The Information Economy

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The Information Economy

• Carl Shapiro
• Hal R. Varian

2
Key Aspects

• Complementary systems
• Cost Structure
• Consumption Characteristics
• Compatibility

3
Complements

• Systems of Products
• Different manufacturers
• Strategy for complementors as well as competitors
• Compatibility as strategic choice
• Standards and interconnection

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Cost structure

• Expensive to produce, cheap to reproduce
• High fixed cost, low marginal cost
• Not only fixed, but sunk
• No significant capacity constraints

5
Consumption Characteristics

• Experience good
• Subject to Overload
• Economics of attention
• Reputation and brand identity
• Reliance on technology to add value to
  information

6
Compatibility

• Competitive Examples
• Beta v. VHS
• Sony v. Philips for DVD
• Role of 3rd parties
• Read v. write standards
• Compatibility over time?
• Windows 95
• Windows NT
• Windows XP

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Information is Differentbut not so different

• Key concepts
• Versioning
• Systems competition
• Network effects
• Lock-in

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STANDARDS
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How Standards Change the Game

• Expanded network externalities
• Reduced uncertainty
• Reduced consumer lock-in
• Competition for the market vs. competition in the
  market

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Change Game, contd.

• Competition on price vs. features
• Competition to offer proprietary extensions
• Component vs. systems competition
• With interconnection, can compete on components
• Consumers
• Generally better off
• But variety may decrease
• Complementors
• Generally better off

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Formal Standard Setting

• Essential patents must be licensed on fair,
  reasonable and non-discriminatory terms
• ITU
• Notoriously slow
• ANSI and ISO

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Building Alliances

• Assembling allies
• Pivotal customers should get special deals
• But dont give your first customers too big an
  advantage

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Building Alliances, contd.

• Who bears risk of failure?
• Usually ends up with large firms
• But bankruptcy favors small firms
• Government is even better!

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The standards game
Player B
Player A
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Managing Open Standards

• Standard is in danger if it lacks a sponsor
• Unix
• ATT invention by accident
• Gave away source code to EDU
• 1993 Coalition Novell purchased rights for 320
  million and gave name to X/Open
• SGML and XML

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Types of Standards Wars
Rival Technology
Compatible
Incompatible
Compatibile
Rival Evolutions
Evolution vs Revolution
Your Technology
Rival Revolutions
Revolution vs Evolution
Incompatible
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Recent Standards Wars

• AM stereo
• Digital wireless phones (Global)
• GSM 220 million
• TDMA 115 million
• CDMA 75 million
• Others?

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Once Youve Won

• Stay on guard
• Offer a migration path
• Commoditize complementary products
• Competing against your own installed base
• Attract important complementors
• Leverage installed base
• Expand network geographically
• Stay a leader
• Develop proprietary extensions

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Current Events
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Microsoft vs. Liberty Alliance
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Network Identity
Network identity refers to the global set of
attributes that are contained in an individual's
various accounts with different service
providers. These attributes include such
information as name, phone numbers, social
security numbers, addresses, credit records and
payment information. For individuals, network
identity is the sum of their financial, medical
and personal data-which must be carefully
protected. For businesses, network identity
represents their ability to know their customers
and constituents and reach them in ways that
bring value to both parties.
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Microsoft Passport

• Microsoft Passport
• http//www.passport.com/Business/Default.asp?lc10
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• Passport is a core component of the Microsoft
  .NET initiative, which will allow businesses to
  develop and offer distributed Web services across
  a wide range of applications, devices, and
  complementary services, all based upon a common
  Internet experience.
• Passport intends to charge a nominal annual
  license fee to service operators. However,
  Microsoft is currently waiving fees.
• Passport was originally part of Hailstorm .Net
  services

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Advantages to Businesses

• Increase traffic by simplifying the sign-in and
  registration process.
• Improve customer retention by delivering
  personalized content based on core Passport
  profile data.
• Increase impulse sales by simplifying the
  purchase process.
• Offer easy, more secure sign-in and purchasing to
  millions of Passport members.

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Users Side

• Microsoft Passport
• http//www.passport.com/Consumer/Default.asp?lc10
  33
• Passport is an online service that makes it
  possible for you to use your e-mail address and a
  single password to sign insecurelyto any
  Passport participating Web site or service.

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• Sign in to Passport participating sites using
  your e-mail address and a single password so you
  don't have to remember a different sign-in name
  and password at every Web site.
• Speed registration and get personalized services
  at Passport participating sites by optionally
  sharing the information you store in your
  Passport profile with the site when you sign in.
• Make faster, more secure online purchases with
  Passport express purchase.
• Protect and control online privacy for children
  with Kids Passport.

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Liberty Alliance

• Initiated by Sun MicroSystems
• www.projectliberty.org
• American Express, American Airlines, the Apache
  Software Foundation, Bank of America, Bell Canada
  Enterprises, Cingular Wireless, Cisco Systems,
  CollabNet, Dun and Bradstreet, eBay, Entrust,
  Fidelity Investments, Gemplus, GM, Global
  Crossing, i2, Intuit, Liberate Technologies,
  Nokia, NTT DoCoMo, Openwave, O'Reilly and
  Associates, RealNetworks, RSA Security, Sabre,
  Schlumberger, Sony Corporation, Sprint, Sun
  Microsystems, Travelocity, United Airlines,
  Verisign, Vodafone
• They represent over 1 B network identities

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Founding Members
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Vision
The vision of the Liberty Alliance Project is to
enable a networked world in which individuals and
businesses can more easily conduct transactions
while protecting the privacy and security of
vital identity information. To accomplish its
vision, the Liberty Alliance will establish an
open standard for federated network identity
through open technical specifications
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Liberty Alliance

• Under Liberty's plan, the same services would be
  provided in an open, federated way. (Everyone
  manages their own data, authentication is
  decentralized.)
• Version 1.0 announced July 15, 2002.
• Intended to encompass all internet devices.
• VeriSign joins both...

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Federated Network Identity
On a very basic level, federated network identity
means consumers and businesses can allow separate
entities to manage different sets of identity
information. Account federation enables
associating, connecting or binding a user's
multiple Internet accounts within an affiliated
group established between or among commercial and
non-commercial organizations and governed by some
legal agreement. Federated single sign-on enables
users to sign on with one member of an affiliate
group and subsequently use other sites within the
group without having to sign-on again.
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Microsofts Response

• Incorporates Internet-standard Kerberos 5.0
  security architecture
• Promises interoperability
• The Hailstorm name is being dropped in favor of a
  less-threatening label, .Net Passport.
• Proposes industry group to oversee standard.

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June 27, 2002Web Services Security Spec Sent to
OASIS Aiming to address critical security issues
that still hang over Web services, the powerhouse
triumvirate of VeriSign , IBM (NYSEIBM), and
Microsoft (NASDAQMSFT) Thursday submitted their
Web Services Security (WS-Security) specification
to the OASIS standards body (Organization for the
Advancement of Structured Information Standards).
http//www.internetnews.com/ent-news
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"Liberty Alliance has gotten quite a few partners
because of the project being alliance oriented,
and that's a very positive thing for them," said
Rosen. "Microsoft is going at this as much more
of a corporate negotiation. It's two different
approaches to capturing market share and it's
going to be a year or two before we have any
sense of which one is more effective."
Michele Rosen, IDC, 7/12/02
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Sept. 18, 2002
Sun Microsystems on Wednesday unveiled a new
open-source software development tool designed to
help businesses start testing and building online
identification systems using the new Liberty
Alliance standard. Sun executives say the
Java-based tool is the first open-source
implementation of the Liberty Alliance standard
and a prototype of Sun's forthcoming server
software, called Identity Server 6.0, which will
manage computer user's access and authentication.
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.NET Passport operates at massive scale
today.Live since 1999, .NET Passport is the
largest online authentication system in the
worldwith more than 200 million accounts
performing more than 3.5 billion authentications
each month. Reliability is very high and a key
design consideration for any new features.
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Sources of Positive Feedback

• Supply side economies of scale
• Declining average cost
• Marginal cost less than average cost
• Example information goods
• Demand side economies of scale
• Network effects
• In general fax, email, Web
• In particular Sony v. Beta, Wintel v. Apple

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Positive Feedback in Markets

• Strong get stronger, weak get weaker
• Makes a market tippy
• Winner take all markets

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Network Effects

• Real networks
• Virtual networks
• Number of users
• Importance of expectations

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Example Word Processors
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In 1986 WordPerfect and WordStar were the two
leading word processors, with moderately larger
market shares than several other programs
(DisplayWrite, Word, MultiMate, Samna Word). In
the next few years, however, WordPerfect broke
away from the pack, and by 1990 it clearly
dominated the market.
Source Liebowitz Margolis (1999) Winners,
Losers, and Microsoft Competition and Antitrust
in High Technology
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In the late 1980s Microsoft shifted its attention
away from its DOS version of Word, which was then
number two in the market, and began to focus on
the Windows version. Microsoft Word for Windows
hit the market in late 1989, and began to
generate a serious market share in 1990.
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Wintel Platform
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What happened in 1990?
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Who captures value?
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Macintosh Platform
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Example Spreadsheets
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Wintel Platform
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Macintosh Platform
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Supply-side Learning

• Lotus 1-2-3 did not have a Mac application until
  1992.
• Effect on Wintel market position?

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Example Summary
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Market Tipping
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Likelihood of Tipping
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Forms of Positive Feedback
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Igniting Positive Feedback

• Evolution
• Give up some performance to ensure compatibility,
  thus easing consumer adoption
• Revolution
• Wipe the slate clean and come up with the best
  product possible

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Evolution

• Offer a migration path
• Examples
• Microsoft
• Intel
• Build new network by links to old one
• Problems technical and legal

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Revolution

• Grovess law 10X rule
• But depends on switching costs
• Example Nintendo

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I.P. Strategies
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Openness v. Control

• Your reward Total added to industry your
  share
• Value added to industry
• Depends on product and
• Size of network
• Your share
• Depends on how open

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Openness

• Full openness
• Anybody can make the product
• Problem no champion
• Alliance
• Only members of alliance can use
• Problem holding alliance together

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Control

• Control standard and go it alone
• If several try this strategy, may lead to
  standards wars

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Strategy in Network Markets

• Standards are key.
• Compatibility creates customer benefits
• Alliances are key for both producers and users
• Open vs. Closed standards.

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Change Strategies in Network Markets
STANDARDS
Proprietary
Open
Compatibile
Controlled Migration
Open Migration
TECHNOLOGY
Market Discontinuity
Firm Discontinuity
Incompatible
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Change Strategy Examples

• Controlled Migration Microsoft, Intel
• Firm Discontinuity Iomega, Nitendo
• Open Migration modems, FAX, LINUX
• Market Discontinuity Cassette Tape, CDs, 31/2
  disk, wireless phones

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Performance Play

• Introduce new, incompatible technology
• Examples
• Palm Pilot
• Iomega Zip
• Attractive if
• Great technology
• Outsider with no installed base

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