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,
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
The thesis of this book is that durable economic principles can guide
you in today's frenetic business environment. Technology changes.
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
officials, 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 difficult 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 can serve as an early warning
system. We're not sure exactly how software for viewing Web pages will
evolve, but we do know that Netscape is fundamentally vulnerable because
its chief competitor, Microsoft, controls the operating environment
of which a Web browser is but one component. In our framework,
Netscape is facing a classic problem of interconnection: Netscape's
browser needs to work in conjunction with Microsoft's operating system.
Local telephone companies battling the Bell System around 1900 faced
a similar dependency upon their chief rival when they tried to interconnect
with Bell to offer long-distance service. Many did not survive.
Interconnection battles have arisen regularly over the past century in the
telephone, the railroad, the airline, and the computer industries, among
others. We wonder how many investors who bid Netscape's stock price
up to breathtaking heights appreciated its fundamental vulnerability.
We examine numerous business strategies on both the information
(software) and the infrastructure (hardware) sides of the industry.
Software and hardware are inexorably linked. Indeed, they are a leading
example of complements, one of the key concepts explored in our book.
Neither software nor hardware is of much value without the other; they
are only valuable because they work together as a system.
We use the term information very broadly. Essentially, anything that can
be digitized--encoded as a stream of bits--is information. For our
purposes, baseball scores, books, databases, magazines, movies, music,
stock quotes, and Web pages are all information goods. We focus on the
value of information to different consumers. Some information has
entertainment value, and some has business value, but regardless of the
particular source of value, people are willing to pay for information. As
we see, many strategies for purveyors of information are based on the fact
that consumers differ greatly in how they value particular information
Of course, information is costly to create and assemble. The cost
structure of an information supplier is rather unusual. Since the very
nature of competition in information markets is driven by this unusual
cost structure, we begin our overview of information strategy there.
The Cost of Producing Information
Information is costly to produce but cheap to reproduce. Books
that cost hundreds of thousands of dollars to produce can be printed and bound
for a dollar or two, and 100-million dollar movies can be copied on
videotape for a few cents.
Economists say that production of an information good involves high
fixed costs but low marginal costs. The cost of producing the first
copy of an information good may be substantial, but the cost of producing (or
reproducing) additional copies is negligible. This sort of cost structure
has many important implications. For example, cost-based pricing just
doesn't work: a 10 or 20 percent markup on unit cost makes no sense
when unit cost is zero. You must price your information goods according
to consumer value, not according to your production cost.
Since people have widely different values for a particular piece of
information, value-based pricing leads naturally to differential pricing.
We explore strategies for differential pricing in detail in Chapters 2
and 3. Chapter 2 is concerned with ways to sell an information good to
identifiable markets; Chapter 3 examines ways to "version" information
goods to make them appeal to different market segments which will pay
different prices for the different versions.
For example, one way to differentiate versions of the same information
good is to use delay. Publishers first sell a hardback book and then
issue a paperback several months later.
The impatient consumers buy the high-priced
hardback; the patient ones buy
the low-priced paperback. Providers of
information on the Internet can exploit
the same strategy: investors now pay
$8.95 a month for a Web site that offers portfolio analysis using 20-minute
delayed stock market quotes but $50 a month for a service that
uses real-time stock market quotes.
We explore different ways to version information in Chapter 3 and
show you the principles behind creating profitable product lines that
target different market segments. Each version sells for a different
price, allowing you to extract the maximum value of your product from
Managing Intellectual Property
If the creators of an information good can reproduce it cheaply, others
can copy it cheaply. It has long been recognized that some form of
"privatization" of information helps to ensure its production. The U.S.
Constitution explicitly grants Congress the duty "to promote the progress
of science and useful arts, by securing, for limited times, to authors
and inventors, the exclusive right to their respective writings and
But the legal grant of exclusive rights to intellectual property via
patents, copyright, and trademarks does not confer complete power to
control information. There is still the issue of enforcement, a problem
that has become even more important with the rise of digital technology
and the Internet. Digital information can be perfectly copied and
instantaneously transmitted around the world, leading many content
producers to view the Internet as one giant, out-of-control copying
machine. If copies crowd out legitimate sales, the producers of
information may not be able to recover their production costs.
Despite this danger, we think that content owners tend to be too
conservative with respect to the management of their intellectual property.
The history of the video industry is a good example. Hollywood was
petrified by the advent of videotape recorders. The TV industry filed
suits to prevent home copying of TV programs, and Disney attempted to
distinguish video sales and rentals through licensing arrangements. All
of these attempts failed. Ironically, Hollywood now makes more from
video than from theater presentations for most productions. The video
sales and rental market, once so feared, has become a giant revenue
source for Hollywood.
When managing intellectual property, your goal should be to choose
the terms and conditions that maximize the value of your intellectual
property, not the terms and conditions that maximize the protection. In
Chapter 4 we'll review the surprising history of intellectual property and
describe the lessons it has for rights management on the Internet.
Information as an "Experience Good"
Economists say that a good is an experience good if consumers must
experience it to value it. Virtually any new product is an experience
good, and marketers have developed strategies such as free samples,
promotional pricing, and testimonials to help consumers learn about
But information is an experience good every time it's consumed.
How do you know whether today's Wall Street Journal is worth 75 cents
until you've read it? Answer: you don't.
Information businesses--like those in the print, music, and movie
industries--have devised various strategies to get wary consumers to
overcome their reluctance to purchase information before they know
what they are getting. First, there are various forms of browsing: you can
look at the headlines at the newsstand, hear pop tunes on the radio, and
watch previews at the movies. But browsing is only part of the story.
Most media producers overcome the experience good problem through
branding and reputation. The main reason that we read the
Wall Street Journal today is that we've found it useful in the past.
The brand name of the Wall Street Journal is one of its chief assets,
and the Journal invests heavily in building a reputation for accuracy,
timeliness, and relevance. This investment takes numerous forms,
from the company's Newspapers in Education program (discussed in
Chapter 2), to the distinctive appearance of the paper itself, and the
corporate logo. The look and feel of the Journal's on-line edition
testifies to the great lengths designers went to carry over the look and
feel of the print version, thereby extending the same authority, brand
identity, and customer loyalty from the print product to the on-line
product. The Wall Street Journal "brand" conveys a message to potential
readers about the quality of the content, thereby overcoming the
experience good problem endemic to information goods.
The computer scientists who designed the protocols for the Internet
and the World Wide Web were surprised by the huge traffic in images.
Today more than 60 percent of Internet traffic is to Web sites, and of
the Web traffic, almost three-fourths is images. Some of these images
are Playboy centerfolds, of course--another brand that successfully
made the move to cyberspace--but a lot of them are corporate logos.
Image is everything in the information biz, because it's the image that
carries the brand name and the reputation.
The tension between giving away your information--to let people
know what you have to offer--and charging them for it to recover your
costs is a fundamental problem in the information economy. We talk
about strategies for making this choice in our discussion of rights
management in Chapter 4.
The Economics of Attention
Now that information is available so quickly, so ubiquitously, and so
inexpensively, it is not surprising that everyone is complaining of
information overload. Nobel prize-winning
economist Herbert Simon spoke for us
all when he said that "a wealth of information
creates a poverty of attention."
Nowadays the problem is not information
access but information overload.
The real value produced by an information provider comes in locating,
filtering, and communicating what is useful to the consumer. It is no
accident that the most popular Web sites belong to the search engines,
those devices that allow people to find information they value and to
avoid the rest.
In real estate, it is said that there are only three critical factors:
location, location, and location. Any idiot can establish a Web
presence--and lots of them have. The big problem is letting people know
about it. Amazon.com, the on-line bookstore, recently entered into a
long-term, exclusive agreement with America Online (AOL) to gain
access to AOL's 8.5 million customers. The cost of this deal is on the
order of $19 million, which can be understood as the cost of purchasing
the attention of AOL subscribers. Wal-Mart recently launched the
Wal-Mart Television Network, which broadcasts commercials on the television
sets lined up for sale at the company's 1,950 stores nationwide. Like
AOL, Wal-Mart realized that it could sell the attention of its customers
to advertisers. As health clubs, doctors' offices, and other locations
attempt to grab our valuable attention, information overload will worsen.
Selling viewers' attention has always been an attractive way to support
information provision. Commercials support broadcast TV, and
advertisement is often the primary revenue source for magazines and
newspapers. Advertising works because it exploits statistical patterns.
People who read Car and Driver are likely to be interested in ads for
BMWs, and people who read the Los Angeles Times are likely to be
interested in California real estate.
The Internet, a hybrid between a broadcast medium and a point-to-point
medium, offers exciting new potentials for matching up customers
and suppliers. The Net allows information vendors to move from the
conventional broadcast form of advertising to one-to-one marketing.
Nielsen collects information on the viewing habits of a few thousand
consumers, which is then used to design TV shows for the next season.
In contrast, Web servers can observe the behavior of millions of customers
and immediately produce customized content, bundled with customized
The information amassed by these powerful Web servers is not
limited to their users' current behavior; they can also access vast
databases of information about customer history and demographics. Hotmail,
for example, offers free e-mail service to customers who complete
a questionnaire on their demographics and interests. This personal
information allows Hotmail to customize ads that can be displayed alongside
the user's e-mail messages.
This new, one-to-one marketing benefits both parties in the
transaction: the advertiser reaches exactly the market it wants to target,
and consumers need give their attention only to ads that are likely to be
of interest. Furthermore, by gathering better information about what
particular customers want, the information provider can design products
that are more highly customized and hence more valuable. Firms that
master this sort of marketing will thrive, while those that continue to
conduct unfocused and excessively broad advertising campaigns will be
at a competitive disadvantage. We'll examine strategies for customizing
information in detail in Chapters 2 and 3.
We have focused so far on the information side of "information
technology." Now let's turn to the technology side--that is, the
infrastructure that makes it possible to store, search, retrieve, copy,
filter, manipulate, view, transmit, and receive information.
Infrastructure is to information as a bottle is to wine: the technology
is the packaging that allows the information to be delivered to end
consumers. A single copy of a film would be of little value without a
distribution technology. Likewise, computer software is valuable only
because computer hardware and network technology are now so powerful
In short, today's breathless pace of change and the current fascination
with the information economy are driven by advances in
information technology and infrastructure, not
by any fundamental shift in the nature
or even the magnitude of the information
itself. The fact is, the Web isn't all
that impressive as an information resource.
The static, publicly accessible
HTML text on the Web is roughly
equivalent in size to 1.5 million books.
The UC Berkeley Library has 8 million volumes, and the average quality
of the Berkeley library content is much, much higher! If 10 percent of
the material on the Web is "useful," there are about 150,000 useful
book-equivalents on it, which is about the size of a Borders superstore.
But the actual figure for "useful" is probably more like 1 percent, which
is 15,000 books, or half the size of an average mall bookstore.
The value of the Web lies in its capacity to provide immediate access
to information. Using the Web, information suppliers can distribute
up-to-date information dynamically from databases and other repositories.
Imagine what would happen if the wine industry came up with a
bottle that gave its customers easier, quicker, and cheaper access to its
wine. Sure, the bottle is only infrastructure, but infrastructure that can
reduce cost and increase value is tremendously important. Improved
information infrastructure has vastly increased our ability to store,
retrieve, sort, filter, and distribute information, thereby greatly
enhancing the value of the underlying information itself.
What's new is our ability to manipulate information, not the total
amount of information available. Mom-and-pop hardware stores of yesteryear
regularly checked their inventories. The inventory information
now captured by Home Depot, while surely more accurate and up-to-date,
is not vastly greater than that of a generation ago. What is truly new
is Home Depot's ability to re-order items from suppliers using electronic
data interchange, to conduct and analyze cross-store demand
studies based on pricing and promotional variations, and to rapidly
discount slow-moving items, all with minimal human intervention.
Indeed, in every industry we see dramatic changes in technology
that allow people to do more with the same information. Sears Roebuck
popularized catalog sales more than a century ago. Lands' End does not
have that much more raw information than Sears did. Like Sears, it has
a catalog of products and a list of customers. What is new is that Lands'
End can easily retrieve data on customers, including data on previous
purchases, that allows it to engage in targeted marketing. Furthermore,
Lands' End can use the telecommunications and banking infrastructure
to conduct transactions in real time over the telephone and on-line.
Content providers cannot operate without infrastructure suppliers,
and vice versa. The information economy is about both information and
the associated technology.
Systems show up everywhere in information technology: operating systems
and applications software, CPUs and memory chips, disk drives
and controller cards, video cassette recorders and the videotapes
themselves. Usually, one firm cannot hope to offer all the pieces that
make up an information system. Instead, different components are made by
different manufacturers using very different production and business models.
Traditional rules of competitive strategy focus on competitors, suppliers,
and customers. In the information economy, companies selling
complementary components, or complementors, 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. Many of our strategic
principles are specifically designed to help companies selling one
component of an information system.
The dependence of information technology on systems means that
firms must focus not only on their competitors but also on their
collaborators. Forming alliances, cultivating partners, and ensuring
compatibility (or lack of compatibility!) are critical business decisions.
Firms have long been faced with make/buy decisions, but the need for
collaboration, and the multitude of cooperative
arrangements, has never been greater
than in the area of infotech. We describe
how firms must function in such
a systems-rich and standards-rich environment
in Chapter 8.
The history of the Microsoft-Intel
partnership is a classic example. Microsoft focused almost exclusively on
software, while Intel focused almost exclusively on hardware. They each
made numerous strategic alliances and acquisitions that built on their
strengths. The key for each company has been to commoditize complementary
products without eroding the value of its own core strengths.
For example, Intel has entered new product spaces such as chipsets and
motherboards to improve the performance of these components and
thereby stimulate demand for its core product: microprocessors. Intel
has helped to create a highly competitive industry in component parts
such as video cards, sound cards, and hard drives as well as in the
assembly and distribution of personal computers.
Microsoft has its following of independent software vendors (ISVs),
and both companies have extensive licensing programs with original
equipment manufacturers (OEMs). And they each have each other, an
extraordinarily productive, if necessarily tense, marriage. It's in the
interest of each company to create multiple sources for its partner's piece
of the system but to prevent the emergence of a strong rival for its own
piece. This tension arises over and over again in the information
technology sector; Microsoft and Intel are merely the most visible, and
profitable, example of the complex dynamics that arise in assembling
Apple Computer pursued a very different strategy by producing a
highly integrated product consisting of both a hardware platform and
the software that ran on it. Their software and hardware was much more
tightly integrated than the Microsoft/Intel offerings, so it performed
better. (Microsoft recognized this early on and tried to license the Apple
technology rather than investing in developing its own windowing system.)
The downside was that the relative lack of competition (and, later,
scale) made Apple products more expensive and, eventually, less powerful.
In the long run, the "Wintel" strategy of strategic alliance was the
Lock-In and Switching Costs
Remember long-playing phonograph records (LPs)? In our lexicon,
these were "durable complementary assets" specific to a turntable but
incompatible with the alternative technology of CDs. In plain English:
they were durable and valuable, they worked with a turntable to play
music, but they would not work in a CD player. As a result, Sony and
Philips had to deal with considerable consumer switching costs when
introducing their CD technology. Fortunately for Sony and Philips, CDs
offered significant improvement in convenience, durability, and sound
quality over LPs, so consumers were willing to replace their music
libraries. Quadraphonic sound, stereo AM radio, PicturePhones, and
digital audiotape did not fare as well. We'll see how the new digital video
(or versatile) disks (DVDs) will do in the next few years.
As the impending problem of resetting computers to recognize the
year 2000 illustrates, users of information technologies are notoriously
subject to switching costs and lock-in: once you have chosen a technology,
or a format for keeping information, switching can be very expensive.
Most of us have experienced the costs of switching from one brand
of computer software to another: data files are unlikely to transfer
perfectly, incompatibilities with other tools often arise, and, most
important, retraining is required.
Switching costs are significant, and corporate information officers
(CIOs) think long and hard about changing systems. Lock-in to historical,
legacy systems is commonplace in the network economy. Such
lock-in is not absolute--new technologies do displace old ones--but
switching costs can dramatically alter firms' strategies and options. In
fact, the magnitude of switching costs is itself a strategic choice made by
the producer of the system.
Lock-in arises whenever users invest in multiple complementary
and durable assets specific to a particular information technology system.
You purchased a library of LPs as well as a turntable. So long as
these assets were valuable--the albums were not too scratched and the
turntable still worked--you had less reason to buy a CD player and start
buying expensive CDs. More generally, in replacing an old system with a
new, incompatible one, you may find it necessary to swap out or duplicate
all the components of your system. These components typically
include a range of assets: data files (LP records, COBOL programs,
word processing documents, etc.), various pieces of durable hardware,
and training, or human capital. Switching from Apple to Intel equipment
involves not only new hardware but new software. And not only
that, the "wetware"--the knowledge that you and your employees have
built up that enables you to use your hardware and software--has to be
updated. The switching costs for changing computer systems can be
astronomical. Today's state-of-the-art choice is tomorrow's legacy system.
This type of situation is the norm in the information economy. A
cellular telephone provider that has invested in Qualcomm's technology
for compressing and encoding the calls it transmits and receives is
locked into that technology, even if Qualcomm raises the price for its
gear. A large enterprise that has selected Cisco's or 3com's technology
and architecture for its networking needs will find it very costly to
change to an incompatible network technology. Whether the enterprise
is locked in to proprietary Cisco or 3Com products or to an "open"
standard with multiple suppliers can make a big difference.
Lock-in can occur on an individual level, a company level, or even a
societal level. Many consumers were locked into LP libraries, at least in
the sense that they were less inclined to purchase CD players because
they could not play LPs. Many companies were locked into Lotus 1-2,-3
spreadsheets because their employees were highly trained in using the
Lotus command structure; indeed, Lotus sued Borland for copying the
1-2-3 command structure in its spreadsheet product, Quattro Pro, a
dispute that went all the way to the Supreme Court. Today, at a societal
level, most of us are locked into Microsoft's Windows desktop operating
We explore lock-in and switching costs in Chapters 5 and 6. We'll
examine the different kinds of lock-in, strategies to incorporate
proprietary features into your product, and ways to coordinate your
strategy with that of your partners. We'll explain how to exploit lock-in
when you are offering an information system and how to avoid it, or at
least anticipate it, when you are the buyer.
Positive Feedback, Network Externalities, and Standards
For many information technologies, consumers benefit from using a
popular format or system. When the value of a product to one user
depends on how many other users there are, economists say that this
product exhibits network externalities, or network effects.
Communications technologies are a prime example: telephones, e-mail, Internet
access, fax machines, and modems all exhibit network externalities.
Technologies subject to strong network effects tend to exhibit long
lead times followed by explosive growth. The pattern results from positive
feedback: as the installed base of users grows, more and more users
find adoption worthwhile. Eventually, the product achieves critical mass
and takes over the market. Fax machines illustrate nicely the common
pattern. The Scottish inventor Alexander Bain patented the basic technology
for fax machines in 1843, and AT&T introduced a wire photo
service in the United States in 1925, but faxes remained a niche product
until the mid-1980s. During a five-year period, the demand for and
supply of fax machines exploded. Before 1982, almost no one had a fax
machine; after 1987, the majority of businesses had one or more.
The Internet exhibited the same pattern. The first e-mail message
was sent in 1969, but up until the mid-1980s e-mail was used only by
techies. Internet technology was developed
in the early 1970s but didn't really
take off until the late 1980s. But when
Internet traffic did finally start growing,
it doubled every year from 1989 to
1995. After the Internet was privatized in April 1995, it started growing
But network externalities are not confined to communications networks.
They are also powerful in "virtual" networks, such as the network
of users of Macintosh computers: each Mac user benefits from a larger
network, since this facilitates the exchange of files and tips and
encourages software houses to devote more resources to developing software
for the Mac. Because these virtual networks of compatible users generate
network externalities, popular hardware and software systems enjoy
a significant competitive advantage over less popular systems. As a result,
growth is a strategic imperative, not just to achieve the usual production
side economies of scale but to achieve the demand side economies
of scale generated by network effects.
We explore the implications of network externalities for business
strategy in Chapter 7. The key challenge is to obtain critical mass--after
that, the going gets easier. Once you
have a large enough customer base, the
market will build itself. However, having
a superior technology is not enough
to win. You may need to employ marketing
tools such as penetration pricing
to ignite the positive feedback.
The company that best understands information systems and complementary
products will be best positioned to move rapidly and aggressively.
Netscape grabbed the Web browser market early on by giving
away its product. It lost money on every sale but made up for it in
volume. Netscape was able to give away its browser and sell it, too, by
bundling such critical components as customer support with the retail
version and by selling complementary goods such as server software for
In competing to become the standard, or at least to achieve critical
mass, consumer expectations are critical. In a very real sense, the
product that is expected to become the standard will become the
standard. Self-fulfilling expectations are one manifestation of positive-feedback
economics and bandwagon effects. As a result, companies participating
in markets with strong network effects seek to convince customers that
their products will ultimately become the standard, while rival,
incompatible products will soon be orphaned.
Competitive "pre-announcements" of a product's appearance on the
market are a good example of "expectations management." In the mid-1980s,
when Borland released Quattro Pro, a new spreadsheet, Microsoft
was quick to counter with a press release describing how much
better the next release of its comparable program, Excel, would be. It
didn't take long for the press to come up with the term vaporware to
describe this sort of "product." Microsoft played the same game IBM
had played in an earlier generation, when IBM was accused of using
pre- announcements to stifle competition. When network effects are
strong, product announcements can be as important as the actual
introduction of products.
Product pre-announcements can be a two-edged sword, however.
The announcement of a new, improved version of your product may cut
into your competitors' sales, but it can also cut into your own sales.
When Intel developed the MMX technology for accelerating graphics in
the fall of 1996, it was careful not to advertise it until after the
Christmas season. Likewise, sales of large-screen TV sets in 1997 declined
as consumers waited for digital television sets to arrive in 1998.
Because of the importance of critical mass, because customer
expectations are so important in the area of information infrastructure,
and because technology is evolving so rapidly, the timing of strategic
moves is even more important in the information industry than in others.
Moving too early means making compromises in technology and going out
on a limb without sufficient allies. Japan's television network NHK tried
to go it alone in the early 1990s with its own high-definition television
system, with disastrous consequences: not only has NHK's analog
MUSE system met with consumer resistance in Japan, but it has left the
Japanese behind the United States in the development and deployment
of digital television. Yet moving too late can mean missing the market
entirely, especially if customers become locked into rival technologies.
We'll explore timing in Chapter 7 along with our discussion of critical
mass, network externalities, standards, and compatibility.
Whether you are trying to establish a new information technology or
to extend the lifetime of technology that is already popular, you will face
critical compatibility decisions. For example, a key source of leverage for
Sony and Philips in their negotiations with others in the DVD alliance
was their control over the original CD technology. Even if Sony and
Philips did not develop or control the best technology for DVD, they
were in the driver's seat to the extent that their patents prevented others
from offering backward-compatible DVD machines. Yet even companies
with de facto standards do not necessarily opt for backward compatibility:
Nintendo 64 machines cannot play Nintendo game cartridges
from the earlier generations of Nintendo systems. We explore a range of
compatibility issues, including intergenerational compatibility, in Chapter
Another method for achieving critical mass is to assemble a powerful
group of strategic partners. For this purpose, partners can be customers,
complementors, or even competitors. Having some large, visible customers
aboard can get the bandwagon rolling by directly building up
critical mass. In November 1997 Sun took out full-page ads in the New
York Times and other major newspapers reciting the long list of the
members of the "Java coalition" to convey the impression that Java was
the "next big thing."
Having suppliers of complements aboard makes the overall system
more attractive. And having competitors aboard can give today's and
tomorrow's customers the assurance that they will not be exploited once
they are locked in. We see this strategy being used with DVD today;
Sony and Philips, the original promoters of CD technology, have teamed
up with content providers (that is, customers) such as Time Warner and
competitors such as Toshiba to promote the new DVD technology. Both
player manufacturers and disk-pressing firms are on board, too. The
same pattern occurs in the emergence of digital television in the United
States, where set manufacturers, who have the most to gain from rapid
adoption of digital TV, are leading the way, with the Federal
Communications Commission (FCC) dragging broadcasters along by offering
them free spectrum for digital broadcasts.
Very often, support for a new technology can be assembled in the
context of a formal standard-setting effort. For example, both Motorola
and Qualcomm have sought to gain competitive advantages, not to mention
royalty income, by having their patented technologies incorporated
into formal standards for modems and cellular telephones.
If you own valuable intellectual property but need to gain critical
mass, you must decide whether to promote your technology unilaterally,
in the hope that it will become a de facto standard that you can tightly
control, or to make various "openness" commitments to help achieve a
critical mass. Adobe followed an openness strategy with its page
description language, PostScript, explicitly allowing other software
houses to implement PostScript interpreters, because they realized that
such widespread use helped establish a standard. Nowadays, participation in
most formal standard-setting bodies in the United States requires a
commitment to license any essential or blocking patents on "fair,
reasonable and non-discriminatory terms." We explore strategies for
establishing technology standards in Chapter 8.
A go-it-alone strategy typically involves competition to become] the
standard. By contrast, participation in a formal standard-setting process,
or assembling allies to promote a particular version of technology,
typically involves competition within a standard. Don't plan to play the
higher-stakes, winner-take-all battle to become the standard unless you
can be aggressive in timing, in pricing,
and in exploiting relationships with
complementary products. Rivalry to
achieve cost leadership by scale economies
and experience, a tried and true
strategy in various manufacturing contexts,
is tame in comparison. Just ask
Sony about losing out with Beta in the standards war against VHS, or the
participants in the recent 56k modem standards battle. We explore
effective strategies for standards battles in Chapter 9.
The ongoing battle between Microsoft and the Justice Department illustrates
the importance of antitrust policy in the information sector.
Whether fending off legal attacks or using the antitrust laws to challenge
the conduct of competitors or suppliers, every manager in the network
economy can profit from understanding the rules of the game. We
explore government information policy in Chapter 10, including antitrust
policy and regulation in the telecommunications sector.
Microsoft's wishes to the contrary, high-tech firms are not immune
to the antitrust laws. Competitive strategy in the information economy
collides with antitrust law in three primary areas: mergers and
acquisitions, cooperative standard setting, and monopolization. We explore
the current legal rules in each of these areas in Chapter 10.
Overall, we do not believe that antitrust law blocks most companies
from pursuing their chosen strategies, even when they need to
cooperate with other industry members to establish compatibility standards.
Now and then, companies are prevented from acquiring direct
rivals, as when Microsoft tried to acquire Intuit, but this is hardly
unique to the information sector.
The Sherman Anti-Trust Act was passed in 1890 to control monopolies.
Technology has changed radically since then. As we have stressed,
the underlying economic principles have not. As a new century arrives,
the Sherman Act is flexible enough to prevent the heavy hand of monopoly
from stifling innovation, while keeping markets competitive enough
to stay the even heavier hand of government regulation from intruding
in our dynamic hardware and software markets.
HOW WE DIFFER
We've explained what this book is about. We also should say what our
book is not about and what distinguishes our approach from others.
First, this book is not about trends. Lots of books about the impact
of technology are attempts to forecast the future. You've heard that work
will become more decentralized, more organic, and more flexible.
You've heard about flat organizations and unlimited bandwidth. But the
methodology for forecasting these trends is unclear; typically, it is just
extrapolation from recent developments. Our forecasting, such as it is, is
based on durable economic principles that have been proven to work in
Second, this book is not about vocabulary. We're not going to invent
any new buzzwords (although we do hope to resurrect a few old ones).
Our goal is to introduce new terms only when they actually describe a
useful concept; there will be no vocabulary for the sake of vocabulary.
We won't talk about "cyberspace," the "cybereconomy," or cyber-anything.
Third, this book is not about analogies. We won't tell you that
devising business strategy is like restoring an ecosystem, fighting a war,
or making love. Business strategy is business strategy and though analogies
can sometimes be helpful, they can also be misleading. Our view is
that analogies can be an effective way to communicate strategies, but
they are a very dangerous way to analyze strategies.
We seek models, not trends; concepts, not vocabulary; and analysis,
not analogies. We firmly believe the models, the concepts, and the
analysis will provide you with a deeper understanding of the fundamental
forces at work in today's high-tech industries and enable you to craft
winning strategies for tomorrow's network economy.