Analysis: You Can't Escape the Consequences

Bob Diefenbacher

It doesn't matter what your company's product or service is, its future success is dependent upon how well your company understands the new economics of the information age. For years the words information age have had more buzz than basis associated with them. But the Internet has made it abundantly clear that information has a value, even for the most mundane products and services. And now there are tangible rewards for understanding how your business fits in the information economy.

Maybe you're the CIO of your company; maybe the CEO. Perhaps you're a systems programmer or an independent consultant. Whatever your present job role, your personal success will also depend upon your ability to capitalize on the unique information at your disposal.

A particularly interesting book makes it easier to develop strategies for winning in the information economy. Written by Carl Shapiro and Hal R. Varian, "Information Rules - A Strategic Guide to the Network Economy" (Harvard Business School Press, Boston, Mass., 1998), the book lays the basis for information value, and in a straight-forward approach, gives the reader a thorough grounding in the new economics of information.

Information, the authors say, is anything that can be digitized. Information has different values to different consumers. Whether it's for entertainment or for job-related activities, people are willing to pay for information goods.

The book's initial insight is that "information is costly to produce, but cheap to reproduce." Producing the first copy or version of an information good may involve high fixed costs. But the cost of reproducing additional copies is, in the author's words, "negligible."

Because every business activity involves some form of information and because the advent of Web-based competition threatens to make commodities of many products, the added value that timely or unique information can bring to a product may make the difference between long-term success or failure.

Therefore, even if your company has thus far ignored the impact of the information economy on its future, it can no longer do so. Any one participating in product or market strategy -- whether in purchasing or in strategic planning -- needs to read "Information Rules."

If you're in a position to sell your information, how should it be priced? Shaprio and Varian suggest you need to begin with a cost analysis. They also explain the importance of being first to market and the value of economies of scale. They explain how to position your information product to gain the greatest return from the market, and what to do to learn about your customers and the profitability of your market segments.

Information can be recombined, revised and remolded to fit various market segments. Pricing strategies may involve using versioning, bundling, nonlinear pricing, and many other techniques to gain the greatest return on your initial development cost. There is great value in understanding information product pricing options before starting into the market.

For a long time the music recording industry has fought the idea of allowing digital music downloading from the Web. Fearing widespread copyright violations, the industry has watched MP3 become a Web standard. Now it has relented and decided to embrace the concepts of Web distribution. Recording industry execs must have read "Information Rules."

One of the more interesting points the authors make is that although copyright infringements will occur, they will not be in so large a volume as to offset the large additional revenue gains the new distribution technology offers. They also point out that when a violator becomes too big, he gains too great a profile and can easily be identified and stopped.

Not a seller of information-based products? You still cannot ignore this book. As a buyer of information products, you need to understand how to recognize "lock-in" and evaluate its ramifications before you buy a product. "Information Rules" provides helpful guides for recognizing and managing lock-in.

Another interesting topic the book covers is networks and positive feedback. This phenomenon is related to "increasing returns" in which a trivial happenstance, according to M. Mitchell Waldrop in "Complexity - The Emerging Science at the Edge of Order and Chaos" (Simon and Schuster, New York, 1993), can become magnified into something historically irreversible. Positive feedback is the dynamic process by which the strong get stronger. Shapiro and Varian add that the dark side to this is that it makes the weak get weaker.

Here we are in September 1999, almost ready to flip the calendar to a new century. Your Y2K issues had better be pretty nearly conquered by now. Perhaps your company is finalizing its strategic plans for the next five years, or maybe you're just beginning to think about them. Either way, you cannot escape the consequences of the information economy!