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Information Products

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How Are Information Products Different?

Costly to Develop, Cheap to Reproduce The Network Effect Switching Costs and Lock-In Positive Feedback and Tipping Modularity, Standards and Interfaces The Future: The Quest for the Dominant

Standard The Future: Alliances

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Costly to Develop, Cheap to Reproduce

Figure : Variation of Total Costs with Quantity Produced of an Information Product

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TotalCost

DevelopmentCosts

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Costly to Develop but Cheap to Reproduce

Computer software may cost $millions to develop but can be copied and distributed for $1-2 or less.

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High fixed costLow marginal cost

What is the effect on pricing and profitability?

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The Network Effect

The usefulness of information products is often dependent on the number of other users of that technology.

For example, e-mail is quite useless if there are only a few others that use e-mail.

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Metcalfe’s Law According to Metcalfe’s Law, if there are n

users of a technology, then the usefulness of that technology is proportional to the number of other users of that technology (n-1 in this case). The total value of the network of the technology is therefore proportional to the usefulness to all users, which is:

n(n-1) = n2 – n.

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Metcalfe’s Law

If n is large, as it will be for most information products, then n will be small relative to n2 and Metcalfe’s Law becomes:

The total value of the network of a technology is proportional to n2

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Network Effect

The more users of a technology there are, the more useful it becomes.

Examples: Fax E-mail MS Windows MS Office

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Switching effects and lock-In Once a technology is established there are

costs associated with changing. E.g. QWERTY keyboard Old software

Costs associated with retraining and converting data.

Effect is to lock customers into a technology.

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Positive Feedback

How does this work?

More users the greater will be the network effect and hence the greater push for new users and so on.

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Positive feedback and tipping

Effects of these characteristics is to create a “winner takes all” environment as users start flocking to the winning standard.

“Quest for the Dominant Standard”

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Positive feedback and tipping

Examples VHS and DVD Word and WordPerfect Chemical and Digital photography

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Help to Tip the Market

First to Market a New Technology. Have a Technology that is Substantially

Better Have High Credibility

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Having High Credibility

A dominant player in an allied technology. A very strong group of allied corporations

who support the technology. For instance, Sun and Java consortium

Can also use expectations management Beware of ‘vaporware’.

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Modularity, Standards and Interfaces

Because of the inherent complexity of information products, modularity will be vital to their success.

Need standards for interfaces. Dislike of multiple standards - natural

tendency to tip to single standard Examples, VHS and Betamax, x2 and K56Flex

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Mechanisms to Formulate

Standards Organizations Market-Driven Standards What are the main differences between these

two methods?

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The Future: The Quest for the Dominant Standard

“In the information economy, companies selling complementary components … are equally important. When you are selling one component of a system, you can’t compete if you’re not compatible with the rest of the system”

Important to tie into the dominant standard Cell phones as example

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Technology and Information Products

Technology changes will dramatically change markets and communications.

Distance will be less relevant Products will increasingly include

information portions -- product development must take this into account.

Quest for the dominant standard.