Type: Process Essays
Sample donated: Stacey Little
Last updated: April 19, 2019
Corel Corporation is one of only a handful of companies that compete in the graphics software market. Corel’s early entrance into the field gained it some early success but as the market matured it has since seen its market share dwindle and its competitors consistently outperform it strategically and financially. The following will provide a brief overview of the company, its history, competitors, and the market and supply conditions it faces. Finally some possible courses of action will be provided for the company to deal with its slumping performance.Corel OverviewCorel Corporation was founded in 1985 in Ottawa, Ontario as a software development firm. The company’s first major innovation and the source of its early success was the launch of CorelDraw in 1989. This product sells several hundred thousand units each year and along with various spin-off products has helped Corel to grow to its current $260 million a year in revenue and 900 employees (Corel Corp.
Nov 2002).Originally simply a drawing application, CorelDraw is now a suite of three applications: its original illustration platform, a photo editor and a motion graphics editor for web animations.Competitive ConditionsCorel has three main competitors: Adobe Inc, Macromedia Inc, and the privately held Quark Inc. While Quark’s sole offering is the standard page layout application for the print industry, both Adobe and Macromedia have a full suite of graphics, illustration, animation and page layout tools.
Each competitor entered the graphics industry with a competitive advantage in one of the applications that now make up this market. For Corel its strength was its illustrator, for Adobe its photo editing tool Photoshop and for Macromedia, its motion graphics application Flash. With the exception of Quark, after each firm established its self in their particular niche they proceeded to expand their offerings into related areas of graphic design until the firms entered into competition with each other on all fronts.The industry is representative of monopolistic competition. All firms offer a set of tools designed to meet the same end goal but each has its own unique user interface and differing sets of menus, tools, icons, settings and file formats.
A designer using one piece of software would not be able to instantly and seamlessly switch to a competing tool but the learning curve to reach a productive level would be relatively short. The products are thus fairly easily substitutable.However, there are so few firms competing that characteristics of an oligopoly also apply. The Herfindahl-Hirschmann Index of market power is high for this particular market. The index is determined by squaring the market shares of each of the competitors and adding these together. A monopoly would have an index value of 10,000 (1002) while an industry with 100 competitors with 1 percent of the market would have a value of 100 (12 * 100). In this particular case the value based on market share information is 54611 (Bear 2000).While the market power of the sector as a whole is high.
Corel’s is low. During this arms race Corel has been pushed out to the fringe, dropping from a high of 35% of the professional graphics software market to only 6% in 2001 (Hill 2001).Economies of Scale and ScopeGraphics software and software in general typically have very large economies of scale. It can cost millions in labor costs to have a team of programmers develop a piece of software. Adobe for instance credits 34 people in the development of Photoshop over its 12 years (Adobe Inc. 2002). Not to mention the three other applications included in its Web Collection.
Further, each additional upgraded version of the software is built on the previous version so the work put into previous versions maintains its value through future versions. On the production and distribution side costs are close to zero. Printing a CD costs under $1 and with internet downloadable software, the only cost is bandwidth. At $3 per gigabyte of data transferred (Canaca Inc. 2003) and the typical graphics software weighing less than 100 megabytes, the cost is under $0.
30 per unit. Corel claims its margins, when all overhead costs are factored into the distribution of its software are still over 80% (Corel Corp. Feb 2002).The industry does not display any significant economies of scope that would lower it’s per unit costs. Developing a related product may re-use some code or know-how when making that related product compatible with the original but any new features or functionality contained in the new product must be developed from the ground up.
Since the marginal costs are so small to begin with, there is also no significant savings on the production and distribution side. The new software could be bundled with the original on to the same disk but that is an insignificant savings. When the software is downloaded over the internet, the company is charged for all the additional bandwidth the new software takes up.Demand ConditionsPart of the reason for Corel’s dwindling market share is that the professional graphics software industry is one that displays network externalities. While the final products from these programs are typically universally readable, paper for instance, the source files used to create these outputs is specific to each application. Photoshop for example, stores its files as a .
psd file that contains information on the document’s fonts, lines, colors and layer information. A designer would need a copy of Photoshop in order to edit this document effectively. Since the graphic design development process both for print and web often involves multiple people and even multiple companies it is important that the source files are compatible. The printing house must be able to read the design studios brochure file just as a web developer must be able to manipulate the company logo provided by its graphic designer. The more users of a specific platform, the more value that platform has since it means a designer can work with more developers and more printers.
This puts pressure on the market to move towards a dominant provider.Compatibility is also important not only between users but also between applications. The easier it is to move a collage a designer created in a photo editor to the page layout program used for the final version, the better. Moving between a photo editor and a page layout tool created by the same company can be made easier since the programmers of the software understand both file formats and have the code needed to render both. This creates a demand side economy of scope. Corel was much later than Adobe and Macromedia in adding on these complimentary programs and this could explain why Corel was not the company chosen by users as the standard.These compatibility issues and network externalities have created a lock-in that means price changes on Corel’s part can do little to improve its position. For one, the competitive offerings are simply so much more valuable that a small drop in Corel’s prices would not be enough to overcome this value difference.
Second, a firm would not simply be able to change from Adobe Illustrator to CorelDraw, but to gain the compatibility benefits it would need to make a wholesale shift, moving from Illustrator, Photoshop, and LiveMotion to the entire CorelDraw Suite. However, this lock-in goes both ways, Corel may be able to increase its prices to a point, since its current customers are likely locked in. Otherwise, they would have shifted to the competitor’s already.Corel’s Graphics Suite is far less expensive than the competitive offerings. The offerings are not directly comparable because each contains a slightly different assortment of applications. Still it does provide a comparison of where they sit in the market place. CorelDraw Graphics Suite is priced at US $529 (Corel Corp. 2003), Macromedia Studio MX Plus at US $899 (Macromedia Inc.
2003) and Adobe Web Collection runs US $999 (Adobe Inc. 2003). They all contain an illustration, photo editing and page layout application as well as their own variety of supporting applications. Even though Corel charges far less than its competitors, it has still seen a dramatic decline in its market share.
While the market is mature, it continues to grow steadily. On average the four firms’ revenue grew 9.2% in 2002 primarily fueled by an increased need for graphics tools to create websites and other internet and multimedia applications (Hoover’s 2003).Recommended StrategyIt will be difficult for Corel to make a turn around now, however there are a couple of options the company can pursue.Stemming the TideFirst, simply in order to stop the bleeding, they must make their software as compatible with the competitive file formats as possible. If they can bring their software to the point where it can open, manipulate and save the competitive formats nearly perfectly than it will become a viable alternative and eliminate or reduce a lot of the network effects working against it.
However, in doing so Corel must ensure that while it learns to work with the other file formats it does not violate any patents or copyrights its competitors hold. It needs to learn to work with the files while maintaining its unique user interface and tools. Macromedia was recently successfully sued by Adobe for copying its user interface and Macromedia had to completely alter the look and feel of all its software (MacWEEK 2000).Another way Corel can combat the network externalities working against it and potentially increase its market share is to license its file formats and even certain aspects of its software to other companies. These companies can build new and innovative uses for the software and file format while users who need more robust control over the files or need to access other features may upgrade to Corel’s software.Innovating to Gain Users BackWhile the above suggestions may allow it to make slight gains or at least hold its current market share, in order for the company to gain market share it will have to dramatically improve its product with some innovative ‘killer app’.
This feature must be so useful that users of the competing products will switch. Further, this new tool would have to be hard to copy or patented to prevent its competitors from simply releasing a similar tool in their next release.If Corel releases a great new innovative tool that could potentially be copied by its competitors in the next version people may begin to switch. However, if Macromedia announces that Freehand will have a similar tool in its next version, than users will have to evaluate whether the costs of switching (training, converting files, buying new licenses) is less than the gains that can be obtained by Corel’s new tool before Macromedia can catch up.
Since new versions come out every 12-18 months, and lock-in is typically high in networked goods, it is unlikely that a highly innovative but easily duplicated new feature will help Corel. Therefore, a new feature will only help if it adds significantly to the value of the software and is difficult to duplicate.Price CuttingCurrently Corel offers a competitive upgrade priced at $389 or part way between an upgrade to an older version of its software and a brand new version. One potential option is for Corel to offer a dramatically under priced competitive upgrade to its products. Essentially users of say the last few versions of Adobe Illustrator could upgrade to the latest version of CorelDraw for next to nothing. However, for this to work, two things must happen.
First, the users who take this upgrade must actually switch, not just take a copy of the nearly free version of the Corel product while still upgrading or running its current version of Adobe Illustrator. Second, and far less likely, is that Adobe must not follow suit. If the two firms follow the Bertrand model and compete by price setting, a price war will ensue and will drive prices down to or below the marginal cost. At this point the firm with the deeper pockets will survive while the other will fail. Given Adobe’s size in this market relative to Corel, Corel does not stand a good chance of outlasting it in a price war. As such, price cutting may not be a good strategy for the firm.Selling OutCorel having been unprofitable in the last 4 of 5 years (Corel Feb 2002) may not be able to recover.
As such their best option might be to simply sell the CorelDraw suite source code to one of its competitors, who can choose to continue to support it separately or integrate it with its existing offerings. It simply should not be in business if it continually loses money.ConclusionsCorel’s CorelDraw Graphics Suite competes in an Oligopoly with three other firms in a steadily growing industry. Due to network externalities and slow expansion into related applications it has been reduced to a fringe player. The market has large economies of scale further reducing Corel’s ability to compete. Unless Corel is able to gain success opening parts of its source code and file format or has an innovative protected technology it can launch, its best option is to exist the industry.
It will not be able to compete through a price war with the dominant firms.