The perils of exclusivity

Yesterday GT Advanced, maker of the Sapphire Glass that was supposed to be used in Apple’s iPhone 6, filed for bankruptcy. As most people well know, that glass was not used in the iPhone6, after months of speculation which had driven up GT Advanced stock to being worth $2.8 Billion in early July. When Apple announced that the iPhone wasn’t using GT Advanced glass, the stock fell 90% to 75 cents.

The story is a familiar one to me. GT Advanced was a successful company with US$299 Million in revenue in 2013. Yet they were bankrupt less than 12 months later. What was reported to have happened was the following:

In November 2013, they signed a deal with Apple which made a prepayment loan to GT Advanced of US$578 Million.
In return, Apple restricted GT Advanced from selling it’s Sapphire Glass to be used in any other applications
Also GT Advanced gave Apple an exclusive license for Sapphire Glass, but Apple had no obligations to buy the product.
GT Advanced has to start paying the $578 Million loan back next year.
Apple for what ever reason, which could have been a issue that was nothing to do with GT Advanced, decided not to use the Sapphire Glass and GT Advanced was caught without a Plan B.

In this is a lesson for any entrepreneur and company about the perils of exclusivity. I always recommend companies to never do an exclusive deal, and to never restrict your ability to sell. Even if the buyer wants to only lock in all of your initial product production volume, don’t do it. Ask for the ability to ship small amounts to other buyers at the same time, just in case.

If your product is so hot that the buyer wants exclusivity, then it’s because they can’t get it from someone else in the same timeframe, or with the same quality. So be confident, don’t agree to exclusivity, no matter who it is, because exclusivity locks you to one buyer who then controls your core business.

This lesson doesn’t just apply to hardware. The GT Advanced story reminds me of the early days of 3 UK, when we launched the X-series in 2006, which was at the time a ground breaking integration of mobile and internet services. We included many of the internet market leaders of the time in the offering, including Skype. The social network leader was MySpace, and Facebook was just starting to grow. MySpace had just been bought by Fox, and I remember the MySpace/Fox business development guy turning up and telling us he had just done an awesome exclusive deal with Vodafone for $1Million up front, and a guaranteed spend by Vodafone of $1Million in marketing. He said that unless we paid more, MySpace would be exclusive with Vodafone for a year.

Facebook simply offered a simple agreement for us to promote and use Facebook on mobile for nothing. No exclusivity. Every operator would be able to use it, but it wouldn’t cost anything.

We told the MySpace/Fox guy he had done a bad deal, and tried to explain that Vodafone would do nothing meaningful with it, as they wouldn’t even know what to do. And that while Facebook was being carried by every operator, MySpace would be locked into a deal with Vodafone whose customer base didn’t even know what MySpace was, let alone use it, because Vodafone‘s base was primarily corporate businesses. He told us that we didn’t understand anything, and that in a year’s time we would be back begging for a deal.

Sure enough, Vodafone did nothing with MySpace. Facebook got a lot of experience on how people across all networks used it on mobile, while MySpace sat exclusive with Vodafone for the crucial year of 2007/2008 when internet services on mobile really took off. I never heard from the MySpace guy again.

These days startups still get asked to do exclusive deals, and I always advise against it. If the buyer wants you that badly they should just acquire you. Otherwise you should respond like this:

“No exclusivity, but lets work out something that gives you an edge on your competitors in terms of features or price”.