Competitive Strategies for Network Economies

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Competitive Strategies for Network Economies

• The Value of Information

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From Last Time

• Internet Concepts
• Changes in existing businesses
• New ways to do old businesses
• New kinds of business (infrastructure)
• Conflicts and the role for intermediaries
• Privacy vs. efficiency
• Anonymity vs. accountability authenticity
• Local commerce vs. global jurisdiction

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Overview

• From last time intermediaries
• Information
• Failure of traditional market Economics
• Unique features (and opportunities)
• Adding value to information
• Overdue realization
• Information is valuable but not profitable

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From Last Time
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Other Players
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Microsoft the EU

• May 2001
• Microsoft accepts EUs Safe Harbor demands,
  accepting responsibility for misuse of negligent
  flaws in its technology
• November 2001
• Microsoft has acknowledged that it knew about an
  Internet Explorer security hole--and failed to
  issue a fix--a full week before it accused a
  security company of placing IE users at risk by
  publicly disclosing details of the flaw. cNet
  News
• The simple suggestion that users disable a
  common feature is not sufficient EU minutes

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Information

• Anything that can be digitized
• Technology
• Infrastructure for the storage, retrieval,
  filtering, manipulation, viewing, transmitting,
  and receiving of information
• Unique Cost Characteristics
• Unique Demand Characteristics

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How Much Information(Annual Worldwide Production)

• Film 40 teraB
• Music 50 teraB
• Paper 200 teraB
• X-Ray 20 petaB
• Photo 250 petaB
• Camcorder 300 petaB
• Disk Drives 600 petaB

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Information Cost

• Costly to produce
• High fixed, sunk cost
• Effectively free to reproduce
• Low, constant marginal costs
• No significant capacity constraints
• Traditional Economic Analysis Fails
• ?

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Traditional Economics

• Marginal costs decrease initially, then increase
• Competition drives prices down to marginal cost
• But, if marginal costs only decrease, or are
  constant? Pmc0
• Profits 0, implying no entry!

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Marginal Costs Storage Bandwidth

• 1988 10.00 / MB
• 1998 00.10 / MB
• 2000 00.02 / MB
• 2001 00.005 / MB
• 2002 00.0025 / MB
• IBM Deskstar 60GXP 60GB 159.18 ½ / MB
  
• Library of Congress
• (250 IBM 60GXP)
• 15 terabytes 40,000
• bandwidth cost 30 (NY to CA)

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Profiting from Information

• Information can be resold Ad. Infinitum.
• Personalized Pricing (Scott)
• Versioning (Manka, David K.)
• Marginal costs of production are 0
• Hence, price tends to 0
• Lower costs of production imply lower costs of
  reproduction
• Rights Management (Dallas, David S.)
• Fixed costs decrease for each new firm
• Learning
• Legal protection

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Information is Now Free

• Stock prices Morningstar encyclopedia
• vs. CBS Big Charts
• Maps Rand McNally
• vs. MapQuest
• Phone Bell Atlantic
• directories vs. Switchboard.com

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Unique Demand Characteristics

• Experience good
• Browsing
• Always new
• Reputation and brand identity
• Overload
• Economics of attention

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Information Overload

• More information produced in the last 30 years
  than the previous 5000!
• 1000 new books are published every day!
• Over 8,000 new web sites every day
• The amount of printed information doubles every
  eight years!
• Over one billion pages on the Web
• Only about 20 are indexed

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Relevance

• 1 billion web pages
• x 20K text / page
• 20 terabytes 10,000 gigabytes
• 20 million books
• x 1/200 (0.5) useful
• 100,000 books
• 1 Bookstore

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Adding Value to Information

• If information is free,
  how do we capture profits?
• Profitability proportional to added value
• AltaVista survey
• Would you be willing to pay 10/mo for the
  ability to search the Internet for web sites
  relevant to you?
• Sure but would you pay AltaVista 10?

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Adding Value to Information

• Accuracy Quality
• Timeliness
• Accessibility and Search
• Relevance
• Categorize, Personalize
• Adding Context to Information
• Analysis, Comparison
• Synthesis
• Calculate, Condense

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Adding Value to Information

• Accuracy News sites
• Timeliness Stock trading, quotes
• Accessibility Search engine listings
• Search Targeted catalogs
• Personalization Recommender systems
• Analysis Market research
• Synthesis Sales data

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Profiting from Technology

• Unstable Industry Model
• Traditional price competition
• Always incentive to undercut prices
• Network economies preclude this
• Stable Monopoly / Dominant Firm
• Achieved through Lock-In
• Achieved through Cost Leadership
• Stable Differentiated Market
• Achieved through added value

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Summary

• Pure information cannot be priced !!!
• Companies still asking Is it valuable?
• Information
• Profits from added value
• Technology
• Profits from means to analyze and exchange
• Directions
• How to price and manage information?