Information Rules: A Strategic Guide to the Network Economy

Citation

Cassell, K.A. and Mercado, M.I. (1999), "Information Rules: A Strategic Guide to the Network Economy", The Bottom Line, Vol. 12 No. 1. https://doi.org/10.1108/bl.1999.17012aad.003

Information Rules: A Strategic Guide to the Network Economy

Information Rules: A Strategic Guide to the Network Economy

Carl Shapiro and Hal R. VarianHarvard Business School PressBoston1999

Keywords: Economy, IT, Libraries, Strategy

The authors, who have impressive credentials as Professors at the University of California at Berkeley, present managers and policy makers, who have to make strategic choices concerning information technology, with insights gleaned from economic research as well as from their own experiences in applying principles of economics to the network economy. The thesis of this book is that durable economic principles can guide the reader in today's frenetic business environment of information technology. "Technology changes. Economics laws do not" is their mantra throughout this work. In keeping with this mantra, they systematically set out to introduce and analyze the concepts and strategies needed to successfully navigate the network economy. This book is quite relevant for the community of librarians, who, even though they are not in the business of the network economy, have to deal with its effects every working day. It is relevant because the competitive strategies of companies and the effects of governmental policy impact upon how the network economy interfaces with the information providing function to libraries.

Because information technology is bursting forward in a seemingly chaotic manner, it is difficult to figure out relevant business patterns which help guide business decisions. However, according to the authors, a few basic economic concepts go a long way toward explaining how today's industries are evolving. To this end, they examine numerous business strategies relating to the software (information) and hardware (infrastructure) side of the information industry and found that they are inexorably linked, i.e. neither software nor hardware are of much value without the other. They are only valuable in so far as they work together as a system.

They use the term information to mean anything that can be digitized, i.e. encoded as a stream of bits. For their purposes books, databases, magazines, movies, stock quotes, baseball scores and Web pages are all information goods. These information goods are only valuable in so far as people are willing to pay for information. Since people place widely different values on a particular piece of information, value based pricing naturally leads to differential pricing. For instance, Chapter Two explores the ways in which information can be sold to an identifiable market, while Chapter Three examines the ways "to version information goods to make them appeal to different market segments which will pay different prices for different versions." The different ways of versioning information leads to the authors explaining the principles behind creating profitable product lines that target different market segments. Thus by selling each version for a different price, one can extract the maximum value of the product from the marketplace.

Chapter Four explains the very interesting history of intellectual property, property rights management and describes the lessons to be drawn for rights management on the Internet. In addition, they point out that regardless of whether one is creating information for print, and/or nonprint media, it is important to realize that the legal grant of exclusive rights to intellectual property via patents, copyright and trademarks does not confer complete power to control information. Thus, in the digital technological age the difficulties in enforcing intellectual property rights have become a financial threat to producers of information. Based on this scenario, the advice the authors give is that "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 protection.

The next chapters analyze the technological infrastructure that makes it possible to store, search, retrieve, copy, filter, manipulate, view, transmit and receive information. Technology is considered the "package" that permits information to be delivered to the end user. For example, computer software is valuable only because computer hardware and network technology are now so powerful and inexpensive. But, according to Shapiro and Varian, it is important to note that the breathtaking rate of change and the "fascination with the information economy are driven by advances in information technology and infrastructure, not by any fundamental shift in the nature or even the magnitude of the information itself." Thus, the Web is valuable only in so far as it is capable of providing immediate access to information. That is to say that the technology of the Web utilized by suppliers of information allows them to distribute up-to-date information dynamically from databases and other repositories. Consequently, "what is new is our ability to manipulate information, not the total amount of information available." Therefore, content providers cannot operate without the technological infrastructure of the systems, and vice versa.

So what happens is that there is competition in the development of new and more dynamic systems over which this information can be carried, i.e. operating systems and applications software, CPUs and memory chips, disk drives and controller cards, video cassette recorders and videotapes themselves. Because one supplier cannot hope to develop all the technology needed for the system, different manufacturers using very different production and business models make different components. Whereas traditional rules of competitive strategy focus on competitors, suppliers and customers, in the information economy companies selling complementary components are equally important. When you develop and sell one or more components you have to be sure that your product is compatible with the rest of the system. In keeping with that view, the authors offer strategies that are specifically designed to help companies selling one component successfully compete in this new environment. They discuss the formation of alliances, cultivating partners and cite the Wintel strategies of Microsoft and Intel which enable them to be able to "commoditize complementary products without eroding the value of their own core strengths" (Chapter 8).

The ideas of "lock-in and "switching costs" are examined in Chapters 5 and 6. Lock-in occurs when users invest in multiple complementary and durable assets, which are specific to a particular information technology system. For example, most of us are locked into Microsoft's Windows desktop operating system. And the switching costs, i.e. hardware and software, inherent in changing from the Apple computer operating system to Intel equipment. These chapters analyze the different kinds of "lock-in," "strategies to incorporate proprietary features into your product, and ways to coordinate your strategy with that of your partners." In addition, the chapters explain how to exploit "lock-in" when one is offering an information system and how to try to avoid it when you are the consumer.

"When the value of a product to one user depends on how many other users there are, economists say that this product exhibits network externalities, or network effects." Communication technologies such as telephones, e-mail, Internet access, fax machines and modems all are said to exhibit network externalities. However, having superior technology is not enough to capture the marketplace. A business needs to employ marketing tools such as penetration pricing to encourage positive feedback. In addition, the company that understands information systems and complementary products will be best positioned to move rapidly and aggressively. For example, Netscape grabbed the Web browser market early by giving away its product. It lost money on the sale, but made up for it in volume. Yet with all of this, to become the standard in the industry, consumer expectations are critical. As a result, it is crucial that companies participating in markets with strong network effects concentrate on convincing customers that their product will become the standard, while those of their rival will become virtually obsolete (Chapters 7, 8 and 9).

Given the current antitrust suit against Microsoft by the US Department of Justice, the chapter on Information Policy (Chapter 10) is very important for library managers who have to deal with the impact of information technology on their library systems. This chapter discusses the fact that whether managers in the network economy are fighting legal attacks or using antitrust laws to challenge the conduct of competitors or suppliers, it is important that they know the rules of the game. The competitive strategies of vendors often collide with antitrust laws in three basic areas: mergers and acquisitions, cooperative standard setting and monopolization.

No librarian can ignore the US Government's role in information technology. The relationships and conflicts between Government and business over their respective roles in controlling the network economy are not going to diminish. And because of that situation no librarian can understand government policy and the rules of the game now and in the future without a sound understanding of how competitive strategies work in the network economy. This book is highly recommended for administrators of libraries, for those librarians who are responsible for acquisitions, for those responsible for information policy in their libraries or in library systems, and for those who purchase information technology from vendors.