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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
It is still the best anlaysis of network economy among 5 books that I read about, though 2 of which are also from Harvard. This book just touches the heart of network economy, and it gives me a lot to further analyze the continuous economics events happening in the globe.
Even if Carl Shapiro and Hal R Varian are saying that: "Technology changes, Economics laws do not" their careful analysis on networks and positive feedback is conducting them to write "Strategy in network markets is distinct from strategy in markets for information content, not to mention traditional industrial markets". In network markets positive feedback based on Metcalfe's Law - the value of a network goes up as the square of the number of users - makes the strong grow stronger ... and the weak grow weaker.
To maximize your return you need to find the balance between openness and control, compatibility and performance and to be ready to build alliances, to battle for standardization on your own or with partners... "It is not enough to have the best product, you have to convince customers that you will win" is a crucial idea to apply in the network economy to ignite a positive feedback and reach the critical mass necessary to fuel explosive growth.
The authors are presenting, through real-life examples including the Microsoft Netscape browser battle , a complete battlefield with maps of strategies and tactics to win and stay in the network economy. Keep this guide close to your hand, as it will become your better source of knowledge to be at the forefront of the New Economy. Personally I plan to re-read this book on regular basis to make sure to extract all the richness the authors have put in.
Technology changes, economic laws do not. This is the thesis of this book. Shapiro & Varian do a great job of explaining how the fundamental principles of economics are still relevant, even in the new network economy. On the other hand, the technology increases the pace of economic game and requires greater speed and agility to keep playing. Thus, it's necessary to adopt new strategies based on fundamental economic principles.
Shapiro & Varian develop this thesis into ten chapters: The Information Economy, Pricing Information, Versioning Information, Rights Management, Recognizing Lock-In, Managing Lock-In, Networks and Positive Feedback, Cooperation and Compatibility, Waging a Standards War, and Information Policy. Specific strategies are suggested in each chapter. At the end of each chapter, "lessons" are summarized to for readers to outline the main ideas efficiently.
Following are some feature points and strategies this book has reached to enable myself to the network economy.
Point 1: Information is costly to produce but inexpensive to reproduce.
The competition between Britannica Encyclopedia and Microsoft's Funk & Wagnalls brings reader into this topic. The cost change of information products is coming up with the shifting of 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.
Strategy: Personalize your product and your prices
There are three ways to pricing information: personalized pricing, group pricing and versioning. Let's analogize those strategies to the modern fashion industry, a fashion designer can tailor dresses specifically for the need of one customer (personalized pricing) or a group of customer (group pricing). At the same time, he/she also designs different styles (different versions of your products) which are hanged in the window of shopping center. This allows customers to select the styles (versions) that best meets their needs and enables you to pick up as wide a base of customers as possible. There are variety of dimensions along which you can version your products: delay, user interface, convenience, image resolution, speed of operation, flexibility of use, capability, features and functions, comprehensiveness, annoyance, support.
Point 2: Switching costs and lock-in
The total cost of switching = cost the customer bears + costs the new supplier bears. In companies' stance, products that can achieve "lock-in" will benefit from the "switching costs" that preclude customers from switching-over to competing solutions. The more successful you are at getting customers more locked-in to your products, the more successful you will be in keeping customers at peak prices.
Strategy:
1.Invest to build an installed base. 2.Cultivate influential buyers and buyers with high switching costs. 3.Get your customers to invest in your technology, thereby raising their own switching costs. 4.Sell complementary products and access to your installed base
Point 3: Positive feedback
The value of your product to new users depends on the total number of other users there are (externalities). As the base of users grows, more and more users add in. In information economy, the companies that have been propelled forward by positive feedback will become the biggest winners. So, it is the ultimate metric of success that each company pursues.
Strategy:
There are four generic strategies in network markets for igniting positive feedback, Controlled Migration (Windows 98), Performance Play (Iomega Zip), Open Migration (fax machines), Discontinuity (records to CDs).
Point 4: Standardization
The key assets in winning standards 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. Preemption and expectations management are two basic marketplace tactics that companies will need to employ.
Point 5: Intellectual property
Given the low cost of reproduction and quick, cheap and invisible distribution, protecting and managing intellectual property are more difficult. Although authors believe that the technological advance offer new opportunities which are far outweigh this rights problem, the solutions recommended here are relatively weak and difficult to carry out.
Strategy:
Take advantage of the lower distribution costs by promoting your products more effectively. Such as giving away free samples to sell the content, selling complementary products, choosing the terms and conditions that maximize the value of your property.
Besides those core points and strategies the book reaches, examples which integrate those points make whole book more readable. Authors use examples not only happened recently, but also 100 years ago. Such as interconnection battles were already existed in 1900 when local telephone companies were interconnected with Bell to provide long-distance service. 100 years later, browsers are interconnected with operating systems. History provided a pretty good guide for evaluating network-centric business.
However, almost all of these cases involve the very large firms: e.g. Microsoft, IBM, AT&T, which have strategic planning, high capitalization, and access to best consultants. But the very essence of the new information economy today is entrepreneurship, like Napster, Visi-calc, etc, with good ideas and lucky chance.
The most contradictive part in this book is chapter 6. Authors offer both sellers and buyers alternative strategies on how to manage Lock-in. No matter how effective those strategies are, the dilemma here is that if both sellers and buyers adopt the alternative strategies this book recommends, who will be the winners ultimately?
This book was published four years ago. The network economy has changed a lot since then. From the beginning of 2001, most Internet companies experienced the toughest time. As a reader of this book, a question comes to my mind constantly: are those information rules still applicable in today's network economy? According the thesis of this book, the answer should be yes. It's time to test the models of this book.
While book is very business oriented and targeting to players in the information economy, it also speaks to a larger audience in no nonsense terms. This point is illustrated with the fact that Shapiro and Varian discuss lock-in from both an information producer and consumer perspective. The real world examples and case studies, which range from the government's antitrust case against Microsoft to Microsoft and Netscape's browser battle to digital phones, Iomega's Zip drives and PDAs, serve to disambiguate and complement the theoretic commentary. Thus, instead of merely discussing the dry laws of economics, they complement such theories with sound and practical historical examples. In addition, supply and demand style graphs, tables, highlighted annotations, and end-of-chapter lesson summary lists, do an excellent job of stressing important concepts. This is not one of those block digram business books!
Being a computer science student studying recommender systems and personalization, Shapiro and Varian were able to maintain my attention by presenting a coherent survey of the landscape of new and innovative technology as well as their issues, controversies, and evolving standards. Thus, the most striking contribution this book made to me was an introduction to important economic principals via examples that were close to home. I learned about product and price differentiation, lock-in, positive and negative feedback and network externalities as well as what each mean to the information world.
The book is a quick and enjoyable read. Shapiro and Varian's recommendations are grounded in history and each of their track records in this field speaks for itself. Currently they are both tenured professors at UC Berkeley. By the end of the book, their message is clear. They painted and instilled a picture in my mind of what technical, governmental, and economic issues players in the information economy must face. [...]Enjoy!
Shapiro and Varian point out that since the marginal cost of producing information goods is zero, manufacturers of these products will not make any economic profit, unless they can lock-in their customer through network effects or very high switching costs. They then give several case studies to explain this concepts, as well as the strategies that customers and manufacturers should employ in the network economy. There is also an excellent discussion of the standard setting process and the strategies different players must employ based on their place in the industry.
I strongly recommend this book for everyone who plans to work in the information economy. It is a totally excellent book, an eye-opener.
For those of us who live and breath this stuff and use the book as a reference, you can print out a detailed Table of Contents at their website.
According to the authors, the thesis of their book is that "durable economic principles can guide you through today's frenetic business environment. Technology changes. Economic laws do not. If you are struggling to comprehend what the Internet means for you and your business, you can learn a great deal from the advent of the telephone system a hundred years ago." That's true. The interdependence of information (software) and infrastructure (hardware) will always be important, indeed imperative. Therefore, interconnection battles are won only if, for example, local telephone companies in 1900 were interconnected with Bell to provide long-distance service and, 100 years later, browsers are interconnected with operating systems.
The authors "use the term information very broadly. Essentially, anything that can be digitized -- encoded as a stream of bits -- is information." However, Information Rules focuses on models, not trends; concepts, not vocabulary; and analysis, not analogies. Recall the previous reference to "durable economic principles." Trends come and go, as do vocabularies; therefore, today's brilliant analogies may well make no sense tomorrow, or even later today. Hence the necessity of durable principles, principles which continue to guide efforts to anticipate and then manage what Peter Drucker has called "the consequences of what has yet to occur."
The Chinese character for "crisis" has two different meanings: peril and opportunity. The title of Information Rules can also be interpreted in two different ways: rules of principle and rules of dominance. In a Darwinian sense, those who dominate the Information Age will be those who apply the right principles. What do Shapiro and Varian suggest?
With regard to the pricing of information, the subject of Chapter 2, they suggest two strategies: don't be greedy and play tough. The "lessons" to be learned are to personalize your product and personalize your service, "know thy customer", differentiate your prices when possible, and use promotions to measure demand. Indeed, at the end of each chapter, they summarize "lessons" to be learned after having suggested specific strategies to apply them. In the "Further Reading" "Bibliography" sections which conclude Information Rules, Shapiro and Varian direct the reader to various sources to which they referred previously.
Who will gain the greatest value from this book? Owners/CEOs of small-to-midsize companies which are struggling to decide what to do...and what not to do...with opportunities created by the Internet and, more specifically, the WWW. Also, senior-level executives of much larger organizations (both for-profit and not-for-profit) who must formulate long-term strategies to achieve sustainable prudent growth. For thousands of years, there has never been a shortage of available information but until the printing press, access to it was severely limited. Since then, a variety of media have broadened and deepened that access and, indeed, the volume of available information has increased exponentially.
According to Shapiro and Varian, the challenge today is not one of access; rather, the challenge is to follow certain "certain durable principles" on which effective strategies are based. No one knows precisely how and to what extent the network economy will change in years to come. Principles which endure are those which accommodate change, whenever it occurs, whatever it proves to be. Shapiro and Varian suggest what those principles should be.
Information Rules is a stunning achievement.
My disappointment with the book stems from their choice of cases. Almost all of their extended examples involve the very largest firms operating in the American economy: e.g. Microsoft, IBM, Sony, AT&T, and Sun Microsystems. They have chosen mostly firms from the Fortune 1000, firms that have strategic planning departments, deep pockets, and access to highly paid consultants.
But, the very essence of the new information economy is entrepreneurship -- the creation of 1000s of startups that are poorly capitalized and begin with not much more than a founding teams' vision of what they might become, if they are lucky. The pioneers in the new economy were firms like Osborne and Visi-calc, NOT IBM and AT&T. When an accurate economic history of the past several decades is written, it will emphasize the 1000s of experiments represented by struggling startups to make their mark, not the maneuvers of the largest & most powerful firms that arrived late at the party.
"Assume you are a large firm" seems to be the operating assumption of Shapiro and Varian, rather than a realistic appraisal of the true size and power of the thousands of firms constituting the real infrastructure of the new economy. Where are all the failures? The bankrupt firms? The strategic mis-steps that cut down many firms in their infancy? E.g where's Psuedo Networks? Case studies of information goods' firms that didn't make it would have lent an aura of reality to sn otherwise blandly optimistic book.
To cite a couple of instances: page 3: "You must price your information goods according to consumer value, not according to your production cost." In actuality, what you want to do is price your information goods in such a way as to build a base of customers with repetitive loyalty that will then allow for multiple additional marketing revenue. On page 6: "Image is everything in the information biz, because it's the image that carries the brand name and the reputation." That should've been worded: "Image is important but content ultimately is king- content drags eyeballs which create new opportunities". More- page 8: "Likewise, computer software is valuable only because computer hardware and network technology are now so powerful and inexpensive". In reality, software has always been a boon in that it allows for greater productive efficiencies.
One more example (this led me to stop reading the book): page 9- "What is truly new is Home Depot's ability to re-order items from suppliers using electronic data interchange, to conduct and analyze cross-store demand studies based on pricing and promotional variations, and to rapidly discount slow moving items, all with minimal human intervention". In fact of matter, all of the aforementioned was able to be done prior to the internet- what Home Depot did was revolutionize selling by creating a sector store, total inventory, low price and knowledgeable people model that had not been done before.
A final thought: I gave this book two stars because, after deciding not to read the entire book due to the disappointment of the first nine pages, I skimmed the rest and realized that despite the misleading title, the book DOES have merit as an elightned text on ways to conduct aggressive modern business methods. My biggest disappointment though, is the misleading title; I was all set, looking foward to reading how the information age plus the internet would rule the world- unfortunately, this book is not about that.
But if the rules are the same and the pace has increased what about the playing field? Well, it is turning bigger and a player who wants to be in the game should know every inch of it.
The main theme of the book centers on the concept that while we may adopt new strategies in the information economy the fundamental economic principles still apply. The goods that we are dealing with are information goods that are costly to produce and cheap to reproduce. In such a scenario, what are the cost characteristics, pricing strategies and market structures? Similarly the concepts of Versioning, Rights management, Lock-in, Networks & positive feedback are analyzed in great detail with appropriate illustrations and cases.
Highly recommended.
If you are really, truly into the Information Economy, you will find their spin on our overanalyzed market segment is worth reading. Otherwise, your eyes will glaze over around chapter 3. Econ students, start making coffee in the middle of chapter 2.
But all this is not new, to understand it better, to be better prepared for the new challenges, read the book.
If only for the number, the variety, and the significance of its examples, the Book is well worth reading. The Book is a reminder that the "breadth" of Information Technology is more than just conventional computer systems, as many of us have come to think of, and that the "depth" of Information Technology is more than just the last 50 years or less. The authors remind us that Information Technology existed well before the advent of computer systems and the age of digital recording of information in general.
The authors refer to companies and products that most of us have already heard of but they go one step beyond the mere presentation of these examples, they do analyze them and they propose explanations of the underlying principles behind the successes and the failures of the former as well as of the battles that took place.
The Book is well-written, has a good flow, shows objectivity, and provides useful backward references as well as summaries of lessons learned throughout. The authors successfully translate the lingo of Economics into layman's terms. Reading the Book is like taking a refresher class in Economics applied to Information Technology.
The one lesson learned, after reading the Book, could well be: "look back in history and look around in the various areas of Information Technology if you want to better understand what the future might hold in one specific area of Information Technology".
Do buy, read, enjoy, and apply the valuable information in this excellent book.
Not a lot of tactics that someone can immediately take to the bank, but an excellent strategic overview. Perhaps the best book in its genre.
David Scott Lewis, Director, Internet & eCommerce SWAT Team, Oracle Corporation
Their discussions on price discrimination do the lay reader a disservice because they ignore that many (or most) of the differences in price are actually cost based and have nothing to do with monopoly power. Some of these firms that follow their belief that significant monopoly power is everywhere will be in for a very rude awakening. The story is a lot more complicated than Shapiro and Varian let on.
I would heartily recommend it -- if you are interested in learning some concepts to help you make sense of the *NEW* economy. The authors do a great job of avoiding the typical economic jargon that makes these sorts of ideas opaque. However, like any academic book, it requires that you take the concepts you learn from it and apply them YOURSELF to the business world around us. Unlike a lot of HYPE TECHNO books, these concepts will not go OUT OF STYLE. They are basic, fundamental and informative, if you're willing to think a little bit about them.
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.
Information technologies have advanced rapidly but business knowledge has not kept up. That's why I am glad that Shapiro and Varian have taken the time to make the insights from economics more broadly accessible and relevant with this book.
This book should be required reading for business managers working with the Internet or related information technologies. I am including it on the reading lists for my MBA classes MIT.
This will probably become a classic in MBA technology courses.
Varian and Shapiro (henceforth VS) argue that economics is applicable to the Information Age, even though information has characteristics that differ from those of ordinary goods. As they put it,
"Even though technology advances breathlessly, the economic principles we rely on are durable. The examples may change, but the ideas will not go out of date." (preface, p. viii)
"markets for information will not, and cannot, look like textbook-perfect competitive markets..." (p. 22-23)
In other words, the asylum of economic analysis is still sturdy, even though it may resemble the movie "King of Hearts," in which the inmates are in charge. In this case, the inmates are phenomena that formerly were regarded as theoretical curiosities: zero marginal cost, significant complementarity, etc.
Mass-market business books instead tend to focus on providing affirmation, not information. ("You can be great, too! Here is the recipe for success!"). Many authors use jargon and metaphors to try to make their ideas sound more radical and important than they really are. VS offer neither chicken soup nor cyberbabble. They provide business executives with advice that is unconventional from a traditional vantage point and yet is well-grounded in economic reasoning.
As someone who finds pure intellectual curiosity sufficient motivation to read about this subject, I found "Information Rules" to be very worthwhile. The book is rich with substance, which can be conveyed only superficially in a brief review. It gave me fresh insights that helped to clarify my thinking.
Men occasionally stumble over the truth, but most of them pick themselves
up and hurry off as if nothing had happened.
-- Winston Churchill
Never worry about theory as long as the machinery does what it's supposed to do.
-- R. A. Heinlein
