Information Rules: A Strategic Guide to the Network Economy

Features

• Cover Type: Hard Cover with 352 pages
• Published by: Harvard Business School Press
• Edition: 1st Edition November 1998
• Written in: English
• ISBN 10 Number: 087584863X
• ISBN 13 Number: 978-0875848631
• Book Dimensions: 9.2 x 6.1 x 1.3 inches
• Weighs: 1.3 pounds

Product Review
Chapter 1 of Information Rules begins with a description of the change brought on by technology at the close of the century--but the century described is not this one, it's the late 1800s. One hundred years ago, it was an emerging telephone and electrical network that was transforming business. Today it's the Internet. The point? While the circumstances of a particular era may be unique, the underlying principles that describe the exchange of goods in a free-market economy are the same. And the authors, Carl Shapiro and Hal Varian, should know. Shapiro is Professor of Business Strategy at the Haas School of Business at UC Berkeley and has also served as chief economist at the Antitrust Division of the Justice Department. Varian is the Dean of the School of Information Management and Systems at UC Berkeley. Together they offer a deep knowledge of how economic systems work coupled with first-hand experience of today's network economy. They write:

Sure, today's business world is different in a myriad of ways from that of a century ago. But many of today's managers are so focused on the trees of technological change that they fail to see the forest: the underlying economic forces that determine success and failure.

Shapiro and Varian go to great lengths to purge this book of the technobabble and forecasting of an electronic woo-woo land that's typical in books of this genre. Instead, with their feet on the ground, they consider how to market and distribute goods in the network economy, citing examples from industries as diverse as airlines, software, entertainment, and communications. The authors cover issues such as pricing, intellectual property, versioning, lock-in, compatibility, and standards. Clearly written and presented, Information Rules belongs on the bookshelf of anyone who has an interest in today's network economy--entrepreneurs, managers, investors, students. If there was ever a textbook written on how to do business in the information age, this book is it. Highly recommended. --Harry C. Edwards

From Booklist
In this day and information age, it is all about those who are able to utilize the information they have to maximize potential, and these two University of California, Berkeley, professors have assembled the guide to do just that. The nuts-and-bolts approach to finding ways to differentiate one's product from all the others, and a how-to guide to simplify and improve customer interface, are both helpful, and the idea of managing intellectual properties to maximize value is infinitely superior to just protecting them from competitors. Some of the information delves into building positive feedback for the product, and every businessperson probably requirements to know some of the legal ins and outs of building alliances and the ramifications of competition. Shapiro and Varian seem to be targeting the hard-core student of business here (not the casual browser); their approach is extremely thorough, and there is much practical information for those willing to wade through the information rules. Joe Collins

Reader Reviews
Information Rules: A Strategic Guide to the Network Economy by Carl Shapiro and Hal Varian takes a look at the emerging Internet economy, and argues compellingly that traditional economics still apply in evaluating the Yahoos of our generation. In fact, history provides a pretty good guide for evaluating network-centric businesses. One only has to look at the evolution of the railroad, telephone and television networks. The book reaches some interesting conclusions, summarized here: 1.Information is costly to produce but inexpensive to reproduce (i.e., has a high fixed cost but a low marginal cost). This translates to a lot of latitude, challenges and opportunities in coming up with pricing models and corresponding versions of a product to create both the maximum revenue opportunities and establish the largest number of members of the product's network of users. Also, given the low cost of reproduction, it stands to reason that protecting intellectual property is a key determinant of information good's economic success. 2.Information is an "Experience Good," which is to say that customers must use and experience the product to put value on it. One only has to think about Netscape's initial success giving away the browser to see the value of leveraging the "experience" factor. 3.Products that can achieve "lock-in" will benefit from the "switching costs" that preclude customers from switching-over to competing (even superior) solutions. In other words, products that get a user to commit time, knowledge and/or resources to them are likely to continue to be used even in the face of superior products given the cost of switching to alternative products. An interesting point the book makes is to look at lock-in and switching costs not only in terms of your product, but your collaborators and complementors as well. 4.Fundamental to success is leveraging the power of positive feedback, or network effects. What this means is that the value of your product is a function of the total number of vendors, partners and endusers participating in its "network." Some specific strategic considerations: 1.Versioning: create different versions of your products tailored to the need of different groups of customers. This allows customers to select the version that best meets their needs and enables you to pick up as wide a base of customers as possible (e.g., Quicken, Quicken Deluxe, QuickBooks). Specific mechanisms for accomplishing same are: delay, user interface, convenience, image resolution, speed of operation, flexibility of use, capability, features and functions, comprehensiveness, annoyance, support. 2.The total cost of switching = cost the customer bears + costs the new supplier bears. Types of lock-in: contractual commitments, durable purchases, brand-specific training, information and databases, specialized suppliers, search costs, loyalty programs. 3.The lock-in cycle: brand selection, product sampling, entrenchment, lock-in. Needless to say, the more successful you are at getting customers more locked-in to your products (e.g., taking advantage of proprietary features), the more successful you will be in keeping customers at peak prices. 4.Leveraging your installed base: focus on selling complimentary products (Micorsoft), selling access to your installed base (Yahoo), setting differential prices to achieve lock-in (Adobe's Photo Deluxe for beginners is a low-end product that is often bundled with scanners and gets users hooked on product. Many ultimately upgrade to full version of product, Adobe Photoshop), exploiting first-mover advantages (Ticketnmaster locks customers into long-term contracts). 5.Market adoption dynamics in positive feedback markets tend to evolve along the lines of an S-curve, with the initial adoption period being flat (while the market winner is in doubt). Once an apparent market winner emerges, the adoption rates takes off dramatically continuing until market saturation. In other words, popularity in positive feedback markets is the ultimate metric of success. Hence, perception becomes reality in these markets. Those expected to win in the market do win because second place or third place is tantamount to last place (i.e., having to bear the switching cost of moving to the winning vendor in the market). This is a zero-sum game, where both vendors must proclaim themselves the ultimate winner, and the success of getting out the message is as important as the technical attributes of the product. 6.Evolution vs. Revolution: there are two paths for unseating an incumbent. One is evolution, which is akin to providing an adapter to a legacy technology. The other is revolution, which disregards legacy in favor of improved design (CDs as a replacement for records). Both paths have technical, creative, systemic, performance and legal considerations. 7.Openness vs. Control: This is a key tightrope in the age of open standards. The more open your solution, the lower the bar to positive feedback. With control comes a hedge against commoditization and low margin pricing. Four key vectors are represented: Controlled Migration (Windows 98), Performance Play (Iomega Zip), Open Migration (fax machines), Discontinuity (records to CDs). 8.How standards change the game: Expanded network effects, reduced uncertainty, reduced consumer lock-in, competition for the market vs. competition in the market, competition on price vs. features, competition to offer proprietary extensions, component vs. systems competition. 9.Tactics in formal standard setting: If you can follow a control strategy, you are better off organizing an alliance outside of the formal standards bodies. Search carefully for blocking patents of competitors in the standard definition. Consider building an installed base pre-emptively. 10.Waging a standards war -The key assets in such a battle are: 1. Control of an installed base, 2. Intellectual property rights, 3. Ability to innovate, 4. First mover advantages, 5. Manufacturing abilities, 6. Presence in complimentary products, and 7. Brand name and reputation. Example: Netscape vs. Explorer: Netscape had a huge first-mover advantage over Microsoft that Microsoft was able to neutralize by preempting new users through a number of strategies, including bundling on OS, signing deals with OEMs, bundling content with the browser and giving links to ISPs for making Explorer the preferred browser supported. Both vendors used penetration pricing to set a low bar to using their products. Both vendors also leveraged the expectations management and alliances trump cards to win their places in the market.