BUSINESS: The Ultimate Resource

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MANAGEMENT LIBRARY
Information Rules
by Carl Shapiro and Hal R. Varian

Why Read It?

The economy is increasingly dominated by information-based products and services. There has been a tendency to believe that companies can ignore the old rules of economics and substitute new ways of marketing and doing business. The authors urge a more cautious approach, explaining that the basics of business have not changed. However, the existing rules need to be adapted to the new marketplace. They offer practical advice, backed by case studies, on ways to develop strategies for the new economy that are based on sound business principles.

Getting Started
Information, according to Shapiro and Varian, is any product or service that can be digitized. It is costly to produce, but cheap to reproduce, and it has different values for different people. They believe that information has to be carefully managed to maximize its potential value. The Internet may provide the technological infrastructure needed for instant delivery to users, but there are other related technologies, such as payment mechanisms, that are essential to the profitable development of an information economy.

Contribution
1. Information Pricing The cost of production, say the authors, is dominated by first-copy costs; reproduction and distribution cost very little. There are no production constraints on producing very large or very small quantities. One million copies of a software product have the same unit cost as ten million copies. This pricing structure, they claim, leads to two business models for an information market:

the dominant firm model; the differential product model, where many firms produce competing versions of the same information.

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BUSINESS: The Ultimate Resource

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Companies in a dominant firm market must, they argue, strive for cost leadership. In a differentiated market, companies need to add value and protect their intellectual property rights. They point out that even a commodity product can be differentiated by organizing it differently for different users. Personalizing information takes this process to its logical conclusion. They offer three approaches to information pricing:

personalized pricing, tailored to individual users; version pricing, where users choose their preferred version; group pricing, aimed at discrete groups such as students or companies with large numbers of users.

Personalized pricing, they claim, can be refined by the information available on customer buying habits. Group pricing is particularly effective where a product, such as software, is sold in very large numbers and effectively creates a standard that locks customers in. 2. Versions of Information The authors argue that producing different versions of the same information can broaden the market. Products can be differentiated by features, availability, support levels, and quality. A high-end version would have all the important features; other versions would have fewer. The authors recommend offering three versions, with the middle version likely to be the most popular. Bundling is another method of versioning, where producers put together distinct but related products at a discount price. Bundling software products, experience indicates, produces more overall revenue. 3. Information Rights Management Shapiro and Varian point out that information, or intellectual property, should be managed and protected. Free content, they say, can act as an effective method of sampling chargeable information. Many publishers, for example, provide free executive summaries and charge for access to the complete work. As most Internet users read only a few pages, free content is unlikely to reduce overall sales. 4. Information Lock-in The authors explain how certain types of information can lock a customer in to a supplier. With products that require a great deal of training, the cost of switching supplier can be prohibitively high. They recommend building a large base of customers, putting a value on that base and then maximizing its value by offering a continuous stream of new products.

Bloomsbury Publishing Plc 2005

BUSINESS: The Ultimate Resource

May 2005 Upgrade 32

5. The Economics of Networks The information economy is driven by the economics of networks. The authors explain how the concept of positive feedback helps to build and sustain networks. Once a product gains wide acceptance, the positive feedback encourages or forces suppliers of related products to design products that are compatible. The authors refer to this process as demand-side preference. Customers like standardization. Compatibility is the key factor in creating networks of suppliers developing products to the same standard. The authors explain the apparent contradiction in the importance of openness to building standards. Openness appears to open the door for competitors, but it also encourages more suppliers to join the network and add weight to the standard. 6. The Importance of Cooperation Shapiro and Varian point out that standards and the development of networks encourage cooperation between companies who would normally be regarded as competitors. They use the term complementors to describe companies who benefit from each others productscomputer manufacturers and software developers are an example. Cooperation is an important part of the information economy, and the objective of dominant firms in a network is to build strong alliances so that they can offer their customers total solutions.

Context
Media hype about digital companies led to the dot-com boom in the late 1990s, a boom that was based on the belief that the old rules of business had been blown away by new media companies. The subsequent dot-com collapse showed that basic principles still applied. Information Rules is the first book to compare the economics of the new information economy with traditional economics. The authors take a classical economics approach to the subject, but include many practical examples of the new rules in action. Books such as Being Digital by Nicholas Negroponte (Knopf, 1995) have explained the nature of digital information, while Nalebuff and Brandenburgers Co-opetition (HarperCollins Business, 1996) looks at cooperation and complementary business in the information economy.

For More Information

Shapiro, Carl, and Hal R. Varian. Information Rules: A Strategic Guide to the Network Economy. Boston, MA: Harvard Business School Press, 1998.

Bloomsbury Publishing Plc 2005