Fabien Benetou's PIM | ReadingNotes / InformationRules

Information Rules: A Strategic Guide to the Network Economy by Carl Shapiro and Hal R. Varian - ISBN 087584863X - Harvard Business Press 1998

Motivation

Interested in CS, IT and thus in their economical ecosystem in particular regarding proprietary software vs. FLOSS or public domain vs. IP. Previously read books like Information Feudalism, The Future Of Ideas. Also appreciated Hal Varian on Combinatorial Innovation, EUXTV June 2009 and discovered Hal Varian was Chief Economist at Google. Understanding how one can handle the paradox of the attractiveness of the IT/CS industry low barrier to entry (a laptop + time) vs. the economical soundness of the investment.

Pre-reading model

Draw a schema (using PmGraphViz or another solution) of the situation of the area in the studied domain before having read the book.

Skimming

including its per chapter summary
regarding Chapter Nine: Waging a Standards War
- The Art of Standards Wars by Carl Shapiro and Hal R. Varian, California-Management-Review 1999

Reading

1 The Information Economy
- "The thesis of this book is that durable economic principles can guide you in today's frenetic business environment. Technology changes. Economic laws do not." (p1-2)
- "Many did not survive. Interconnection battles have arisen regularly over the past century in the telephone, the railroad, the airline, and the computer industries, among others." (p2)
- "Information is costly to produce but cheap to reproduce". (p3)
  - fixed vs. marginal costs
  - similar to discussions at UTC during GE27 - Gestion financiere de l'entreprise with Christine Divry-Groff regarding marginal costs when you distribute distribution itself through p2p means (example of WoW updates)
    - but not necessarily cheap to sell which I did not see then
- "You must price your information goods according to consumer value, not according to your production cost." (p3)
- example of delay strategies for pricing
- short summary of each chapter
2 Pricing Information
- "The dominant component of the fixed costs of producing information are sunk costs, costs that are not recoverable if production is halted. " (p21)
- "attention is scarce in the information economy, and sellers of content have to invest in marketing new products to grab their potential customers' attention. " (p21)
- "Competition among sellers of commodity information pushes prices to zero. " (p24)
  - a very compelling argument for advertisement based business model
- opposition between 2 types of market
  - monopoly or dominant firm model enjoying the network effect at its best and keeping high margin
  - oligopoly or differentiated products with high number of firms tending toward marginal costs
- "The key to reducing average cost in information markets is to increase sales volume. " (p28)
  - as supply chain management and related costs will not really help to lower costs
- "a volume-based strategy of cost leadership must be rooted in adding value to raw information to broaden appeal and fully exploit the economies of scale and scope. " (p29)
- tactics to scare competitors away seem very close to Game Theory At Work and Getting To Yes
- in table 2.1. Bulk versus Targeted Ad Rates for Web Search Engines Google is not mentionned, it would be interesting to know if the founders did read the book as it was published at about the time Google started (1998)
- Lessons (p50-51)
  - Analyze and understand how much you invest in producing and selling your information.
  - If you are one of many firms selling similar information, grab market share and exploit economies of scale to become a low-cost producer
  - Differentiate your product by personalizing the information and the price.
  - Invest in collecting and analyzing data about your market, using focus groups, statistical analysis, promotions, and other marketing techniques.
  - Use the information about your customers to sell them personalized products at personalized prices.
  - Analyze the profitability of selling to groups."
- Wikipedia:Value-based pricing
3 Versioning Information
- versioning through different dimension (delay, interface, dataset size, ...) provides accurate pricing and larger market share through induced self-selection
- examples of Kurzweil's speech recognition software and its vocabulary size, Wolfram's Mathematica and its limited speed, etc
- "think about information provision as a service rather than a good." (p65)
- "By allowing Bargain Finder to look only at one dimension of what the stores offered, they ended up commoditizing their product." (p80)
- Lessons (p80-81)
  - Adjust the characteristics of your information products to emphasize differences in what customers value.
  - You can version your products along a variety of dimensions.
  - Add value to on-line information to differentiate it from hard copy.
  - If your market segments naturally, design your information product line to match.
  - If your market does not segment naturally, choose three versions (just like Goldilocks).
  - Control the browser
    - hence funding in Mozilla, FOSS work on Javascript Engine, then Google Chrome?
  - Bundling makes sense if it reduces variation in willingness to pay
  - Nonlinear pricing can also be used to let consumers build their own bundles.
  - Promotional pricing makes sense if it helps you segment the market.
4 Rights Management
- arguing again for free offer then versionned more expensive products, basically a freemium business model
- "this chapter we will examine how digital technology affects the management of intellectual property. " (p84)
- "option value: you can exercise the option to play it where and when you want" (p87)
- "In the Middle Ages, professors used a primitive form of intellectual property protection: they lectured in darkened rooms so that the students couldn't take notes. " (p93)
- "We think that the natural tendency is for producers to worry too much about protecting their intellectual property. The important thing is to maximize the value of your intellectual property, not to protect it for the sake of protection. " (p97)
- lessons (p101-102)
  - Digital technology poses two challenges for rights management
  - Reduced distribution costs help to advertise your product by making it cheap to give away samples.
  - Reduced distribution costs are beneficial to those who sell illicit copies as well, but their need to advertise helps keep "bitlegging" under control.
  - Copy protection schemes impose costs on users and are highly vulnerable to competitive forces.
  - When choosing terms and conditions, recognize the basic trade-off: more liberal terms and conditions will tend to raise the value of your product to consumers but may reduce the number of units sold.
  - Site licenses and other group-pricing schemes are a valuable tool for managing terms and conditions.
- see also Information Feudalism and The Future Of Ideas
5 Recognizing Lock-In
- as the Mac by Apple is used as the first example, check Apple
- "buyers typically must bear costs when they switch from one information system to another. Understanding these costs of switching technologies, or even brands, is fundamental to success in today's economy. " (p103)
- "When the costs of switching from one brand of technology to another are substantial, users face lock-in. " (p104)
- "why small lock-in matters involves user behavior on the Web [...] When you pick up a magazine or a book and sit in your favorite chair, you have to exert effort, however small, to switch to a different magazine or book. When you are looking at one Web page, other pages are just a mouseclick away. " (p110)
- "lock-in is a two-edged sword; you may loathe it as a customer yet embrace it as a supplier. " (p111)
- extending switching cost not just to yourself but to other actors in the value chain
- "one of the distinctive features of information-based lock-in is that it tends to be so durable: equipment wears out, reducing switching costs, but specialized databases live on and grow, enhancing lock-in over time. " (p116)
- "most durable equipment requires follow-on purchases, making this pattern of lock-in extremely common. " (p120)
  - see also Freebie marketing aka "razor and blades business model" on Wikipedia
- "aftermarket policies constitute a key strategic choice for manufacturers of high-tech, durable equipment. " (p120)
- "With brand-specific training, switching costs tend to rise with time, as personnel become more and more familiar with the existing system." (p121)
  - "The obvious example for many of us is computer software. " (p121)
    - see Tools for my learning notes on software
- "With information and databases, switching costs tend to rise with time as more and more information comes to reside in the historical database. " (p123)
- "users to limit these switching costs [must] insist on employing standardized formats and interfaces" (p123)
  - cf Chapter 8
- "As a buyer [of specialized suppliers], remember that your choices today will dictate your needs tomorrow. " (p123)
- "Even when true dual sourcing [keep alive an alternative source of supply] is not possible because of specialized needs and large fixed costs, a large buyer can make efforts to nurture capabilities at more than one supplier to spur future rivalry. " (p125)
- "You are not born <<locked in;>> you only get locked in by virtue of choices you make. The next time around the cycle [Figure 5.1], the playing field will not be so level, however. " (p132)
- see also Wikipedia:Coupling (computer science)
- Lessons (pp133-p134)
  - Switching costs are the norm in information industries.
  - As a customer, failure to understand switching costs will leave you vulnerable to opportunistic behavior by your suppliers.
  - As a supplier, switching costs are the key to valuing your installed base.
  - Fortunately, lock-in arises in one industry after another according to certain identifiable patterns.
  - The essence of lock-in is that your choices in the future will be limited by your investments today. These linkages differ from one technology to another, but are predictable.
- see also Michael Porter, especially sub-section Durable and specialized assets (pp. 259-60) in section Competitive strategy in declining industries of the chapter 12 Exit barriers in his book Competitive Strategy, Free Press 1980
6 Managing Lock-In
- "If you're trying to break into the market with a new technology, you can ill afford to ignore the costs that your target customers must bear to switch to your products. " (p136)
- "Whatever concessions you seek, your bargaining position will be weaker once you make sunk, supplier-specific investments. " (p137)
- buyer's checklist (p141)
- "During the lock-in cycle, the buyer and the seller will perform an intricate dance, causing the magnitude of lock-in - that is, the buyer's switching costs - to vary over time. " (p156)
- "make it difficult for your customers to seek out alternatives and compare your offerings with those of your rivals. This is worth trying, but we think it will be hard to do on the Web. " (p168)
  - see also Wikipedia:Rational Ignorance
- Lessons (p170-171)
  - basic lessons for purchasers
    - Bargain hard before you are locked in for concessions in exchange for putting yourself in a vulnerable position.
    - Pursue strategies like second sourcing and open systems to minimize the extent of your lock-in.
    - Look ahead to the next time you'll be picking a vendor, and take steps at the outset to improve your bargaining position at that time.
  - strategies for sellers
    - Be prepared to invest to build an installed base through promotions and by offering up-front discounts.
    - Cultivate influential buyers and buyers with high switching costs.
    - Design your products and your pricing to get your customers to invest in your technology, thereby raising their own switching costs.
    - Maximize the value of your installed base by selling your customers complementary products and by selling access to your installed base.
7 Networks and Positive Feedback
- "There is a central difference between the old and new economies: the old industrial economy was driven by economies of scale; the new information economy is driven by the economies of networks." (p173)
- "In virtual networks, the linkages between the nodes are invisible, but no less critical for market dynamics and competitive strategy. " (p174)
- multiple names : network effects, network externalities, demand-side economies of scale
  - Wikipedia:Network effect
- "Positive feedback makes the strong get stronger and the weak get weaker, leading to extreme outcomes. " (p175)
- "In a negative-feedback system, the strong get weaker and the weak get stronger, pushing both toward a happy medium. " (p176)
- "In its most extreme form, positive feedback can lead to a winner-take-all market in which a single firm or technology vanquishes all others," (p177)
- "Microsoft's dominance is based on demand-side economies of scale. Microsoft's customers value its operating systems because they are widely used, the de facto industry standard. " (p180)
- "The sponsor of a network creates and manages that network, hoping to profit by building its size. " (p183)
- "Building a network involves more than just building a product: finding partners, building strategic alliances, and knowing how to get the bandwagon rolling can be every bit as important as engineering design skills. " (p183)
- Wikipedia:Metcalfe's law
  - "the number of unique connections in a network of a number of nodes (n) can be expressed mathematically as the triangular number n(n - 1)/2, which is proportional to n² asymptotically."
- "The challenge to companies seeking to introduce new but incompatible technology into the market is to build network size by overcoming the collective switching costs - that is, the combined switching costs of all users. " (p184)
- "two basic approaches for dealing with the problem of consumer inertia:
  - the evolution strategy of compatibility and
  - the revolution strategy of compelling performance" (p190-191)
- "one-way compatibility created an interesting dynamic: influential early adopters had a hard time sharing files with their slower-to adopt colleagues. " (p193)
- "three strategies for helping to smooth user migration paths to new technologies:
  - Use creative design.
  - Think in terms of the system.
  - Consider converters and bridge technologies" (p194-195)
- "Andy Grove speaks of the <<10X>> rule of thumb: you need to offer performance "ten times better" than the established technology to start a revolution. " (p196)
- "Which route is best, openness or control? The answer depends on whether you are strong enough to ignite positive feedback on your own. " (p197)
- "Strength in network markets is measured along three primary dimensions: existing market position, technical capabilities, and control of intellectual property such as patents and copyrights. " (p197)
- "In choosing between openness and control, remember that your ultimate goal is to maximize the value of your technology, not your control over it. " (p197)
- "information technology is comprised of systems, and an increase in the value of one component necessarily spills over to other components. Capturing the value from improvements to one component typically requires the cooperation of those providing other components. " (p199)
- 4 Generic Network Strategies (Figure 7.2) as a combination between
  - Control (retain proprietary control) or Openess (open up the technology to others)
  - Compatilibity (evolution) or Performance (revolution)
  - resulting in
    - performance play
    - controlled migration
    - open migration
    - discontinuity
- "if you control a key interface or bottleneck, you should open it up, but on your own terms and conditions. " (p214)
- Lessons (p224-p225)
  - Positive feedback is the dynamic process by which the strong get stronger.
  - Adoption dynamics in the presence of positive feedback tend to follow a predictable pattern.
  - Consumers value information technologies that are widely used, just as they value communications networks with broad reach.
  - Positive feedback works to the advantage of large networks and against small networks.
  - Consumer expectations are vital to obtaining the critical mass necessary to fuel growth.
  - Firms introducing new products and technologies face a fundamental trade-off between performance and compatibility.
  - Firms introducing new products and technologies also face a fundamental trade-off between openness and control.
  - There are four generic strategies for innovators in network markets: performance play, controlled migration, open migration, and discontinuity.
  - Many of the tactics for dealing with positive feedback and network externalities have been tried in the past.
8 Cooperation and Compatibility
- "coopetition captures the tension between cooperation and competition prevalent in network industries. " (p228)
- "Standards alter the very nature of competition in several important ways. " (p229)
- Lessons (p259-260)
  - To compete effectively in network markets, you need allies.
  - To find your natural allies, you must determine how a proposed standard will affect competition. Standards alter competition in several predictable ways.
  - Standards tend to benefit consumers and suppliers of complements at the expense of incumbents and sellers of substitutes.
  - Formal standard setting is now being used to develop more standards than ever before.
  - Find your natural allies and negotiate to gain their support for your technology.
  - Before you engage in a standards battle, try to negotiate a truce and form an alliance with your would-be rival.
  - Try to retain limited control over your technology even when establishing an open standard.
9 Waging a Standards War
- "Your ability to successfully wage a standards war depends on your ownership of seven key assets:
  - (1) control over an installed base of users,
  - (2) intellectual property rights,
  - (3) ability to innovate,
  - (4) first-mover advantages,
  - (5) manufacturing abilities,
  - (6) strength in complements, and
  - (7) brand name and reputation." (p270)
- "four of the tactics for waging a standards [...]
  - (1) preemption,
  - (2) penetration pricing,
  - (3) expectations management, and
  - (4) jockeying for allies." (p291)
- Lessons (p295-296)
  - Understand what type of standards war you are waging.
  - Strength in the standards game is determined by ownership of seven critical assets.
  - Preemption is a critical tactic during a standards war.
  - Expectations management is also crucial to building positive feedback.
  - When you've won your war, don't rest easy.
  - If you fall behind, avoid survival pricing.
10 Information Policy
- "large swaths of the information sector of our economy are subject to little or no regulation." (p302)
- "you should not think of antitrust merely as something to defend against; you may also be able to use antitrust offensively to prevent other firms from engaging in predatory conduct or from consummating a merger that would harm you as a buyer or exclude you from the market. " (p302)
- "each and every company in the information sector needs to be cognizant of antitrust rules and to fashion strategy with these rules in mind. " (p303)
- "Adam Smith once said that <<people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.>>" (p306)
- "Our rule of thumb for regulation in the information sector is simple: government regulation should focus on controlling genuine monopoly power when it will not be eroded by competitive pressures. " (p313)
- Universal Service (p31-316)
  - situation has change since as
    - the EU declared Internet access a civil right (reference required)
    - Sweden and few Scandinavian countries aim at possible broadband access for every citizen, even the one in the most remote locations
- Lessions (p317-318)
  - Don't expect the government's role to diminish.
  - Every company needs to know the rules of competition.
  - Companies have considerable freedom to engage in differential pricing.
  - Competition policy is intended to ensure a fair fight, not to punish winners or protect losers.
  - Mergers and acquisitions involving direct competitors are subjected to careful review by the Justice Department and the Federal Trade Commission.
  - Don't be afraid of cooperating with other companies to set standards and develop new technologies, so long as your efforts are designed to bring benefits to consumers.
  - If you are fortunate enough to gain a leading share of the market, be sure to conduct an audit of your practices.
  - Don't expect government regulation in the telecommunications sector to diminish any time soon.

Overall remarks and questions

the book overall questions the soundness of the business/economy education I received since it was mostly an adaptation from product based economy to the "new" information economy
- according to the book this seems to be hardly the case. Classes of GE27, GE39, ... who are not really adapted to software but only partly to services might be missed key aspects
discussions
- started with OpenSim requiring Mono (thus .Net specifications) on freenode/##AGI 17/06/2010 at 11am
- "en fait ca parle de quoi information rules?" seedeabitlbee/Franck 17/06/2010 at 13am
once again, after Game Theory at Work and several other strategy books, one is advized to avoid the intrensic socially beneficial principles of the market
- through purely rational moves :
  - pure competition through building monopoly, at worse, ollygopoly
  - price lowering through avoiding price discrimination at all
- this clearly was done for more than a century (cf antitrust laws including the 1890 Sherman Act) but clearly demonstrate that the "ideal" of the market should never be confused with the actual application
  - political argument using thus such an idealization have to discarded as just what there are, whishful thinking with, at least currently, no easy solution
    - an easy way to check is to look at the corporations in each industry making the largest benefits and what patterns emerge
      - is it open competition? is the price lowering over time?
why did p2p became popular only during the last decade if it is an inherently efficient scaling solution? like what piece of knowledge or infrastructure was missing until then? the overhead of the protocol was too high for low bandwidth? what broke the hierarchy of The Scene?
- maybe p2p as a technologically symmetric relation was always available and used but aggregative actors repetitively democratized value
  - up to the point where it did not scale and thus p2p emerged again

Synthesis

So in the end, it was about X and was based on Y.

Critics

Point A, B and C are debatable because of e, f and j.

Vocabulary

(:new_vocabulary_start:) new_word (:new_vocabulary_end:)

Post-reading model

Draw a schema (using PmGraphViz or another solution) of the situation of the area in the studied domain after having read the book. Link it to the pre-reading model and align the two to help easy comparison.

Information Rules {ReadingNotes}