Strategies for Succeeding in the Information Economy

Strategies for Succeeding in the Information Economy

A couple of years ago, if you wanted to watch the evergreen blockbuster film Sholay at home, chances are that you visited a video library and hired a VHS or VCD for a day at Rs. 50 or so. Today, you can buy a genuine VCD of the film at a mere Rs. 99!

The multi-volume printed set of Encyclopedia Britannica which was priced at approximately Rs. 1.1 Lac only a few years ago is now available in an interactive CD-ROM format at only Rs. 2000 – that’s less than 2 per cent  of the price of the printed version!

In both the above examples, the reason for the radical price erosion is the direct result of the impact of information technology. Technology has added new dimensions to information, dimensions that have dramatically altered the way we store, modify, exchange, distribute and process information. Software programs have changed the way perform accounting tasks, create documents and manage production schedules. Internet allows us to download music. DVD offers high fidelity digital reproduction of films that allows us to experience theatre effects at home. Email has changed the way we keep in touch. Welcome to Information Economy.

Though vastly different from its predecessor, the Industrial Economy, Information Economy is still governed by the basic economic principles. "Technology changes, economic laws do not", insist Shapiro and Varian. They add, "Information technology is rushing forward, seemingly chaotically, and it is difficult to discern patterns to business decisions. But there is order in chaos: a few basic economic concepts go a long way toward explaining how today’s industries are evolving." This paper attempts to the offer an Indian perspective on these "basic economic concepts" and the strategies that are needed to succeed in the information age.

Nature of Information
Information is truly all pervasive. Even companies that don’t directly produce or sell information are bound by it. In their book Blown to Bits (HBS Press) authors Philip Evans and Thomas Wurster explain, "Information may be the end product of only a minority of businesses but it glues together value chains, supply chains, consumer franchises and organizations across the entire economy. And it accounts for a grossly disproportionate share of competitive advantage and therefore of profits".

In an article published by The Economic Times (Corporate Dossier, November 03, 2000), S Ramadorai, CEO of TCS wrote about the impact of Information technology, "Information explosion is the most pronounced phenomenon of the present era." He also described Internet as the greatest enabler of information because of its "unique power to deliver any information to anyone, anywhere, smartly, instantaneously and inexpensively."

Before we begin to discuss various strategic options available to producers of information, it is important to understand the unique aspects of information:

  • Unlike physical products, information goods can be reproduced at a remarkably low per unit cost.
  • Internet and other technological advances have made distribution/transfer of information goods extremely fast, convenient and cheap.
  • An information good can be easily versioned to appeal to different markets, identified on the basis of perceived consumer value.
  • Due to extremely low reproduction costs and relative ease of copying, information is highly prone to illegal copying that can eat into to the revenue of the original producer/seller. Managing intellectual property rights is therefore crucial for the producers and sellers of information goods.
  • While most physical products are experience goods for the first few times that they are consumed, information is an experience good, every time it is consumed.

See box, "Information Rules Summarised" at the end of the article

We will now discuss these issues in detail. First let’s take a close look at the information side of "Information Technology"


Pricing an information good

As mentioned earlier, due to the nature of information goods and its special cost structure, pricing cannot be determined by traditional cost based methods. Cost-based pricing will not work: a 10 or 20 percent mark-up on unit cost makes no sense when unit cost is zero.

A quick analysis of the market reveals that information goods are priced with one of the two objectives: Differentiation or Cost Leadership. All other pricing strategies are derivatives of these two objectives.

Crisil Research & Information Services Ltd., is a wholly owned subsidiary of CRISIL, that produces and sells information and analysis on the Indian economy, industries as well as companies under the brand name CRIS INFAC. Over the past twelve years the company has built an information base on about 80 industries, 2500 companies and 250 commodities.

The company produces and sells intelligence reports that typically contain detailed information on the evolution, current status, factors affecting performance and profitability (regulatory environment, technology, inputs, competition, markets) along with short and long term forecasts on performance and profitability.

CRIS INFAC’s pricing strategy is one of differentiation. They price their reports by highlighting the value additions in their products as compared with perceived competitor’s offerings (primarily that of data).

Sameer Bhakhri, Chief Executive of CRIS INFAC says, "Our positioning has been one of a "knowledge" provider and the kind on which people can rely as well as one that would enable them to take a more informed decision. This strategy has enabled us to price our products at a premium and thereby gain substantial value from our customers who recognise the benefits they derive through gaining access to our unbiased and reliable "knowledge" and "information" base, through our products and services as against the data oriented products provided by competitors."

Let’s take another example of pricing. This is based on segmenting the market. Tally is India’s most popular financial accounting software, and arguably India’s most successful software product. According to a study conducted by International Data Corporation (India), Tally is bigger than all other accounting software brands in India put together. It is used by businesses of all types and sizes and boasts of 70,000 customers with over 1 million users worldwide. It is used by half of the 100 largest companies (listed by The Economic Times – 500 Index of India’s most valuable companies).

Tally is almost a habit with Indian Accounting professionals. It is the leader in its industry. Therefore, Tally has been priced according to perceived consumer value. According to a senior company official, "Tally is priced to provide consumer value at differentiated price points". Tally targets different segments of the market by offering different versions of the same product

Tally is able to command a price premium because of its market leadership, the network effects that it has created and its product superiority.

In both the above examples, CRIS INFAC and Tally offer different products to their consumers and price each of those products according to the value that their customers derive from using them.

But when a company operates in a price sensitive market, or when the market is highly competitive with no clear leader, premium pricing may not work. In such circumstances, a firm may consider pricing the product to achieve cost leadership.

Navneet Publications Ltd. has been the leader in the Indian education sector for over four decades. The company possesses a copyrighted archive of about 3,000 titles in English, Gujarati, Hindi, Marathi and a few other Indian languages. These book titles are sold in twenty-one states across India.

The company recently ventured into web-based tutoring, online training, e-le
arning, and learning through CD-ROMs. As a leader in its industry, Navneet has always priced its products competitively. In fact all its interactive CD-ROMs titles (Digest Plus) are priced below Rs. 120. Affordable pricing means Navneet sells more at less, but its low average costs more than make up for the loss in revenue due to thin margins. Here, Navneet is following a cost leadership strategy, aimed at reaching as many students as possible.

Lower price also helps Navneet to keep the piracy menace at bay. Since their products are priced so low, there is virtually no incentive for bootleggers to cope and sell illegal versions of Navneet products.

Taking advantage of scale economies and its dominant position, Navneet has become the price leader in its segment.

Group Pricing

Group pricing can be used in cases where your customers can be classified on the basis of certain common characteristics, such price sensitivity, group licensing or sharing potential.

Low price editions of books aimed at students is a prime example of pricing according to price sensitivity. A popular textbook such as "Marketing Management" by Philip Kotler is sold in the US at $115 or Rs. 5,500 approx.; the same book is available at about Rs. 250 in India. The contents of both the US and the Indian editions are the same – except for the difference in the binding (US edition is hardcover, Indian is paperback). Yet, the price of the book is much lower (only 5% of the original price) in India. This is because Indian customers simply cannot afford the US price. This type of pricing is essential to reach out to the various market segments.

Group pricing is very popular in the software industry. Licensing a product for multiple users is a type of group pricing. Here the product is the same, yet the pricing differs according the number of users.

Pricing in the entertainment industry

In the entertainment industry, where unpredictability is the name of the game, pricing assumes a different dimension. Since no one knows for sure which album will be the winner, it is difficult to follow pricing strategies discussed above. This is because there are huge development costs and the pricing strategy of the entertainment producer must be able to recover these costs. Apart from development costs, competitive pressures and technology used, pricing in the entertainment business must keep in mind a highly intangible, yet extremely important factor of talent.

Managing Director of Sony Music Shridhar Subramaniam explains, "Producing music involves an almost invaluable ingredient in the form of an individual’s creative expression – it’s impossible to put a price to it. On an average, only one out of ten artists actually turns out a successful album, but no one can predict who will give a hit and who will not. So while pricing a product one has to keep in mind the "creative expression" component that includes searching, identifying and selecting artists. The revenue from this one successful product has to cover the costs of all the losses incurred in producing the nine unsuccessful albums, besides paying for its own costs and also making profits."

We discussed pricing strategies based on differentiation and segmentation, where value-based pricing is the key. To be able to successfully target information goods based on these strategies, information goods must be offered in more than just one standard version. Let us now explore the various strategies for versioning information goods.

Versioning Information Goods

Although versioning works for all kinds of goods, it is a particularly important strategic tool in the information goods industry. Versioning is a close ally of pricing. In fact it is an extension of pricing because almost all versions differ on two aspects – product features and price. Versioning helps target different market segments by appealing to varied needs of the consumers. Some popular versioning strategies are discussed below.

Delay: Book publishers first sell a hardback book and then issue a paperback several months later. The impatient consumers buy the high-priced hardback, while the patient ones buy the low-priced paperback. Similarly, website that provide stock quotes typically charge a higher price for real-time quotes than for 20-minute delayed quotes, because real-time quotes are more valuable to the persons who buy them (typically professional brokers).

Delay can also be used to sell the same information repeatedly. Unlike physical products, information never wears out… .although in some cases it does become obsolete.

According to media reports, a recently released Hindi film Devdas cost about Rs. 50 crore to produce. To recover this amount (fixed cost), the producers of the film will have exploit many different streams of revenue over the next couple of years.

For instance, after the film exhausts its revenue potential through theatre screenings, the producers tap the Home Video Market for which the film is published (reproduced) on VHS/VCD/DVD. Each of these formats caters to a different market and is priced accordingly. Soon, the rights of the film may be sold for broadcast on cable/satellite television. This way, the same information (in this case, the film Devdas) can be sold repeatedly, and can fetch revenue on each occasion.

Note: Here, we have considered only direct revenue from the film. The producers also generate revenue from selling the film’s original sound track, it’s merchandising rights, exhibition rights and so on, but these issues fall under the purview of rights management, a subject that is dealt with later in this paper.

Timing of Release: Timing of release is an extremely important factor across the information goods industry. Most information products are useful only if offered at the right time.

Take Navneet’s example. The formal education industry has two peak sale seasons. One is at the start of a new academic year, around July-August and the other is between February and May, when most final examinations are scheduled. This is why, for class X and XII, Navneet has two main versions for each subject in the syllabi – the guide which is detailed and is released in the beginning of the academic year and the highly popular "21 Most Likely Questions" sets aimed at last minute learners, which are released just a couple of months before the final examinations.

Each year, Navneet sets production targets based on the sales forecast for the two seasons. Marketing activities too are focussed around this time of the year. According to Gala, "If during the peak period, the supply does not meet demand, Navneet can end up making huge losses, and a pile of unused inventory. Information is usually dated and depends on the syllabi of the respective State Education Board. Any change in the syllabus of a particular class renders the old material completely redundant. This shows the importance of timing of release."

For physical goods, it is usually more expensive to produce an extra unit of the high quality versions. For example, a 29 inch colour TV will more costly to build than a 21 inch TV. But with information, it generally costs just about as much to distribute the fancy version as the plain version. A software program can target various segments by modifying the product to suit the requirements of those segments.

Features and Functions: The principle of versioning information is based on the fact that some customers are willing to pay higher prices in return for some additional advantage. The key is to reduce the price of the high-end version and the quality of the low-end version. For example, student version of a software program is usually a stripped down version of the original high-end, full featured program. Also known as "value-subtracted version" such a version is also cheaper than the professional version.

EViews is an econometric analysis, forecasting, and modeling software intended
for professionals. EViews also has a "Student Version", a low-cost alternative to the full version of EViews. While it does contain some capacity and feature limitations, Eviews Student Version is specially designed for classroom instructional settings where the full power of EViews is not required.

Libraries such as the British Council Library and other similar associations often offer memberships to students at reduced prices. These memberships have limitations of use and may not be useful to serious professionals, but more than serve the purpose of students.

(See Table Below)

Freeware, Adware and Nagware: Many companies give away basic, stripped-down versions of their software free. This free version is akin to sampling in the FMCG products and often acts like an advertisement for the advanced or full version.

Award winning HTML text editor NoteTab Light, which is given away free, pushes the sales of its advanced versions, NoteTab Standard and NoteTab Pro.

Some software developers give away their software free provided that the users agree to allow third party advertisements to be displayed every time the application is run. This type of software is often referred to as adware. Developers of such software recover their costs from the advertisers. The users are also given a choice to remove these advertisements by paying a one time license fees to register the product.

Incredimail is a high-end email client available free for downloading from the Internet. The free version displays advertisements each time the program runs and it also adds a link to the bottom of each outgoing email, advertising the product. Plus, certain advanced features are "locked". The premium version on the other hand is a full featured, ads free and link free program with guaranteed technical support.

Nagware is a practise which annoys users by programming the "software" in such a way that it nags the user by asking them to register the product each time the program runs. This type of versioning is especially useful for high involvement users who will pay the license fee to avoid the disturbance due to nagging.

A popular file compressing software called WinZip uses this ploy to get its users to register the products.

Customised versions: Information can be customised according the customers’ needs and charged accordingly. This way market can be expanded by selling the same information to different subsets of customers.

CRIS INFAC’s Bhakhri says, "We have realised that customers’ information needs differ to a great extent and that providing them with standard products would not lead to maximisation of revenue potential." CRIS INFAC has begun offering customised versions to its clients in an attempt at realising greater value by providing them with information in their required formats and at the frequency at which they want them in. The company’s clients are willing to pay far greater amounts for such products while continuing to subscribe to the standard products.

Product Dimensions Susceptible to Versioning and their likely Users/Uses
Product Dimension Likely Users/Uses
Delay Patient/Impatient Users
User Interface Casual/Experienced Users
Convenience Business/Home Users
Image Resolution Newsletter/Glossy Uses
Speed of Operation Student/Professional Uses
Format In-screen/Printed Uses
Capability General/Specific Uses
Features Occasional/Frequent Uses
Comprehensiveness Lay/Professional Uses
Annoyance High-time-value/Low time value Uses
Support Casual/Intensive Uses
Source: Information Rules

Bundling Information: Selling information in bundles is a fairly common strategy across categories. Here, one or more different products are offered as a package at a single price.

Microsoft Office is perhaps the best example of bundling. MS Word, Excel, Powerpoint, Frontpage, Outlook and Access are different programmes but are sold in a package. Each of these products is also available separately. But by offering it in a package, the perceived value of the products increases manifold. For one, these products are guaranteed to work smoothly with each other, making the entire package extremely user friendly. Two, all products offer distinct utilities to working professionals who are likely to use almost all the programmes in the package although their usage of individual programmes may vary according to their profession.

Another good example of bundling can be found in the world of pre-recorded music. E.g. Music is the ultimate experience good and depends heavily on the individual preferences. Hindi Film music albums are often sold in bundles wherein two albums are clubbed together as a package. These albums could have many things in common – theme, music director, singer or even class of music (Pop, Country, Ghazal, Love Songs etc).

Digital v/s Offline Versions: Navneet recently introduced interactive educational CD-ROMs for individual subjects of class VII, IX and X. Priced rather low at just about Rs. 85, these CD-ROMs offer a different kind of experience to the students by making learning a more enjoyable activity than ever before. Navneet calls this "edutainment". Gala reiterates, "Books printed in single colour are more expensive to produce than CD-ROMs. But CD-ROMs offer a far superior experience to students, and makes learning enjoyable too. Our vision is to make CD-ROM’s so affordable that it replaces books to a large extent."

Technology Versions: The entertainment and publishing industry can distribute information in many forms, both traditional and modern. Exploitation of technology carrier offers many opportunities to create different versions. The best example of this type of versioning is music again. Music can be sold on LP, Cassette tape, CD. It can be downloaded on the Internet. It can be heard on Radio and Television. Each version caters to a distinct set of consumers and is priced according to the technology used, the carrier of the product and the perceived consumer value.

Complementary Products: One way to sell information goods is to create two products, one of which is given away for free and the other, the complement of the first, is only available for sale. A complementary product is a product which needs to be used in combination with another product in order to be useful.

A well known example is the Adobe Acrobat Reader, a cross platform document reader which allows a user to browse and print PDF files. Its complement, the Adobe Acrobat products allows the user to convert existing documents or create new ones into PDF format. While Acrobat Reader is given away free, Adobe Acrobat can only be purchased from Adobe. By giving away the reader for free, Adobe has established a large user base which can read PDF files, making it attractive to publish information in this format. Because there are a large number of "Acrobat Readers" installed, the sales full Adobe Acrobat product also intensifies. This is also a good example of network effects (discussed later).

There may be many more strategies for versioning your information goods and your individual versioning strategy will be based on many factors: your product, your industry, competitors, and finally your customers. Of course the ultimate objective of any versioning strategy is to maximise the revenue.

Rights management

In a recent interview, Microsof
t India’s Managing Director Sanjay Mirchandani said, "The average consumer is unaware that they are using pirated software. It is not about the kid who copies a game. It is about enterprises, about governments, who are, knowingly or unknowingly, using pirated software as part of their enterprises. With the IT industry becoming as strong as it is in India, and as prominent as well, we at Microsoft believe that intellectual property rights will come to the forefront of people’s attention, and piracy will erode."

Mirchandani may be optimistic, but the fact remains that piracy is the single biggest threat to the producers of information. According to IDC, Indian Software Industry lost about US$ 245 Million (approximately Rs. 1225 crores) in 2001. In such a scenario, managing intellectual property has become an extremely important matter.

Copyright law has traditionally been used to enforce a merchant business model for sellers of books, music and other information goods. The creation, distribution and publication of the work can be restricted. However, in electronically networked environments, it is very easy to copy and distribute an information good.

Shapiro and Varian think that producers of information goods tend to worry "too much about protecting their intellectual property". According to them, "Every new reproduction technology, from the printing press to the VCR, has brought forth dire predictions that it would destroy an industry, but somehow this has never happened."

Digital technology has lowered the reproduction and distribution costs. Shapiro and Varian advise producers to stop fighting against lower distribution costs and instead to take advantage of them. Reduced distribution costs offer a significant advantage by allowing the producers to promote their products more effectively.

These examples substantiate Shapiro and Varian’s views.

As discussed earlier in the section on pricing, Navneet has priced its goods at a level that discourages piracy. Gala affirms, "This kind of aggressive pricing leaves hardly any incentive for the pirates." The VCD of Blockbuster Hindi film Sholay (mentioned earlier) is another prime example of pricing to kill piracy. Subramaniam explains it aptly, "A Sholay CD priced at Rs. 99 doesn’t mean that Sholay is worth only that much. It is also because of an important factor called piracy. A pirated version of Sholay is available at Rs. 50. The digital medium makes replication very easy. To top that, a pirate has zero development costs. So to my mind, one reason why Sholay VCD is available for just Rs. 99 is to discourage piracy and exploit the Home Video market as much as possible."

Liberal terms and conditions increase the value of an information good. First, you can charge a higher price, and second more consumers will want to buy it. Again, Shapiro and Varian explain this well, "A product that can be shared with friends, loaned out, rented, repeatedly accessed, or sold in a resale market is obviously more valuable to a potential user than one that can be accessed only once, under controlled conditions, by only a single party"

Despite the threat of piracy, CRIS INFAC took the decision to supply their reports in a digital format many years ago. The company realised that the value delivered to its clients should be the primary consideration for all its actions. As an electronic version would enable a large number of users in one organisation to access information, process as well as present it, CRIS INFAC decided that the value it would deliver to its clients would far outweigh the "loss" of revenue due to the misuse of the information."

The lesson is clear. As a producer of information goods, you should manage your intellectual property to maximize its revenue potential rather than protecting it for its own sake.

Having discussed the information side, let’s now turn to the technology part of "Information Technology".


Lock in and Switching Costs
Because information is an experience good, producers of information goods must deal with the inexorable issue lock-in and the associated switching costs.

Lock-in is a term used to describe a situation where it is expensive and inconvenient for a user of technology to switch to a competing technology. It is imperative for information producers to understand the phenomenon of lock-in and the associated switching costs.

Almost all of us are locked-in to some extent. Most retail supermarkets run loyalty programmes to keep their customers hooked. Frequent flyer programmes run by airline companies are also an attempt to lock-in. But lock-in assumes critical importance in the case of information goods. The most potent lock-in causes switching costs to rise over time. "Information and databases" and "loyalty programmes" are two types of lock-in that are significant in the information economy.

Technology Lock-in: To gauge the implications of lock-in due to technology, let’s take a couple of examples.

A large organisation has installed Tally as the main accounting package and spends considerable time and money training its employees to acquire proficiency in using the software. Effectively, this implies that the organisation is locked-in with Tally. Now, for some reason, if this company wishes to switch to another accounting package, say E.X., then it will have to bear huge costs to do so. The switching costs would include not only the license fees for the new software package but also investment in re-training employees, transforming existing data into new formats, aligning this data with those of associate companies etc. Additionally, the company will also have to bear the inertia of users to switch to another programme.

Hotmail and Yahoo! are two of the world’s largest providers of free web-based email service. Both these providers exploit their huge subscriber database to promote other services they offer as well by placing advertisements on the email webpage. Subscribers who have been using a particular email ID would resist switch the provider as this would require them to take considerable effort in informing their friends and associate about the new ID.

Lock-in works for the information provider because it helps retain a customer or subscriber base. Lock-in also works against new providers, who, when seeking new customers, must consider the cost to those potential customers of switching to a new technology or new provider. Virtually all PC users are locked-in with the Windows OS and since information technology product work in systems, it would take an enormous amount of time, energy and perhaps technology to displace Windows as the world standard in PC operating systems.

Information lock-in: Technology is responsible for lock-in situations with high switching costs. But sometimes, the information itself causes lock-in.

For CRIS INFAC, lock-in, as explained above, is important from the point of view of building loyalties and dependence and thereby staving off competition by the clients themselves. CRIS INFAC maintains high awareness levels among the users with respect to their services and products. Bhakhri says, "This training is repeated to ensure that the awareness, leading to usage to appreciation to dependence to goodwill to willingness to buy more is kept at a high."

Type of Lock- In Switching Costs
Contractual Commitments Breaking contracts can lead to compensatory damages
Durable Purchases Replacing existing equipment can be expensive
Brand-specific Training Switching programmes means your team has to learn a new interface
Information and Datab
New systems are needed when companies change formats
Search Costs Finding and evaluating a new supplier costs time and money
Specialized Suppliers Sometimes a critical component is supplied by a single supplier
Loyalty Programmes Switching can cause customers to lose out on programme benefits
Source: Information Rules

Due to high levels of client servicing, CRIS INFAC is able to closely track each client’s individual information needs. This has the company them to identify and plug the gaps in its products and services ensuring a continuous improvement. Adds Bhakhri, "Especially during times when they need to take a crucial decision, CRIS INFAC provides them with the relevant, reliable information in a matter of minutes or hours and thus "saves the day" for them. Such a service, which they have utilised regularly and have grown accustomed to, has resulted in a very powerful lock in.

The above discussion on lock-in makes it amply clear that the most valuable asset in the new economy is not manufacturing prowess or raw materials. It’s an installed base of customers, kept loyal by switching costs that deter them from changing brands. Therefore, whether you are a seller or a buyer of information goods, managing lock-in and switching costs should be a critical aspect of your business decisions.

Positive Feedback, Network Externalities and Standards

All kinds of information goods benefit from positive feedback. A case in point is the entertainment industry which survives on positive feedback. No amount of advertising and publicity can substitute the role that word-of-mouth publicity plays in the success of films and music. Some producers spend heavily on advertising and promotions – this helps to the extent of creating an initial demand. But the ultimate success of an information good depends heavily on the positive feedback that it generates among users.

A related aspect of the information economy is Network Externalities, a fundamental economic characteristic of real and virtual networks which occurs when the value of a product or service to one user depends on how many other users there are (i.e.: phone, Internet, e-mail, modems). The pattern such technologies follow results from "positive feedback": as the installed base of users grows, more and more users find the product useful to adopt. Network effects are crucial in the network economy as they lead to demand side economies of scale and positive feedback.

The twin issues of Standards and Compatibility are fundamental features of the Networked economy. For instance, to be able to exchange information freely, compatibility between the various file formats is most important. When a format of technology becomes extremely popular, we say it has become a standard.

S Ramadorai highlighted the importance of setting standards in a recent interview, "We are slowly beginning to get involved in some of the standard-setting fora. We participate in the IEEE standards body. We have been recently invited to be a founding member of the Internet Security Alliance (ISA) and are the only Indian entity to be invited on this forum. So we will be defining standards."

Producers of information goods must compete to become a standard or at least achieve the critical mass that will trigger the standards war. Compatibility and standards issues are so crucial in the information age that it drives many large companies to partner with their rivals to develop a formal technology standard.

A prime example of a "standards development" partnership is Philips and Sony. In 1981 these companies got together to jointly develop the compact disc. Although it took a long time to spread its reach, the compact disc has today become the standard carrier of digital information. The DVD (Digital Video/Versatile Disc) is another format developed jointly by Philips and Sony. The DVD’s strength is its superior quality, backward compatibility (CDs and VCDs too can be played in a DVD player) and efficient storage of data which makes it all set to become the standard for distributing films and music in the future.

PlayStation’s Case
Till 1995, the Video games market was dominated by Nintendo’s cartridge-based consoles. Sega was a close second. Then Sony launched a radically different format: the CD-based console called PlayStation.

In 1995 Sony was a new entrant in the video games market. Today, in less than a decade, PlayStation is the market leader and has turned out to be Sony’s cash cow with more than 60% market share. With over 50% of the company’s profits coming from the gaming division, PlayStation is the most profitable product in Sony’s history.

Let us see PlayStation’s performance through the lens of the network economy.

Positive Feedback and Network Externalities: The PlayStation console is a hardware system and we all know that hardware systems are useless unless supported adequately by the complementary and compatible software (in this case, games). This is where PlayStation scores heavily. PlayStation owners trade their games leading to network externalities. Positive feedback mechanisms exert themselves as more players buy PlayStations and games. This generates impetus for game developers to write games specifically for the PlayStation.

Therefore more players buy PlayStations. Multi tap unit connections allow players to hook up their PlayStations to compete interactively, creating direct network externalities. Also, customers who buy titles for PlayStation are to some degree locked in to a particular set of game titles, since switching costs are high for those who wish to change consoles.

Compatibility and Standards: There is no standard for video game software that ensures compatibility between different video consoles. Leading game developers Namco and Psygnosis were key-partners from the beginning of the PlayStation project when the system’s architecture had to be defined.

This above example shows that to compete effectively in network economy, it is important to find natural allies and develop compatible technology standards. As the installed based of users of this new technology grows, it will lead to scale economies and will benefit the consumers as well as the suppliers of the new technology.

Manufacturers of software (information) and hardware (information carriers/players/processors etc.) must work in close conjunction in order to develop a competitive technology standard for information goods. Introducing new technologies is a long-term affair and needs huge resources. It also requires effective management the customers’ migration from the existing (old) technology standards to the new one developed.


The Indian economy is still not completely networked. A survey conducted by Taylor Nelson Sofres revealed that only two per cent of India’s total Internet users (estimated at about 3 Million) buy goods and services from the Net. Compare this with the global average of 31 per cent, and you will realise that India has a long way to go.

But the situation is changing fast. According to Internet Service Providers Association of India (ISPAI), the number of Internet subscribers in India is expected to be 7.5 million by 2003. The online shopping scene is also improving. From the findings, the survey report stated that online shopping in India is starting to grow and its potential is now being recognized by many internet users.

This then is an ideal time for Indian business managers to act. We are fortunate in that sense, since we can learn a few tricks from our Western counterparts, especially the US, where the excessive hype of the last couple of years led to many business blunders. Thankfully, the chaos of the yesterday is now giving way to a sense of orderliness.

The Information Economy has its own ru
les, which are not very different of the industrial economy. What has changed though is the way these rules are being applied. As we have seen above, in order to survive in the networked economy, managers must understand the wide-ranging dimensions of the information economy and its influence on their business. Pricing options, versioning strategies and managing intellectual property are crucial issues for the producers of information goods. Equally important are the issue of identifying and managing lock-in and switching costs, creating positive feedback and network effects and establishing industry standards.

"Information is the oxygen of the modern age. It seeps through the walls topped by barbed wire; it wafts across the electrified borders", former President of USA, Ronald Reagan once said. Today, as businesses cope with the effects of the networked economy, his words apply more than ever before.

Summarised from Information Rules – A Strategic Guide to the Network Economy By Carl Shapiro and Hal R. Varian

The market for ICE–information, communications, and entertainment–couldn’t be hotter. To exploit the many opportunities, entrepreneurs and corporate leaders alike must understand the strategic implications of the fundamental economic forces shaping the Network Economy.

Essentially, anything that can be digitized – encoded as a stream of bits – is regarded as information. Books, databases, baseball scores, movies, music, stock quotes and Web pages are all information goods.

Information can have entertainment value or business value – but regardless of the source of value, people are willing to pay for information.

Differentiation of products and prices

The high first-copy costs of information inevitably lead to price and product differentiation. Mass customization, differential pricing, personalized content, and versioning are winning strategies in ICE industries.

Rights management
You should manage your intellectual property to maximize its value, not to maximize its protection. The same goes for technology standards. Growing the market is usually more important than extracting the last dime from your existing business model.

Since information technology products work in systems, switching any single product can cost users dearly. The lock-in that results from such switching costs confers a huge competitive advantage to firms that manage their installed base of customers effectively.

Positive feedback
Network externalities are ubiquitous in ICE industries, which leads to intense competition and winner-take-all markets. Positive feedback is an absolute must in the network economy.

Standards and alliances
If you can’t beat your competitors, then join them. Infotech strategy often requires you to build alliances around common standards.

Information policy
Now more than ever, policymakers are confronting the unique features of ICE industries. Since regulatory and antitrust policies can make or break a business model, industry players must understand the economic and legal basis of government competition policy.

© Carl Shapiro and Hal Varian; All rights of the authors reserved.

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