Friday, June 4, 1999

The anti-guru information guru


Hal Varian, Berkeley professor and information economy guru, offers this tip: forget the gurus, concentrate on the economics.

"Some people argue that we do need a new economics to understand the new economy of bytes," he told the National Press Club in Canberra this week. "We do have a new economy - there's no doubt huge economic forces are at work.

"But you don't need a new economics to understand the new economy - you don't need to rely on the speculation of gurus. You can learn a lot from history and case studies and economic analysis," Professor Varian said.

It is a mantra reflected in his latest book, co-authored with Carl Shapiro, Information Rules: A Strategic Guide to the Network Economy. "Executives charged with rolling out cutting-edge software products or online versions of their magazines are tempted to abandon the classic lessons of economics, and rely instead on an ever-changing roster of trends, buzzwords, and analogies that promise to guide strategy in the information age."

Don't buy it, Prof Varian warned Australian executives. Not here.

"You're poised at the brink of playing quite a major role in this information economy," he said of Australia.

"Along with solid telecommunications infrastructure, you've got a highly educated workforce, you're well positioned geographically.

"So I think it's important to try and think seriously about what forces are at work in this new economy."

There are five new forces, in particular:

  • Differentiation of products and prices: "One of the great things about information technology is, you can do one-to-one marketing, you can do mass customisation," Prof Varian noted. "You can also can reach millions and millions at lower cost."

    How, though, do elite providers avoid "commoditisation"? How do you reach a new mass market without cannibalising your traditional market?

    The classic trick, he said, is "versioning". Compare it to books - hardbacks come out first (at higher prices) for the serious user, and then come the cheaper paperbacks, later, for a different sort of customer.

    With Internet information, the mass version will usually be degraded (images for instance) and it will cost more for providers to subtract value. But it's worth it, Professor Varian says, because it opens new markets while saving your top-end.

  • Rights management: The cost of copying and distribution is suddenly vastly lower, but not just for providers, for pirates too.

    But again, Professor Varian cited books as a historical comparison: publishers fought the first libraries, but those are exactly what spread literacy and expanded the market for books. It was the same with videos: Hollywood fought them initially but they have become a major revenue source for producers.

    Don't just think about protecting your intellectual property rights, Professor Varian said. Consider the strategic ways to exploit them best.

    How is it happening? You no longer see the copyright tag on the bottom of Web pages, now it's "click here to email this to a friend".

  • Switching costs/lock-in: When users make a technology choice, they are stuck with it for a long time. The seller wants to encourage this, the buyer wants to avoid it, or be compensated.

    Enter loyalty programs and other innovations to make your website "sticky".

  • Networks and positive feedback: Considering that the value of any network increases as the number of users increases, natural advantage accrues to the leader,to those first to market. The PicturePhone failed because so few peopletried it. Faxes, ATMs, VCRs and the Web are the network success stories. The flipside is ...

  • Standardisation: Because networks increase in value the larger they get, there is a huge advantage in interconnecting and standardisation.

    So Professor Varian's advice? Prepare for war but make alliances. Then compete in the market, not for the market.

    He also sees a key role for government in standardising - not the technology, but the infrastructure that will enable e-commerce to expand. For example, standardising digital signatures, online contracts, security.