Information Rules

Information Rules I. Chapter 1 In this book Carl Shapiro and Hal R. Varian provide an overview of the competitive playing field of the network economy, and highlight the key economic rules that govern it. They assert that one does not 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 one must look at economic issues involving both information and technology. On the information side, Shapiro and Varian 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. II. Chapter 2 To begin, it is asserted that information is costly to produce but cheap to reproduce. The economic rule that parallels this theme states that while fixed costs of production are large, variable costs of reproduction 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 one operates in, and illustrates how the unique characteristics of information markets offer new opportunities to implement time-tested principles of competitive strategy. Shapiro and Varian also examine strategies for customizing information by personalizing your product, and by various means of personalized pricing. III. Chapter 3 This next chapter examines ways to version information goods in order to make them appeal to various market segments that 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, and support. Shapiro and Varian also explore issues such as: how to avoid common pitfalls in versioning, how to determine the number of versions to offer, and the value to be gained from product bundling. IV. Chapter 4 Thirdly, this book explores whether copyright law is hopelessly outdated. Shapiro and Varian say no, and within this chapter demonstrate 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. Shapiro and Varian review the history of intellectual property and describe the lessons it has for rights management on the Internet. They discuss the tension between giving away one’s information to let people know what one has to offer and charging them for it to recover one’s costs, and outline strategies managers can use in making this choice. V. Chapter 5 Then the issue of the lock-in is considered. When the costs of switching from one brand or technology to another are substantial, users face lock-in. Shapiro and Varian argue that the friction free economy is a fiction, and that in the information age, users will be facing more instances of lock-in. Understanding the costs of switching technologies or brands will be critical to success in today’s economy. This chapter describes the common patterns that give rise to switching costs in an attempt to help companies recognize and measure lock-in. Using company examples, the chapter explains the different kinds of lock-in, outlines strategies to incorporate proprietary features into a product, and describes ways to coordinate one’s strategy with that of his or her partners. VI. Chapter 6 Moreover, this chapter describes how to exploit lock-in when one is offering an information system, and how to avoid it or at least anticipate it when one is 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, Shapiro and Varian provide a catalog of strategies to minimize lock-in and avoid monopoly exploitation. In addition, Shapiro and Varian 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. VII. Chapter 7 This next chapter goes on to highlight network externalities as a fundamental economic characteristic of real and virtual networks, which occur when the value of a product or service to one user depends on how many other users there are. 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. Shapiro and Varian 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. VIII. Chapter 8 Furthermore, this next 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; Shapiro and Varian argue that it is especially important to figure out early on who your allies are, and who your enemies are. Carl Shapiro and Hal R. Varian 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. IX. Chapter 9 Subsequently, when a network is launched, the stage of negotiations over interconnection and standardization is 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. Shapiro and Varian explore in detail seven key assets that determine a company’s ability to successfully wage a standards war: control over an installed base of users, intellectual property rights, ability to innovate, first-mover advantages, manufacturing abilities, strength in complements, and 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 precede in protecting and improving their positions once they’ve won. X. Chapter 10 Finally, 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, Shapiro and Varian 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.