Information Economy

Information

Rules

Carl Shapiro

Hal R. Varian

Harvard Business School Press

Boston, Massachusetts

A STRATEGIC GUIDE TO

THE NETWORK ECONOMY

Copyright © 1999 Carl Shapiro and Hal R. Varian

All rights reserved

Printed in the United States of America

03 02 01 00 99 5 4 3 2 1

Library of Congress Cataloging-in-Publication Data

Shapiro, Carl.

Information rules : a strategic guide to the network economy /

Carl Shapiro and Hal R. Varian.

p. cm.

Includes bibliographical references and index.

ISBN 0-87584-863-X (alk. paper)

1. Information technology--Economic aspects. 2. Information

society. I. Varian, Hal R. II. Title.

HC79.I55S53 1998

658.4!038--dc21 98-24923

CIP

The paper used in this publication meets the requirements of the American National Standard for

Permanence of Paper for Printed Library Materials Z39.49-1984.

Contents

Preface ix

1 The Information Economy 1

2 Pricing Information 19

3 Versioning Information 53

4 Rights Management 83

5 Recognizing Lock-In 103

6 Managing Lock-In 135

7 Networks and Positive Feedback 173

8 Cooperation and Compatibility 227

9 Waging a Standards War 261

10 Information Policy 297

U vii

Further Reading 319

Notes 327

Bibliography 329

Index 335

About the Authors 351

viii U Contents

1 The

Information

Economy

As the century closed, the world became smaller. The public rapidly

gained access to new and dramatically faster communication technologies.

Entrepreneurs, able to draw on unprecedented scale economies,

built vast empires. Great fortunes were made. The government demanded

that these powerful new monopolists be held accountable under

antitrust law. Every day brought forth new technological advances to

which the old business models seemed no longer to apply. Yet, somehow,

the basic laws of economics asserted themselves. Those who mastered

these laws survived in the new environment. Those who did not,

failed.

A prophecy for the next decade? No. You have just read a description

of what happened a hundred years ago when the twentieth-century

industrial giants emerged. Using the infrastructure of the emerging

electricity and telephone networks, these industrialists transformed the

U.S. economy, just as today's Silicon Valley entrepreneurs are drawing

on computer and communications infrastructure to transform the

world's economy.

The thesis of this book is that durable economic principles can guide

you in today's frenetic business environment. Technology changes.

U 1

Economic laws do not. If you are struggling to comprehend what the

Internet means for you and your business, you can learn a great deal

from the advent of the telephone system a hundred years ago.

Sure, today's business world is different in a myriad of ways from

that of a century ago. But many of today's managers are so focused on

the trees of technological change that

they fail to see the forest: the underlying

economic forces that determine success

and failure. As academics, government

ofЄcials, and consultants we have

enjoyed a bird's-eye view of the forest for twenty years, tracking industries,

working for high-tech companies, and contributing to an evergrowing

literature on information and technology markets.

In the pages that follow, we systematically introduce and explain the

concepts and strategies you need to successfully navigate the network

economy. Information technology is rushing forward, seemingly chaotically,

and it is difЄcult to discern patterns to guide business decisions.

But there is order in the chaos: a few basic economic concepts go a long

way toward explaining how today's industries are evolving.

Netscape, the one-time darling of the stock market, offers a good

example of how economic principles