1. Information Rules: A Strategic Guide to the Network Economy The Information Economy Carl Shapiro Hal R. Varian

2. Information Rules Spring 98 2 Information Anything that can be digitized –Text, images, videos, music, etc. –a.k.a. content, digital goods Unique cost characteristics –High fixed cost, low incremental cost –Value (not cost) based pricing –Product differentiation (versioning)* Unique demand characteristics

3. Information Rules Spring 98 3 Cost structure Expensive to produce, cheap to reproduce High fixed cost, low marginal cost –Not only fixed, but sunk –No significant capacity constraints

4. Information Rules Spring 98 4 Rights Management Low reproduction cost is two-edged sword –Cheap for owners (high profit margin) –But also cheap for copiers Examples –Library industry –Video industry*

5. Information Rules Spring 98 5 “Now, these machines are advertised for one purpose in life. Their only single mission, their primary mission is to copy copyrighted material that belongs to other people.” “…(W)e are facing a very new and a very troubling assault on our fiscal security, on our very economic life and we are facing it from a thing called the ______” - Jack Valenti

6. Information Rules Spring 98 6 Rights Management Maximize value of IP, not protection –“When managing intellectual property, your goal should be to choose the terms and conditions that maximize the value of your intellectual property, not the terms and conditions that maximize the protection.” Examples –Library industry –Video industry

7. Information Rules Spring 98 7 Consumption Characteristics Experience good –Browsing* –Branding* (examples on next slide) –Reputation*

8. Information Rules Spring 98 8 Consumption Characteristics

9. Information Rules Spring 98 9 Consumption Characteristics Overload – Economics of attention – Hotmail example – Broadcast, point-to-point, hybrid

10. Information Rules Spring 98 10 Technology Infrastructure to store, retrieve, filter, manipulate, view, transmit, and receive information Adds value to information –Web = 1 terabyte of text = 1 million books –If 10% useful = 1 Borders Bookstore –Value of Web is in ease of access Front end to databases, etc. Currency

11. Information Rules Spring 98 11 Systems of Products Complementary products –Hardware/software –Client/server –Viewer/content

12. Information Rules Spring 98 12 Unique Features Complements –Different manufacturers –Strategy for complementors as well as competitors –Compatibility as strategic choice –Standards and interconnection

13. Information Rules Spring 98 13 Systems Competition Microsoft-Intel: Wintel –Intel Commoditize complementory chips –Microsoft Commoditize PCs Apple –Integrated solution –Worked better, but lack of competition and scale led to current problems

14. Information Rules Spring 98 14 Lock-In and Switching Costs Example: Stereos and LPs –Costly switch to CDs Systems lock-in: durable complements –Hardware, software, and wetware –Individual, organizational, and societal

15. Information Rules Spring 98 15 Network Effects Value depends on number of users Positive feedback –Fax (patented in 1843) –Internet (1980s) Indirect network effects – Software Expectations management –Competitive pre-announcements

16. Information Rules Spring 98 16 Compatibility Examples –Beta v. VHS –Sony v. Philips for DVD Role of 3rd parties Read v. write standards Backwards compatibility? –Windows 2000/XP –Nintendo 64

17. Information Rules Spring 98 17 Basic Strategies Go it alone Partnerships (Java) Formal standard setting – Widespread use – Licensing requirements Competition in a market or for a market?

18. Information Rules Spring 98 18 Policy Understand environment IP policy Competition policy – Regulation – Antitrust Electronic commerce – Contracts – Privacy

19. Information Rules Spring 98 19 Information is Different… but not so different Key concepts –Versioning –Lock-in –Systems competition –Network effects