in today's computer society at odds with the strongest claims of superiority of the Dvorak layout.