1 Information Products

2 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

3 Costly to Develop, Cheap to Reproduce Figure : Variation of Total Costs with Quantity Produced of an Information Product

4 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.

5 High fixed cost Low marginal cost What is the effect on pricing and profitability?

6 The Network Effect The usefulness of information products is often dependent on the number of other users of that technology. For example, is quite useless if there are only a few others that use .

7 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) = n 2 – n.

8 Metcalfe’s Law If n is large, as it will be for most information products, then n will be small relative to n 2 and Metcalfe’s Law becomes: The total value of the network of a technology is proportional to n 2

9 Network Effect The more users of a technology there are, the more useful it becomes. Examples: Fax MS Windows MS Office

10 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.

11 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.

12 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”

13 Positive feedback and tipping Examples VHS and DVD Word and WordPerfect Chemical and Digital photography

14 Help to Tip the Market First to Market a New Technology. Have a Technology that is Substantially Better Have High Credibility

15 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’.

16 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

17 Mechanisms to Formulate Standards Organizations Market-Driven Standards What are the main differences between these two methods?

18 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

19 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.