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RFID – From technology &

economics to business & policy

Yale Braunstein School of InformationUpdated April 2010

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Motivation

• Opportunity to have policy informed by economics & technology

• Opportunity for policy and technology to develop in logical, coordinated manner

Today’s approach: From technology & economics to business & policy

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Economic Background

• Costs & features– One approach is to look at prior technology

for analogs (e.g., barcodes)

• Technical hierarchy– Where does RFID fit in with other

technologies in terms of use, complexity, etc.

• The next three slides portray these relationships in different ways

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Y Y

Low(Line of Sight)

Med-High

Y(Discount

Card)

Y(CalTrans)

12 digits (bytes) for

UPC

64 or 96 bits

$.001 $.05

Characteristics Barcode RFID

Persistence

Accessible to remote monitoring

Link to user/consumer database (example)

Bits/bytes of information

Cost per code/tag

Costs & features

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But, it is not an “either-or” case

• Since it is likely that technologies old (barcodes) and new (RFID) can and will co-exist, it is important to look at the rationales and drivers for each technology– Economics– Regulatory and policy issues

• Each informs the other. The old approach was to focus on “optimal regulation”. We now realize this is impossible to define so we look at optimizing strategic business decisions given the regulatory environment. (a la Michael Porter)

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Underlying economics

• Potential to reduce transactions costs

• Fixed cost to adopt/convert to RFIDs

• Per-unit costs

• Other costs for adopters

• Benefits for adopters

• Increase capabilities to– Discriminate in prices– Do versioning

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Standard Value Chain

- a linked set of value creating activities- from raw material to end use product

Procurement R&D Manufacturing Marketing Distribution Service Customer

Value chain Customer Basis

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Redesign of the Value Chain

Redesign can create dramatic gains in:- cost structure- asset investment- speed of responsiveness to external

changes

What has to be redesigned?:- set of activities- the interfaces across the chain

We shall return to this later...

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Widely deployed; broad global freq. deployment; minimum metal interferences

Read range limited to less than 1.5 meters

•Animal tracking•Container tracking•Antitheft systems

Widely deployed; broad global freq. deployment; minimum moisture interferences

Read range limited to less than 1.5 meters

Metal serious problem

•Library asset tracking•Baggage tracking•Retail product tracking

Low Freq. 125 kHz to 134

High Freq. 13.56 MHz

Advantages Liabilities Applications

Operating Frequencies and Uses of RFIDs

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Widely deployed; read range MUCH greater than other standards

Can’t be used in Japan, affected by moisture and adjacent tags

•Pallet•Container tracking•Vehicle tracking

Read range is MUCH greater than even UH.

Not widely deployed, complex implementation, can’t be used in parts of EU

•Vehicle access control

Ultra-high 868 MHz to 928

Microwave 2.45 GHz

Advantages Liabilities Applications

Operating Freq and Uses of RFIDs

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Supply Chain Economics

• Overall ROI? Probably negative if one:– Just looks at costs– Does not restructure to take advantage of the

technology

• Competitive advantage (those with tags worth $$ more than same quality w/o)

• The haves and the have-nots

• High fixed costs

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Transactions costs

• Savings throughout entire supply and retail chain (shipping, inventory, pricing, etc)

• RFIDs have potential to lower transactions costs, but benefits probably will be unequally spread across the supply chain– This raises contractual supplier vs. retailer

issues

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Fixed costs to adopt

• Readers costs appx. $1,000 – 4,000• Tag Printers $2,000 – 5,000• Middleware $25,000 – 200,000• More easily afforded by larger players• Large players more likely to have more

difficult logistics, with costly errors.• According to Forrester, companies must

spend as much as $100 million to see real benefits from deployment

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Unit costs

• At least fifty times that of barcodes(remember the comparisons chart)

• But this will change (learning curve)

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Other costs for adopters

• RFID strategy and technology $50,000 - $300,000

• Training and maintenance

• Specialized, network-connected tagging equipment (ex: factor floor equipment)

• Reoccurring fees to EPCglobal and/or UCCnet (15%-20 of cost of system)

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Benefits for adopters

(Varies for every adopter) • Avoided shipping errors• Reduced labor costs• Accurate inventory counts and improved

forecasting demand• Avoided incidents of counterfeiting (which can

also damage brand value and public confidence)• EPC/RFID adoption saves between $500 million

and $1 billion/yr for pharmaceutical manufacturers, and between $200 million and $400 million/yr for healthcare distributors

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Price discrimination, etc.• To successfully discriminate, the seller needs to:

– Identify two or more market segments– With different elasticities of demand– Prevent arbitrage

• For versioning to work:– New versions need to add functionality, at least in the

minds of some users– Old versions need to expire

• RFIDs can facilitate either of these

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RFID in casinos: price discrimination?

• In the past, casinos have relied on pit bosses and dealers to continually estimate how much gamblers were wagering, which in turn enabled the casinos to figure out about how much a customer spent overall, and what level of discounts and freebies he or she was entitled to. With RFID, the chips are automatically scanned at each bettor's position, and the data are displayed in real time on a personal computer behind the table visible to the dealer and pit bosses -- thus eliminating the human guesswork.

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Potential winners & losers - I

• Who wins? Who loses?– The quick answer is that RFIDs will produce

some big winners and a lot of losers. Even for the winners, RFIDs requires so much capital and change that the risk is very great. Successful transition management requires insight, finesse, and careful planning.

– Smaller firms may be particularly at risk

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Potential winners & losers - II

• Participation will be costly for the manufacturers. Nevertheless, they will have to adopt Auto-ID. Large manufacturers may see a decrease in profitability, but many smaller manufacturers will not have the resources to remain involved at all. At the same time, many smaller retailers will not have the incentive or resources to adopt Auto-ID. This may well accelerate the split in the retail sector between "haves" and "have-nots."

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Issues II - Regulation

• Reasons to regulate– It may be more efficient to treat RFID as a

“special case”

• Reasons not-to-regulate– Avoid the problem of building a regulatory

model based on defunct technology– General approaches to privacy, price

discrimination, etc., may be sufficient

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Recently in California…

California Bill Seeks to Ban Tags in IDs

California's Identity Information Protection Act would prohibit the use of contactless integrated circuits in government-issued identification documents.

(The Identity Information Protection Act of 2005, SB 682, authored by State Senator Joe Simitian)See: http://www.rfidjournal.com/article/articleview/1565/1/1/

and http://www.aclunc.org/pressrel/050517-rfidbill.html

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Consumer applications - 1

• Could RFIDs be valuable once the consumer has purchased products with them?

• Clothes, DVDs, passports, car parts, etc.• Another: Pharmaceuticals

– Supply chain, especially with third-party payers– “Smart Medicine Cabinets”

• Are there consumer analogs to “high reliability systems” such as nuclear power plants, airplanes, etc.?

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Consumer applications - 2

• Eventually, do items w/o RFID become less valuable?

• May not be able to return items w/o active RFID

• Could not “find” item in home• Could not generate list of items• Could be difficult to sell per second hand if

they also have adopted RFID (ex: textbooks)

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Consumer applications - 3

• Potential for complementary effects

• Imagine if your mobile phone had a reader (Phillips Electronics is trying to do this.)

• The PDA may have a revival

• Innovative software that works with RFIDs

• RFID jammers and protectors

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Government applications - 1

• May be useful to distinguish between:– Cases driven by economics (these can be analyzed

with similar approaches to business applications)– Cases driven by non-economic concerns

• National security• National identity

• Government can also direct technology adoption by its (very large) purchasing decisions– Historical example: microfiche in the U.S.

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• The Federal Highway Administration awarded a contract to develop a 5.9 GHz RFID system to cut road fatalities in the U.S. by 50%.

• New U.S. Civilian and Soldier Passports with RFID

• DoD’s supply chain• Satellite tracking of commercial vehicles in

EU

Government Applications - 2

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Final Thoughts - 1

• Old economics rules still apply• Don’t think of just the Low Freq. chips… there is

much room for innovation with other chips as well

• Try to think of what consumer “pain” to solve (is an idea a pain killer or just a vitamin?)

• Think of why there may be the “winners” and the “losers” with RFIDs… can we make everyone winners?

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Final Thoughts - 2

• RFIDs.. just an asset tracking system ?• However, in combination w/ other systems, RFID

is far-reaching capabilities• What types of implementations will be

encouraged? Those that track important resources.

• What are important resources?– Either expensive (cars, razors, electronics)– Dangerous (toxic wastes, drugs, weapons)– Emotional Attachment (pets, children, iPod)