May/June 1999 This article was published in Educom Review, Volume 34 Number 3 1999. The copyright is copyright is shared by the author(s) and EDUCAUSE. See http://www.educause.edu/copyright.html for additional copyright information.

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Information Rules A Strategic Guide to the Network Economy by Carl Shapiro and Hal R. Varian Harvard University Press, 1999 Reviewed by William H. Sanders Information Rules is all about business, so let's cut to the bottom line: To prosper in the information economy you need to leverage the practically nil incremental costs of information such that you version and differentially price products to attract and lock in your customers while avoiding lock-in yourself. Then, if you engage in appropriate "coopetition" with respect to compatibility and standards -- thereby triggering strong externalities in a naturally "tippy" network market -- positive feedback will take over and the only thing to stop your start-up company from becoming a monopoly will be antitrust litigation. Got that? No? Maybe some context would help: "As the century closed, the world became smaller. The public rapidly gained access to new and dramatically faster communications technologies. Entrepreneurs, able to draw on unprecedented scale economies, built vast empires . . . 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 . . . A prophecy for the next decade? No . . . a description of what happened a hundred years ago when the twentieth-century industrial giants emerged." Shapiro and Varian continue: ". . . we kept hearing that we are living in a 'new economy.' The implication was that a new economics was needed. . . . But, wait, we said. . . . You don't need a brand new economics. You just need to see the really cool stuff, the material they didn't get to when you studied economics. So we wrote this book." Unfortunately, on those rare occasions when I was actually awake in economics, I couldn't tell the cool stuff from the hot air, so perhaps a little more context is necessary: "The information age is built on the economics of networks, not the economics of factories. . . . Happily enough, some guiding principles are available to help us understand network economics. Better yet, many of the economic forces so powerful today in the network economy are not entirely new. They have been faced by several industries in the past, and we can learn much from their experience." In this context, "Network" is used in a generic sense and not to mean, for example, the Internet. Network refers to the situation in which the value of a product or service grows exponentially in proportion to the number of consumers involved. For example, the authors point out that, obviously, one telephone is not worth much until it is connected to another . . . and another . . . and another. Eventually, competing phone companies are more valuable to their customers if they can interconnect with all other phone companies, hence "coopetition" and the emergence of standards. The standards in turn allowed compatibility among early phone companies and eventually enabled the Bell System to arise as the ultimate winner in that market. The same network effects can be seen in the evolution of the railroads, televisions, VCRs, automobiles, and . . . yes . . . personal computer operating systems. Basically, according to the authors, natural competition only works in such markets to the point where one participant creates an expectation among consumers that it has set THE standard and will become, in effect, THE winner. At that point, market share begins to "tip" in favor of the perceived winner and then quickly snowballs as customers rush to avoid being "locked-in" to a loser -- that is, left holding a bag of eight-track tapes, Beta VCRs and cp/m computers. In fact, winners in such network markets have trouble NOT becoming a monopoly, a realization sure to create in all of us new and deeper sympathy for the plight of poor Bill Gates. Information Rules is a codification: a well-analyzed, well-ordered and well-written "field guide to the trench warfare of competition in the information age," as one jacket note suggests. Experienced information technology managers will have no trouble identifying with the principles herein. Who among us can forget decades of lock-in to IBM? The high costs of switching? Who hasn't pondered the ease with which years of costly software development can be pirated in no time and at no cost -- a challenge to intellectual property rights likely to bring barristers belly-up to the bar in droves (as if we don't have enough of them already)? By contrast, who among us can see the new opportunities inherent in this "challenge"? Well, that's why most of us aren't running Netscape, which made its fortune giving away its flagship product rather than suing to protect it. (And they say you can't make it up on volume!) Information Rules associates such apparent contradictions with well-established economic principles and illustrates them with clear, compelling and insightful examples and case studies. The book's only shortcoming may be that it isn't physically small enough to fit in a CIO's jacket, available constantly as a handy reference guide to the rules of the game. Of course, understanding the rules does not equate to ability to coach a winning team. Rules or no, the prudent will recall the metaphors of Geoffrey Moore -- author of Inside the Tornado and Crossing the Chasm -- because an understanding of the laws of physics is little comfort to a player caught in the destruction path or plummeting into an abyss. Finally, "the cool stuff" likely won't save any of us from the fundamental devil in the details of free market life. As MY econ professor once said, "If your outgo exceeds your income, then your upkeep will be your downfall." (OK, so I was awake for maybe one class and pirated the quote. Sue me!) Educom Review Table of Contents