Information Rules:A Strategic Guide to the Network Economy

By

Carl Shapiro and Hal R. Varian

Reviewed By:

Amit SharmaINF385Q – Fall 2005 University of Texas at Austin

Topics

• About Authors

• Definitions in Economy

• Theme of the Book

• Information Policy

• Example – Battle of Browsers

• Critique

About Authors“The books that help you the most are the ones that make you think the most”

- Theodore Parker

Carl Shapiro : He is the Transamerica Professor of Business Strategy at the Haas School of Business at UC - Berkeley . He also is TheDirector of the Institute of Business and Economic Research, and Professor of Economics in the Economics Department,at UC Berkeley.

Hal R. Varian:He is the Dean of the School of Information Managementand Systems at UC Berkeley. He is also a professor in the Haas School of Business, a Professor in the Economics Department.

The Information Economy

Economy: All the activities involved in the production and distribution

of goods and services.

Information Economy: It is an economy based on the exchange of knowledgeinformation and services rather than physical goods and services.

The Information Economy (2)

Information: Any Essentially, anything that can be digitized—encoded as astream of bits—is information. E.g. baseball scores, books, databases,magazines, movies, music and Web pages are all information goods. The book focuses on the value of information to different consumers.

Cost of Producing Information:

“ Information is costly to produce but cheap to reproduce.”

Theme of the Book:

3 Strategies for Information Economy:

1) Differentiation of Product and Services.

2) Lock – In.

3) Positive feedback.

Differentiation of Products and Services

Strategies used:

a) Mass Customization b) Differential Pricing

c) Personalized Content d) Versioning

e.g.

How to design your "product line"?

1) Offer Versions Dimensions: Delay, User Interfaces ,Image Resolution, Speed of Operation,

Format, Capability, Features, comprehensiveness, support

2) Principle of “self-selection” : Design these versions to accentuate the needs of different groups of customers.

Lock In Cycle

Phase 1Brand Selection

Phase 3Entrenchment

Phase 4Lock-In

Phase 2Sampling

Lock In

How do Buyers Recognize that they are in Lock In?

• Contractual Commitments

• Durable purchases

• Brand specific Training

• Information and Databases e.g. CD and DVD

• Specialized suppliers.

• Search costs. e.g. Travel Agent, Insurance Agent etc.

• Loyalty Programs

Managing Lock- In for Buyers

How to avoid Lock-In?

• Bargain for initial sweeteners, such as discounts or support for switching from your previous system.

• Don't be too anxious. • Depict yourself as an attractive customer down the road• Seek protection from monopolistic exploitation • Keep your options open via second sourcing• Watch out for creeping lock-in, and retain information about

usage records.

Managing Lock-In for Sellers

• Be prepared to invest to build an installed base through promotions and by offering up-front discounts.

• Cultivate influential buyers and buyers with high switching costs.

• Design your products and your pricing to get your customers to invest in your technology, thereby raising their own switching costs.

• Maximize the value of your installed base by selling your customers complementary products and by selling access to your installed base.

Positive Feedback

“ Positive feedback makes the strong grow stronger . . . and the weak grow weaker.”

Positive Feedback (cont.)How it Helps? 1) Adoption dynamics in the presence of positive feedback tend to follow a predictable

pattern. e.g. NES

2) Consumers value information technologies that are widely used, just as they

value communications networks with broad reach.

3) Positive feedback works to the advantage of large networks and against small networks.

Positive Feedback (cont.)

• Generic strategies for innovators in network markets:

OpennessControl

Compatibility

Performance

Controlled Migratione.g. Win 98 and Intel PII

Open Migratione.g. Modems

Performance Playe.g. Nintendo Entertainment System

Discontinuitye.g. CD Audio and Floppy Drive

Information Policy • Don't expect the government's role to diminish.

• Every company needs to know the rules of competition.

• Companies have considerable freedom to engage in

differential pricing. • Competition policy is intended to ensure a fair fight, not to

punish winners or protect losers.

Information Policy

• Don't be afraid of cooperating with other companies to set standards and develop new technologies, so long as your efforts are designed to bring benefits to consumers.

• If you are fortunate enough to gain a leading share of the market, be sure to conduct an audit of your practices.

Battle of the Browsers

• Microsoft came with IE in 1998 and marketed through OEM, ISP etc.

• Made IE free online and making it Default Browser.

• Investing heavily on User Interface

• Head start with Navigator in 1995, most companies had already installed their software

• Made browser available free of charge, pioneered the idea of Plug-Ins ( third party software )

• Earns revenue through its other products e.g. Netscape Web site

MicrosoftNetscape

Preemption

Penetration Pricing

Battle of the Browsers (cont.)

Expectation mgmt:

• Netscape has partnered with 100 industrial companies in order to bundle their product

• Netscape and Sun Microsystems are strong allies, with Netscape supporting Sun's Java and Sun helping lend credibility to Netscape

• Integrating IE in Windows OS and making user believe that they do not have a need to install a new browser.

• Microsoft as stated earlier has already developed alliances with OEM,ISP and Content Providers by providing Financial Schemes

Alliances:

Netscape Microsoft

Critique

• The definition of Information on which the book focuses is very broad according to author.

• Authors fail to mention about the importance of Sales and Marketing in an economy .

• Third party role in Information Economy is not taken into consideration.

• An economy is not complete until its unit of transactions are defined. The author fail to define how to estimate the value of a product which is available in bits form.

THANK YOU