Information Rules

Information Rules Jeff Bezos, Founder and CEO, Amazon.com Information Rules is that rare book that looks dispassionately and intelligently at the Internet and its place in the history of economies and markets. Authors Shapiro and Varian, in applying the tra- ditional rules of economics to the emerging information market- place, do readers a tremendous service. Anyone interested in par- ticipating in this new economy will stand a far greater chance of success if they follow the rules put forth in this book. Scott Cook, Founder and CEO, Intuit This is the story that needs to be told: the new way to look at competition in the digital era. It's the book I've been looking for. Mike Dolbec, VP for Business Development, 3Com I have been up to my ears in this trench warfare of information age competition for over 15 years and have never found a better guide to tactics. I'd recommend this book as an excellent asset for high-tech strategists. Skip that "fog of war" feeling and read this book to find out exactly what your competitors are doing to you and how best to make their nights sleepless as you compete for the future. Andy Grove, Chairman, Intel An excellent book! It shows how economic principles apply in the age of the Internet, by a combination of clear English, devoid of jargon, and crisp and specific examples drawn from real life. Barry Nalebuff, Co-author of Co-opetition and Milton Steinbach Professor at Yale School of Management Forget Econ 101. This is Econ 2001: state-of-the-art ideas that ex- plain how the market for information works and when it doesn't work. Accessible, historical, real-world and ultimately practical. Capturing the value created by information-based products is a tricky business. Let this book be your guide. Robert Pitofsky, Chairman of the Federal Trade Commission There is no greater challenge facing the United States--indeed the world--than to adjust private and public policies to take account of the revolution in information technology. But under- standing precedes any sensible debate. This book by two leading academic economists, each with real world credentials and prac- tical experience, offers a superb introduction to this challenging and exciting new world, and the opportunities and problems that accompany it. Paul Saffo, Director, Institute For The Future At last, a clear and eminently practical guide to the information economy for executives and policymakers alike. Read this book, and then keep it close by, for it is the perfect antidote to the hype swirling around this brave new world of information, networks and commerce. Long after todays fashionable management books have been consigned to the recycling bin, Information Rules will still be on your shelf, well-thumbed and often referred to. Eric Schmidt, CEO Novell Information Rules is the first book to describe network economics. Shapiro and Varian explain all the crazy things we see happening everyday in Silicon Valley and beyond. This book is a must for every business that wants to survive in the new millennium. Jay M. Tenenbaum, Chairman of Veo Systems, and Founder and Chairman of CommerceNet Information Rules is the indispensible battle manual for those on the front lines of the information revolution. It is the first book to articulate practical strategies, tactics and rules of engagement for surviving and winning standards wars. Reviews Amazon.com Review Summaries The lab of the future, Wall Street Journal, March 16, 1999 Economics on the net, The Economist, March 13, 1999 Behind winning strategies, Upside, January, 1999, p.126. Internet economics, The Economist, December 18, 1998. The Web gets ugly, New York Times Magazine, December 6, 1998, p. 40 Old rules for a new economy, Mass High Tech, January 25-31, 1999 The gift of history, Boston Globe, December 6, 1998 Jesse's book club: tech books you need to read, ZDnet Anchordesk, December 1998 Editors' choice, best business books of the year, Amazon.com, December 4, 1998 Information Rules, eMarketer, November 30, 1998 Whose 'Rules'?, Boston Globe, November 22, 1998 Information as art, Business 2.0, November 1998, p 25 Classics for a new century, American Way, November 1998, p 152 Old rules for a new economy, Worldlink: The Magazine of the World Economic Forum, November/December 1998, p 26-29. Some recommended reading for the serious high-tech player, San Francisco Chronicle, October 24, 1998 Reigning supreme in the information economy , Infoworld, October 24, 1998 Resources: IS manager's bookshelf, ComputerWorld, October 12, 1998 Network economics for dummies, New Media, October, 1998 Our book picks, Fast Company, November, 1998 Interviews « La baisse de 40 % des actions d'Internet est un bon signe », Le Monde, Sept 21, 1999. What Are the Rules, Anyway?, Technology Review, March/April 1999 Old-Fashioned Economics Still Rules in the New Network Economy, CalBusiness, Spring 1999 Internet pricing from National Public Radio, 06/11/1999 Interview from Ernst and Young Journal of Business Innovation Profile of Hal Varian, Fortune, February 15, 1999, p.36 For a slippery commodity, information works pretty well, The Manager, December 1998 Radio interview, CIO Magazine, November, 1998 Training for the future, Clipview, November, 1998 Interview, Financial Times, October 13, 1998 Interview, Harvard Business School Press, November, 1998 Excerpts and Adaptations Versioning: the smart way to sell information, Harvard Business Review, Nov-Dec, 1998. Locked in, not locked out, The Industry Standard, October 23, 1998 Lock 'em up, CIO Magazine, October 15, 1998 The art of war, Wired, October 1998 Quotes The Outlook, Wall Street Journal, June 21, 1999 "Mine was cheaper!", Forbes, November 2, 1998 "Beware tech lock-in: how to avoid getting trapped by holiday computer purchases", Jesse Berst, ZDNet AnchorDesk, December 11, 11998. "Monicanomics 101", by John Cassidy, The New Yorker, September 21, 1998. "Who will own your next good idea?", by Charles C. Mann, The Atlantic Monthly, September 1998, p. 57. Talks based on Book "Government regulation of Internet is an exercise in futility says US guru", Canberra Times, June 3, 1999 "The anti-guru information guru", The Sydney Morning Herald, June 4, 1999. Chapter 2: Pricing Information "What�s On TV? Ask Henry Yuen," Business Week, September 14, 1998, p. 164. The crucial role of patent licensing in exploiting new technologies and establishing new standards is illustrated by the strategy of Gemstar International Group. Fresh from their success with their VCR Plus technology of the early 1990s, Gemstar CEO, Henry Yuen, and his colleagues are now developing an on-screen electronic program guide for television viewers. Gemstone plans to collect royalties from manufacturers of TV, VCRs, and set-top boxes that receive their Guide Plus. In a bold attempt to capture viewers� attention, Guide Plus will pop up automatically when the TV set is turned on. Gemstone also plans to collect advertising revenue. Gemstone�s program-guide patents are the key to this strategy; without patent protection, the program guide would simply become a commodity, as described in Chapter 2, page 23. Chapter 9, page 271 discusses how intellectual property rights can be critical assets in a standards war. "Spam That You Might Not Delete: Marketers are Discovering that Personalized E-Mail Pitches Work," Business Week, June 15, 1998, p. 115 Several companies are pleasing customers by using data on personalized order histories to anticipate customers� needs and offer friendly suggestions for future purchases. Using so-called "data mining" techniques, companies such as 1-800-Flowers, Amazon.com, and Macy's are testing this tactic. Customers are prompted by Streamline, Inc., a delivery service in Boston, to purchase more cereal or tissues when Streamline�s software predicts that they are running low. This is a far cry from traditional junk mail, and an excellent illustration of personalized products, as discussed on p. 32-33. "Good-Bye to Fixed Pricing? How Electronic Commerce Could Create the Most Efficient Market of Them All," Business Week, May 4, 1998, p. 71. More and more companies are taking advantage of the Web to personalize their prices and using the Web to match buyers and sellers. Examples include: Aucnet which offers quality ratings to enhance its business running on-line auctions for used cars; Priceline which matches buyers and sellers of airline tickets and other items; and Netmarket, which guarantees to find its subscribers the best price on books, music, and other merchandise. The price wars that arise when information is commoditized are described in Chapter 2 on p. 23-23; personalized pricing is discussed on p. 32-33. [Priceline may have managed to secure a lasting competitive advantage for itself by patenting the "reverse auction" method it uses to find sellers who are willing to match a buyer's offer. Priceline's patent illustrates the critical role of the government's intellectual property policies in the network economy, as discussed in Chapter 10. See "Web Concern Gets Patent for its Model of Business," New York Times, August 10, 1998, p. C1.] "Now It's Your Web", Robert Hof et. al, Business Week, October 5, 1998, p 164. This survey of personalized Web sites claims that customization can increase the number of new customers and revenues by nearly 50%. Examples described include Garden Escape, Amazon.com, CDNow, Music Boulevard, and several others. Music Boulevard, for example, found in trials that personalization prompted people to buy CDs 10% to 30% of the time, dramatically larger than the 2% to 4% rates that they had previously experienced. Amazon.com claims that repeat buyers account for more than 60% of its $203 million of sales in the first half of 1998. As shown in the book (page 33), ordinary banner ads cost about $17 per 1000 viewers, while personalized ads sell for much more---up to $300 per thousand viewers. Personalized pricing for ads is now common practice; in Chapter 2 we argue that we will see more and more personalized pricing for Web-delivered content. "Mozart for Morning Commute", Gwendolyn Freed, Wall Street Journal, Friday, October 2, 1998. On page 28 we say "One of the great things about information is that you can sell it over and over again." This is amply illustrated in the recording business. In 1984 the classical music producer Erato issued a Sibelius recording in an olive drab cover that sold around 2,000 copies. Nine years later they issued three tracks from the samedisk with a colorful cover and a catch title, which sold more than 50,000 copies. Thelesson: look in your archives for hidden gems! Chapter 3: Versioning Information "Web's Robot Shoppers Don't Roam Free", Rebecca Quick, Wall Street Journal, Thursday, September 3, 1998. Describes how sites restrict Web-bots from comparison shopping. As described onpage 79-80, competitive firms will generally not want consumers to engage in pure price shopping, and will instead try to differentiate their product and services so as to discourage price comparisons. Voice Recognition Software The price chart for Kurzweil voice-recognition software circa 1997 is shown on page 60 of the text. It was a great example of versioning, depicting a 100-fold range of prices for products that differed primarily in their vocabularies. Kurzweil was subsequently acquired by Lernout & Hauspie, but they continue to use the same pricing strategy. See the price list from 21st Century Eloquence for a current example. "Airlines Rely on Technology To Manipulate Fare Structure", Scott McCartney, Wall Street Journal, November 4, 1997. In Chapter 3, on "Versioning Information", we argue that information pricing will evolve to look much like airline pricing. In part, this is due to the similar cost structures---high fixed costs, and low marginal cost. This article describes some of the "yield management" techniques used by airlines. Load factors on airplanes have hit record levels, due in part to successful application of yield management. According to the article: . "By meshing massive historical databases on ridership with up-to-the-minute bookings, carriers could predict with almost pinpoint accuracy how many business customers would want seats on a particular flight. As a result, high fares get higher and low fares get lower," Chapter 4: Rights Management "Divx Gets Off to a Less-Than-Promising Start", Mike Langberg, San Jose Mercury News, Friday, June 19, 1998. Divx is a technology for pay-per-view video disks. It allows the convenience of rental, without the requirement to return the disk or tape the next day. It is described in the book on page 100, in Chapter 4, "Rights Management". This article argues that Divx will never achieve the near universal convenience of video stores since Divx disks are currently available at only a few locations, illustrating the interaction between network externalities and transactions costs. Chapter 5: Recognizing Lock-In "High-Tech Inks Make Green, But Formulas May East Metal", Lee Games, Wall Street Journal, Wednesday, August 19, 1998. This article claims that ink jet cartridges manufactured by HP have a 30 percent profit margin and account for one of every four dollars in HP's net profits. This shows how strongly lock-in can contribute to the bottom line. The section on "Selling Complementary Products", pages 159-162 gives many other examples of this strategy. Chapter 6: Managing Lock-In "H-P Says Smart Cards Will Get Terminals at Some McDonald’s," Wall Street Journal, August 17, 1998, p. B3. Hewlett-Packard�s VeriFone unit has cut a deal with McDonald�s to install terminals for using their smart cards in 870 restaurants in Germany. Although the contract is less than $10 million, VeriFone regards is as strategically significant. VeriFone is hoping that McDonald�s will be a pivotal or influential customer. Knowing this, McDonald�s appears to have cut a good deal, as we discuss on pages 136-139 under the topic "Bargaining before You Become Locked-In." "Mainframe Business, Though Faded, is Still Far From Extinct," New York Times, May 18, 1998. The longevity of lock-in can be seen clearly in the market for mainframe computers. Despite dire predictions that IBM�s mainframe business would collapse overnight, it has remained steady, and is likely to do so for years to come. In May 1998, IBM announced the fifth generation of its System 390 mainframe. One sign that this market has a real future are the ongoing efforts on non-IBM companies to write software to run on IBM mainframes, including back-office software by SAP, financial applications by Oracle, and manufacturing and human resources software from Peoplesoft. Lock-in in the mainframe market is discussed on pages 106-108, using Computer Associates as an example of a vendor who benefits from this lock-in. Also see: "Blue is the Colour," The Economist, June 6, 1998, p. 65. "U.S. Decides to Investigate Airline Handling of Web Agents", by Ann Wilde Mathews, Wall Street Journal, October 20, 1998. Describes an investigation by the US Transportation Department about whether airlines are discriminating against online travel services. The article mentions that the Air Transport Association "has proposed that online travel services track customers with an identifier number and provide that information to the airlines on request--data the online travel services fear could be used to take away customers." The importance of controlling customer information is discussed in the chapter on "Managing Lock-In", page 141. Chapter 7: Networks and Positive Feedback "How Big a Race for the DVD", Peter M. Nichols, New York Times, Friday, July 24, 1998. Difficulties faced by DVD manufacturers in achieving critical mass for their new format, exactly the problem described in the Networks and Positive Feedback. "Videophones Evolve, Slowly," New York Times, July 16, 1998, p. E7. AT&T visibly promoted video phones at the 1964 World�s Fair, but they remain one of the more visible flops in the consumer electronics field, a fine example of the failure to achieve critical mass. This dark side of positive feedback is discussed on pages 175-178. There remains no agree-upon standard for videophones. Television-based systems are sold by C-Phone and ViaTV. Computer-based systems turn PCs equipped with cameras and microphones into videophones; these systems are offered Microsoft (Net Meeting), Intel (Video Phone), VDO (Phone Professional) and CU-SeeMe. The uncertainty caused by such a confused standards war, and the possibility that it can kill off a product altogether, is discussed on p. 230. "IBM to Introduce Disk Drive of Tiny Size and Big Capacity," New York Times, September 9, 1998, p. C2. IBM�s recent advance in tiny disk drives shows the importance of backward compatibility. IBM designed its new Microdrive, a one-inch disk drive that can store five billion bits of information, to fit into the new industry standard called the Compact-Flash Type II slot that is used by flash memory in devices such as digital cameras. Through clever design, IBM was able to obtain striking new performance and backward compatibility, just as we discuss on pages 190-196, under the heading "Igniting Positive Feedback: Performance Versus Control." "For New Film, a Brighter Future," Wall Street Journal, May 5 ,1998. Don't expect to get positive feedback working for you right away. More often than not, successful products must weather a slow start before they really catch on. The new Advanced Photo System (APS) got off to a poor start in 1996, but may yet get the support from retailers, film developers, and camera manufacturers it needs to catch on. The big question is whether APS offers sufficiently improved performance to convince consumers to switch from conventional 35mm film. Kodak and its arch-rival Fuji have teamed up to promote the new system. The slow start typical of new, incompatible technologies is described in Chapter 7, page 178. "An Instant Success! To Where’s the Payoff?" Business Week, June 15, 1998. A good example of a "pure network" product is "instant messaging," a technology enabling instant one-on-one communication on-line using dialog boxes on the screen. AOL led the way with its "buddy lists" in 1996, and had about 20 million active users in June 1998. Mirabilis reported 6 million active users of its free program, ICQ, short for I Seek You. We are not yet convinced that this market will tip to a single company�s product, at least as long as most people desire to use instant messaging with a relatively small number of identifiable friends or colleagues. The factors that affect whether a market will in fact "tip" to a single product are discussed on p. 186-190. "Intel Agreement Indicates a Rift with Microsoft," New York Times, September 16, 1998, p. C1 Intel recently lent support to Real Networks in its standards battle with Microsoft over software to deliver audio and video material over the Internet. Intel will license its compression technology for use in the next version of Real Networks� multimedia software, Realvideo GE. Microsoft�s Netshow product is still reported to be well behind Real Networks in installed base. This alliance shows the value to Intel of improving the performance of software that will fuel demand for its microprocessors (p.279 on commoditizing complementary products) and the value to Real Networks of having not only improved technology but an influential ally in its battle with Microsoft (p. 275 on expectations management) and "Intel is Expected to License Technology to Enhance Video Quality on Internet," Wall Street Journal, September 16, 1998, p. B6] Chapter 8: Cooperation and Compatibility "Battle Over Java is Entering Critical Phase," Wall Street Journal, September 8, 1998, p. B6 The recent legal battle between Microsoft and Sun over the purity of the Java programming language is a good example of managing expectations in markets where positive feedback is a strong force and compatibility is crucial to users. Sun is seeking a preliminary injunction to stop Microsoft from selling Windows 98 until Microsoft modifies its operating system to comply with Sun�s version of Java. The danger that Sun will lose control of Java, and that Java will suffer from multiple incompatible versions, "splintering," is discussed in the book on pages 255-258 in the section on Managing Open Standards. "Joint Document Management System for IBM and Xerox," New York Times, September 19, 1998, p. C5 IBM and Xerox recently announced plans to cooperate to offer customers an integrated document management system. Xerox�s Office Business Unit and IBM�s Pervasive Computing Group will jointly market Xerox�s Document Centre line of digital printers/copiers/scanners and IBM�s Lotus suite of document management software. This example illustrates that even the largest companies need to enter into alliances to offer a full "system" of complementary products that creates the most value of end users. The importance of alliances between providers of complements is discussed on pages 242-245 in the section on Building Alliances. "Real Networks Hope New Streaming Software Will Open Up Medium," New York Times, July 13, 1998, p. C3 Real Networks is adopting a clear "Openness" strategy (p. 199-202) in the provision of streaming technology, which delivers music and video over the Internet to personal computers. Real Networks Real Player G2, released in beta version in July 1998, employs the streaming technology of Synchronized Multimedia Integration Language (SMIL, pronounced "smile"), which has been recommended by the World Wide Web Consortium as an industry standard. SMIL permits Web programmers to integrate video, audio, text, and charts into an integrated presentation that can be transmitted in real time or available on demand over the Internet. Real Networks is building a large installed base, more than 26 million users as of July 1998, by distributing its software free over the Internet. Real Networks links users to broadcast sites such as ESPN, CNN, and The Wall Street Journal. "Adobe, Macromedia Believe Sharing Their Secrets With World Will Pay Off," Wall Street Journal, April 14, 1998. Adobe and Macromedia each agreed to relinquish control of proprietary technology to gain support for their new formats. Adobe's move is part of its effort to launch its precision graphics markup language (PGML), which is based on Adobe's PostScript and Portable Document Format technologies. Macromedia, a maker of multimedia programming tools, published its Flash file format used to create animation on the Web. Executive at Adobe and Macromedia stated that their two formats were complementary, and both may be adopted by the World Wide Web consortium, which sets Internet standards. "Sun bolsters process for Java standards" , by Carol Sliwa, Computerworld October 12, 1998. Sun recently announced a new process by which Java standards will be developed. The process is noteworthing in allowing interested parties to have significant input, and because Sun has engaged PricewaterhouseCoopers to ensure that Sun and other participants follow the new procedures. To gain approval by the International Standards Organization, Sun must guarantee that the Java specs are developed using a truly open process. Formal standard setting is described on pages 237-242, and managing open standards is discussed on pages 254-258. Chapter 9: Waging a Standards War "Trials of Netscape", Scott Herhold , San Jose Mercury News, Monday, September 14, 1998. History of Netscape/Microsoft wars, emphasizing Netscape's errors. This material is analyzed on pages 289-295. "Why Oracle is Having Fits with an Upstart Known as Microsoft", David Bank, Wall Street Journal, Friday, July 24, 1998. Describes the battle between Microsoft and Oracle for database server market. Many of the tactics used are described in our Standards Wars chapter, including: penetration pricing, building alliances, and cultivating influential buyers. "Sony Again Attempts to Sell its Mini-CD, Focusing on Recording," Wall Street Journal, May 28, 1998, p. B1. Sony refuses to give up on its MiniDisc, its 2 ½" recordable digital-audio medium that failed to take off in the US but is very popular in Japan. The MiniDisc offers sound quality superior to that of cassettes, and nearly equal to that of CDs, along with the ability to record music. Sony is employing the risky revolution vs. evolution strategy described on page 263 in its battle against today's CDs and tomorrow's recordable CDs. In its 1992 standards battle against the Digital Compact Cassette from Philips (see p. 190), both Sony and Philips were losers as incompatibility and confusion doomed both formats in the US [See also "Go Ahead-Mix Your Own Digital Disk," Business Week, June 8, 1998, p. 122E2.] Chapter 10: Information Policy "Is Your A.T. M. Ripping You Off?", New York Times, May 4, 1997, Section 3, p. 1 The ongoing debate over ATM fees is a recent version one of the oldest battles in network industries: on what terms will various networks agree to interconnect? Most banks do not charge their own customers to use ATM machines, but assess "foreign fees" on customers who use other banks� machines. Of the typical $2 foreign fee, $1 may go to the customer�s home bank and the ATM network itself, such as Plus or Cirrus. The other $1 is likely to go to the bank whose machine was used. Lawsuits have been brought, and various state and Federal legislators have threatened to limit such surcharges. The book covers the business strategy aspect of this topic on p. 245 under Interconnection Among Allies, and the public policy aspects on pages 305-308 where we discuss the legal limits on collective fee setting. "Internet Service Providers Victorious on Access Fees," New York Times, August 20, 1998, p. C2 Internet service providers recently won a victory when an appeals court upheld the FCC�s decision to exempt them from paying local telephone companies the access fees normally paid by long-distance carriers. This is a good illustration that regulatory rules will increasingly affect the evolution of the Internet, as discussed in Chapter 10, where we warn that government regulation in telecommunications is not likely to diminish any time soon. "Intel Agreement Indicates a Rift with Microsoft," New York Times, September 16, 1998, p. C1 Intel recently lent support to Real Networks in its standards battle with Microsoft over software to deliver audio and video material over the Internet. Intel will license its compression technology for use in the next version of Real Networks� multimedia software, Realvideo GE. Microsoft�s Netshow product is still reported to be well behind Real Networks in installed base. This alliance shows the value to Intel of improving the performance of software that will fuel demand for its microprocessors (p.279 on commoditizing complementary products) and the value to Real Networks of having not only improved technology but an influential ally in its battle with Microsoft (p. 275 on expectations management). [See also "Intel is Expected to License Technology to Enhance Video Quality on Internet," Wall Street Journal, September 16, 1998, p. B6] "FTC Targets Cisco Systems For Antitrust Violations", Wall Street Journal, October 6, 1998 The Federal Trade Commission recently launched an inquiry to determine whether networking giant Cisco violated the antitrust laws by engaging in talks last year with Lucent and Northern Telecom, leading suppliers of telephone gear. The FTC will seek to determine whether Cisco was simply exploring partnership possibilities, or attempted to carve up markets with its rivals. This investigation illustrates that the line between cooperation and collusion can be both fine and fuzzy. The antitrust treatment of cooperation among competitors is covered on pages 305-309 in the chapter on Information Policy. [See also "Feds question Cisco's discussions with rivals", Computerworld, October 12, 1998.]