Information Rules
A Strategic Guide to the Network Economy
Carl Shapiro and Hal R. Varian

The authors provide an overview of the competitive playing field of the network economy, and highlight the key economic rules that govern it. They assert that you don’t need a "New Economics" to understand the New Economy: the basic economic principles needed to develop business strategy remain the same. To understand the economics of "information technology" you have to look at economic issues involving both "information" and "technology". On the information side, they discuss: the cost of producing information, how to manage intellectual property, information as an experience good, and the economics of attention. On the technology side, they introduce: systems competition, lock-in and switching costs, positive feedback, network externalities, and standards. The chapter ends with a brief overview of the policy issues concerning the Network Economy.

Company Examples: Netscape, Wall Street Journal Interactive, Amazon.com, AOL, Wal-Mart, Microsoft, Intel, Apple, NHK, Sony

Information is costly to produce but cheap to reproduce. The economic rule that parallels this theme is that while fixed costs of production are large (ie: creating an original music CD), variable costs of reproduction (making multiple copies of that first CD) are small. This chapter focuses on the special cost structure of information, and outlines effective ways to sell an information good to identifiable markets. It discusses how to develop a basic strategy based on what industry you operate in, and illustrates how the unique characteristics of information markets offer new opportunities to implement time-tested principles of competitive strategy (differentiating your product, achieving cost leadership, first-mover advantages). The authors also examine strategies for customizing information by personalizing your product, and by various means of personalized pricing.

Company Examples: Reuters, Pointcast, Nynex, West, Wall Street Journal, Peapod, Infonautics, Encyclopedia Britannica, Microsoft

How can you get valuable data about customers without customer-provided profiles, without expensive marketing data, and without consumers’ active involvement? Answer: By offering them a menu of products and seeing which one they choose. This chapter examines ways to "version" information goods so as to make them appeal to different market segments who will pay different prices for the different versions. Strategies for versioning are illustrated with examples and include: delay, user interface, convenience, speed of operation, flexibility of use, support, and others. The authors also explore issues such as: how to avoid common pitfalls in versioning, how to determine how many versions to offer, and the value to be gained from product bundling.

Company Examples: Federal Express, PAWWS Financial Network, Knight-Ridder, MusicMaker

Is copyright law hopelessly outdated? The authors say no, and show in this chapter why many of its principles are still valid. What has changed, they say, is that the Internet, and information technology in general, offer new opportunities and challenges in applying these principles. The authors review the surprising history of intellectual property and describe the lessons it has for rights management on the Internet. They discuss the tension between giving away your information—to let people know what you have to offer—and charging them for it to recover your costs, and outline strategies managers can use in making this choice.

Company Examples: Barney & Friends television program, Walt Disney Company, Playboy Enterprises, Network Associates/Virus-Scan, Farcast. Historical Examples: Libraries, Videos.

When the costs of switching from one brand or technology to another are substantial, users face lock-in. The authors argue that the "friction free" economy is a fiction, and that in the Information Age users will be facing more—not less—instances of lock-in. Understanding the costs of switching technologies or brands (both for companies and their customers) will be critical to success in today’s economy. This chapter describes the common patterns that give rise to switching costs to help companies recognize and measure lock-in. Using company examples, it explores the different kinds of lock-in, outlines strategies to incorporate proprietary features into your product, and describes ways to coordinate your strategy with that of your partners.

Company Examples: Bell Atlantic, Computer Associates, the Pentagon, IBM, Intel

This chapter explains how to exploit lock-in when you are offering an information system, and how to avoid it—or at least anticipate it—when you are the buyer. The first part of this chapter is aimed at buyers of information technology, which includes virtually everyone in today’s economy. To help prevent mistakes in dealing with lock-in, the authors provide a catalog of strategies to minimize lock-in and avoid monopoly exploitation. In addition, the authors show how individuals can make their own switching costs work in their favor if they get the timing right. The second part of the chapter outlines competitive strategies for companies that sell their products and services in markets where customers face significant switching costs, and shows how these strategies can be put into practice.

Company Examples: Iomega, Kodak, Netscape, Microsoft, Cisco Systems, Visa/MasterCard/American Express

This chapter highlights "network externalities"—a fundamental economic characteristic of real and virtual networks—which occurs when the value of a product or service to one user depends on how many other users there are (ie: phone, Internet, e-mail, modems). The pattern such technologies follow results from "positive feedback": as the installed base of users grows, more and more users find the product useful to adopt. The authors identify four generic strategies for igniting customer feedback which follow logically from two basic tradeoffs: whether the company will base their strategy on improved performance or enhanced compatibility; and whether the product will be open or proprietary. How these concepts and strategies work in practice is illustrated through a series of historical case studies ranging from the early days of the telephone industry to the introduction of color television.

Company Examples: Apple, Nintendo, Philips, Westinghouse, AT&T, RCA, CBS

This chapter describes how firms must function in a standards-rich environment. It focuses on the openness strategies which are fundamentally based on cooperation with allies. Due to the winner-take-all nature of network markets, the authors argue that it is especially important to figure out early on who your allies are, and who your enemies are. The authors systematically explore how companies can determine critical issues such as: whether they want an "open" standard; which allies they need to win and how to most effectively attract them; whether they can assemble allies to launch their technology successfully while still keeping some control over how it evolves; whether to fight a standards war or seek an early truce; and what a company should do if it has a declining market share in a network industry.

Once a network has been launched, negotiations over interconnection and standardization are critical. This chapter examines what happens if these negotiations break down: how to fight a standards war, and how to get positive feedback working in a company’s favor in a battle against an incompatible rival technology. The authors explore in detail seven key assets that determine a company’s ability to successfully wage a standards war: 1) control over an installed base of users, 2) intellectual property rights, 3) ability to innovate, 4) first-mover advantages, 5) manufacturing abilities, 6) strength in complements, and 7) brand name and reputation. In addition, they outline two marketplace tactics companies will need to employ in pursuing a standards battle, and discuss how they should best proceed in protecting and improving their positions once they’ve won.

Whether fending off legal challenges or using the antitrust laws to challenge the conduct of competitors or suppliers, understanding the rules of the game is important for any manager operating in the Network Economy. In this chapter, the authors explore government policy, including antitrust policy and regulation in the telecommunications sector. They underscore why competitive strategy in the information economy collides with antitrust law in three primary areas: mergers and acquisitions, cooperative standard setting, and monopolization, and explore the current legal rules in each of these areas. In addition, they suggest changes that could be made so that the government supports, rather than impedes, the growth of the information economy.