1. Rights Management McAfee Associates Strategy: Free Anti-Virus Software Downloading He asked users to send him whatever amount they thought it was worth. Result: Earn $5M (1 st year) Continue on offering free Anti-Virus Software and make revenues on upgrades and customer services

2. Rights Management Case 2:Barney the Dinosaurs The most watched show on TV by children under the age of six. The creator is a former teacher: Easy to make the shows and produce tapes Hard to get people buying them Strategy: giving away free video tapes to day care centers and preschools. The videos shown at the preschool would be very effective at advertising themselves, creating a demand for home viewing. Result: More than 35 million units have been sold

3. Rights Management Middle Ages: Professor lectured in the dark room to prevent students taking notes. Now: You can download it. Books: Stores let customers to read books for free. National Academy of Science publish free online books. Result: boosted sales of hard copies.

4. Circulating libraries and video rental stores We describe a number of interesting parallels between circulating libraries in England circa 1725-1850 and video rental stores in the U.S. circa 1980-1990.

5. Chicken and Egg problem  Books were a luxury item in the 1500s: "The purchasers of book were almost wholly confined to the class of nobles and those of the richer citizens and scholars by profession.” Consumers didn’t want to invest in reading ability unless they had access to cheap books. So the customer base was so limited. Book publisher charged a high price for a book, since they were selling to only limited customers.

6. Circulating Library After the birth of circulating library Booksellers were much worried. They thought the sale of books would be much diminished Result: Circulating Lib. provided the general public a cheaper way to access books. Customers developed reading skills. Thus the consumer base was enlarged. 80,000 readers in England in 1800. By 1854 there were 140,000 Publishing companies could recover the fixed cost with selling a book at lower price to a larger consumer base. The sales of books increased significantly.

7. Video Rental Stores VCR was initially used as a time shifting device for TV shows  Significant market demand for prerecorded videos.  In 1979, 4 blank tapes vs one pre-recorded  By 1992, the ratio was about 1:1. A common practice was to rent a video machine plus some tapes for a child's birthday party or just a weekend of viewing.

8. The birth of Video Rental Stores Movies studio tried to kill the growth of video rental. -- Studios wanted to ban rentals entirely, but the "first-sale doctrine" indicates that the first purchaser can do what he wants with a piece of intellectual property. Licensing Contracts: price discriminate between videos sold to end users and those sold to rental outlets. --- T wo segments: some videos targeted for the rental market at price of $80-$90. Videos targeted for consumer purchase at $19.95 and below Result: Video Rental Stores enlarged the market size for both VCRs and Videos. In 1992 consumers spent an estimated $9 billion on video rentals and $4 billion on video purchases.

9. Circulating Libraries and video Rental Stores Movies were only available at Cinema or TV Books were very expensiveBefore Studios think the no. of people going to cinema and sales of videos will decrease Bookseller think the sales of books will decrease Opposition A $9 billion video on demand market and A $4 billion Video Purchases market. Studios earn more money. Sales of books increased. Booksellers earn more money. Result 1725-1850 (U.K) Circulating Libraries Time Event 1980-1990 (US) Video Rental Stores

10. Copy protection with network effects Network Effects: The value of using specific software increases with the number of people using the software program. Two effects of software piracy: (1) Piracy will lead to a fall in direct sales because consumers can use illegal copies. (2) Piracy will increase the total value of the software program because more consumers use the program.

11. Copy protection with network effects Two types of consumers: Big Organizations or companies vs. Ordinary customers. It is much easier to detect using illegal copies on the government or big organization side than on ordinary customers. Big companies have an extra benefit from using legal copies in the comparison with ordinary customers. s measures the amount of (expected) penalty.  When s is sufficiently high, big companies will buy legal copies.

12. Copy protection with network effects  Utility by big companies  = H+N-p, if they buy legal copies = H +N-s, if they use illegal copies.  Utility by ordinary consumers = L +N-p, if they buy legal copies = L+N, if they get illegal copies N denotes the total number of users with the software product. N A and N B denotes the number of big firms and ordinary consumers, respectively.

13. Copy protection with network effects If software is not copy protected, ordinary consumers will use illegal copies. Suppose that the software company can choose either policy. No protection policy: Any consumer can get illegal copies. Protection policy: Installing devices make software piracy practically impossible.

14. Copy protection with network effects Copy Protection. The software company decides whether to sell its products to only big firms or both of big firms and ordinary consumers. If they sell it to only big firms, the number of user is A, and the optimal price is H+ N A. If they sell it to both ordinary persons and big firms, the price is L+N A +N B.

15. Copy protection with network effects No Protection Under no protection, suppose that the firm can sell its products to only big firms. Ordinary consumers can get illegal copies, and the number of consumers using the program becomes N A +N B. The optimal price for big firms becomes H+ N A +N B.

16. Copy protection with network effects The price under no copy protection can be higher!!!!! No protection can be a more profitable strategic choice. An empirical Work: Between 1988 and 1992, more than 80 percent of the software purchased by buyers was probably the result of the influence of the pirates. Acrobat: reader, writer

17. Market segmentation and copy protection. Network effects: a large installation base. To build a large installation base, you must lower a price. How can you build a large installation base even with charging a high price for a high type consumer?

18. Market segmentation and copy protection Low quality good, High quality good. Illegal copies play as low quality good. By allowing illegal copies, you build a large installation base and charge a high price for a high type consumers