Dealing with exclusivity agreements

ofo

 

Felice Gammella looked at the Ofo bike at a T-stop in East Boston by Lewis Street DAVID L. RYAN/GLOBE STAFF

The article in The Boston Globe entitled Is Boston headed for a bike-business border battle? by   got me thinking about the issue of exclusivity in contracts for emerging companies. Once you’ve achieve product/market fit and a customer base you may well start entering into agreements with third parties for distribution of your product.

Here’s what happened in Boston, Cambridge, Somerville, and Brookline: they all signed an agreement with Hubway, a provider of rental bikes that are dependent on docking stations. So bike renters have to return their bike to a docking station. This might have seemed like a good idea at the time. But like giving taxis a monopoly it has proven to be an impediment to providing biker riders in these cities with a much better way to rent bikes: dockless systems that enable riders to leave their bikes almost anywhere.

And typically bureaucrats defend their decision to create yet another monopoly. As after granting taxis monopolies, cities and towns followed up this practice by granting monopolies to cable TV and Internet providers. After all, when you think about it, government is itself a monopoly, so they find it perfectly natural to enter into exclusive agreements with companies large (Comcast) and small (Hubway).

Cara Seiderman, a transportation planning manager in Cambridge, argued that since Hubway is publicly owned, there is greater accountability. And Denise Taylor, a city of Somerville spokeswoman, brushed off the lack of competition to Hubway in her city.

Our Hubway contract precludes other bike-sharing options, but we don’t see this as a hindrance, as Hubway has been a great partner and is working well here,” Taylor said.

Taylor’s defensive statement is particularly uninformed, as clearly dockless systems like Ofo provide a better solution. Seattle, rather than handing out a multi-year monopoly to the new dockless bike sharing companies, wisely “allowed three companies to launch dockless systems for a one year test.”

Transit director Andrew Glass Hastings said dockless systems are easier to manage. Rather than pay to operate a traditional system, Seattle now regulates the dockless companies — which pay the city a fee.

Partners like big cities will demand exclusivity. If you are a small startup it’s highly likely that you’ll be dealing with a bigger, more powerful company that has far more leverage with you. I found this many times in negotiating with companies like Apple, IBM. Microsoft, and Fujitsu. Exclusives are rarely viewed as beneficial to startups. However, if you are expecting your partner to expend signifianct resources to help you distribute your product, as Hubway does in Boston, then it can be beneficial to have your partner focus 100% on you rather than other companies.  Whereas in Seattle three companies will be competing for the city’s assistance.

So assuming you are faced with an exclusivity demand, how do you handle it? The best path is to determine how to put bounds on the exclusivity. Here are the most common methods.

  1. Time: limiting the term of the contract is the most common method. Generally one year, as in Seattle, is the minimum period. Partners may push for more and three to five years, as in the case of Boston, is standard. The big issue here is the rate of change in products and markets. The faster the rate of change, the shorter the term limit you should try to negotiate.
  2. Geographic area: we see this in the city by city agreements for Hubway. However, both parties will have to realize there will be “leakage” – either customers from other geographic areas coming into the agreed upon territory or products being resold outside the agreed upon territory. This is quite common in consumer electronics and products sold outside of the negotiated territory are called “gray market.” Companies try to combat the gray market by not covering these products with a manufacturer’s warranty or otherwise restricting access post-sales support.
  3. Customer type: here we start to get into the “gray areas” – areas that may be more difficult to define. A typical distribution agreement may forbid direct sales to consumers, but permit sales to retailers. And the gray market may raise its head as retailers may “dump” excess inventory to unauthorized resellers.
  4. Product type: at Software Arts, our distributor, Personal Software (later renamed as VisiCorp) had exclusive rights to the electronic spreadsheet, VisiCalc, that we developed. But we were free to develop other software for PCs, as was VisiCorp. But exclusivity can rapidly get muddy, as VisiCorp developed an all-in-one product that included a spreadsheet, called VisiOn. Was that a violation of the exclusivity agreement? Well it ended up in court and eventually both companies died due to their deadly embrace.

So the obvious bottomline with exclusive agreements is that they require policing, otherwise the bounds become meaningless. Emerging companies lack the resources to police a distribution agreement. Your best option is to avoid exclusives if possible, but if not, to put the burden for enforcing any restrictions on the larger partner.

The best way to handle this type of negotiation is to get both parties to focus on the customer and customer benefits, rather than their own benefits. The Hubway/Ofo issue is a great example.

Chris Dempsey, director of the nonprofit advocacy organization Transportation for Massachusetts, likened the bicycle conflict to a two-wheeled version of the Uber-versus-taxis dispute. He encouraged the Hubway municipalities to be open to dockless bikes “as an opportunity to give people more choices, just as Uber and Lyft did.”

Author: Mentorphile

Mentor, coach, and advisor to entrepreneurs, small businesses, and non-profit organizations. General manager with significant experience in both for-profit and non-profit organizations. Focus on media and information. On founding team of four venture-backed companies. Currently Chairman of Popsleuth, Inc., maker of the Endorfyn app for keeping fans updated on new stuff from their favorite artists.

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