THE BUSINESS OF INFORMATION AND INFORMATION IN BUSINESS

1
THE BUSINESS OF INFORMATION AND INFORMATION IN
BUSINESS

• Part 1 Commodities, Pricing, and Niches

2
VOTE
3
Agenda

• Information as a commodity
• Valuing and pricing information
• Supply side concerns
• Scarcity
• Demand side concerns
• Elasticity

4
Todays Key Concepts

• Commodity
• Marginal costs
• Supply
• Demand
• Scarcity
• Elasticity
• Pricing strategies

5
Two types of Information

• Two types of information product, or commodity
• Information that is content, such as text,
  music, movies, etc.
• Information that does usually software,
  sometimes necessarily tied to knowledge, skill,
  and services for deployment
• Both follow the same general economic
  characteristics, and both require specific
  technological infrastructures

6
How information differs from other commodities

• Supply side minimal marginal costs
• Cost of production for any copy after 1 is next
  to zero
• Severe issues of covering costs and with pricing
  strategies
• Once deployed, modifications are often
  inexpensive, enabling adaptation to small markets
  or niches
• Demand side non-rival demand satisfaction
• Use by one party does not preclude use by another
• Often, after adoption, users are locked-in, as
  the cost of change often requires new
  infrastructure
• Sharing an info commodity costs the donor next to
  nothing

7
Example Hollywood Movie
From Forbes www.forbes.com/2005/12/08/cx_lr_bigbu
dgetslide_2.html
8
Example Articles
9
Supply-Side Dilemmas The Perils of Falling
Marginal Costs

• Marginal costs versus average costs high
  front-end costs lumpiness
• Mass-production parallels
• Should early-adopters get penalized?
• Public goods and the free-rider problem paying
  for information infrastructures
• When are taxpayer subsidies or cross-subsidies
  desirable? (recall out discussion of wired phones
  electricity)
• Getting beyond moralisms maybe the rich should
  pay
• Problems in declining-revenue products
• Saturated markets sell once then?
• Featuritis forced upgrades

10
Where does value come from?

• Content creators
• Distributors other intermediaries
• choke-point occupants
• Consumers (mind-share is crucial)
• See Carr reading

11
Scarcity
12
How information commodity providers make money

• Advertising supported
• TV
• Google search
• Value-added, commission models
• Orbitz
• Subscription and pay-per-use
• ProQuest
• HBO, Showtime

13
More about pricing strategies

• Ad-supported
• Problems in accurate counting (NBC vs. Hulu)
• Cross-marketing is easy (referral payments)
• Subscription models
• Problems in leakage and piracy
• Difficult to determine correct price

14
Scarcity of attention

• Attention is a scarce resource when information
  is abundant
• Information goods proliferate as cost of
  production goes down
• Pool of attention remains relatively constant

15
Non-rival demand

• Cant use it up
• My use doesnt take anything away from you
• Not like space

16
Demand Elasticity

• Pricing according to consumer need, not demand or
  costs
• Pharmaceuticals (buyers need)
• Textbooks (buyers dont originate demand)
• Easily done in natural-monopoly, infrastructural
  settings
• Broadband service
• Windows

17
Example Bar bands vs. Katy Perry
18
Example AADL vs. Borders
19
Infrastructural goods

• Goods that others build on
• Windows
• Facebook?
• iPhone?
• Lower demand elasticity

20
Revisiting Demand
21
Examples Niche Market Goods

• Music
• Walmart vs. iTunes
• Movie rentals
• Blockbuster vs. Netflix

22
Example Netflix vs. Blockbuster
23
Example Netflix vs. Blockbuster
24
THE BUSINESS OF INFORMATION AND INFORMATION IN
BUSINESS

• Part 2 Information and the New Economy

25
Agenda

• Example to illustrate concepts from Tuesday
• Review The Long Tail or Niche Markets
• The New Economy
• Informating the Economy

26
Keys for Today

• How information influences niche markets
• Examples of informated businesses
• Disintermediation
• Changes in degree
• Changes in kind

27
Keys from Tuesday

• Commodity
• Marginal costs
• Supply
• Demand
• Scarcity
• Elasticity
• Pricing strategies

28
Pricing Information Goods

• Reproduction
• Distribution

29
Example Medellin

• Vince, Billy, Eric, and Nicky made a movie called
  Medellin
• Production cost 35 million
• Medellin got into the Cannes Film Festival
• The crew goes to Cannes to sell the movie
• Prince Yair offers them 35 millon for the movie

30
Example Medellin
31
Example Medellin

• What are they struggling with in that
  conversation?
• What concerns do they have about their options
  and Yairs offer?
• What do the guys want to get out of the sale of
  their movie?

32
Free rider problem
33
Example Wikipedia
34
Revisiting Demand
35
Examples Niche Market Goods

• Music
• Walmart vs. iTunes
• Movie rentals
• Blockbuster vs. Netflix

36
What enables niche good providers to succeed?

• Not playing the zero-sum shelf space game
• Recommender systems
• Easier to identify and capture consumer
  preferences at a finer grain
• See Frost, Anderson readings

37
Example movielens
38
Information and the New Economy

• Information speed, depth, availability, and
  quality
• More detail often yields new knowledge and
  capabilities compare accounting on paper to
  Excel
• Productivity calculations remain ambiguous (think
  of total factor productivity and
  return-on-investment models), keeping Wall Street
  shuffling
• Corporate info flows can now more closely match
  organizational structures that are designed for
  better effectiveness think work groups
• Slight increase in meritocratic intra-firm
  politics thanks to better surveillance and
  evaluation methodsbut the buddy system survives
  (of course!)
• Rise of information professions what are the
  limits?

39
How new is the economy?

• Commercial Revolution, 1492-1780s
• Rather more plunder than commerce
• Slaves, rum, sugar and the triangular trade
• Industrial Revolution, 1780s-1850s
• Role of globalism, world markets
• Slavery as early US centerpiece
• Second Industrial Revolution, 1870s-1914
• Knowledge-based industry
• Productivity revolution

40
New Business Models?

• IT allows major disintermediation
• A rise or fall in intermediaries?
• Manufacturing, b2b yes, with caveats
• Media NOisnt that what DMCA etc is all
  about--a refusal to develop a new business model
• Finance NOthink of Enron
• Retail maybeconsider the Wal-Mart model of
  direct supplying by manufacturers part of this
  is cost and risk diversion made possible by
  Wal-Marts monopsonist position
• Disintermediation is possible, but more than IT
  is required consider real estate sales
• The software-driven back-office revolution
• The end of middle managers?

41
Example Spoon
42
Comparing models

• The old model
• Hierarchies bureaucracies
• Disempowered and uninformed minions/workers
• One-to-many
• Institutional mediation
• Passive consumers
• The new model
• flat organizations
• Knowledge-empowered actors
• Many-to-many (and peer-to-peer)
• Disintermediation rendering old models
  irrelevant
• Consumers actively creating mind-share and value

43
So, Whats Informating About?

• First and foremost, finer-grained knowledge and
  control over production and markets
• Changes in degree
• Faster, more precise design, produce, sell cycles
• Supply-chain management and JIT
• Integration of business processes using IT ERP,
  CRM, etc.
• Vast increase in the mobility of two factors of
  production, capital and knowledge, while labor
  remains immobile

44
Example Amazon
45
Example Software Service Packs

• Think of any time your software crashes
• Teams like Windows Error Reporting use that data
  to identify problems that need to be fixed right
  away.
• Service packs ship to fix them
• Compare to car safety recalls
• My point? Production and feedback are different
  for information commodities.

46
Changes in Kind Transformations

• Smart and flexible manufacturing, customized
  mass production Flextronics
• New standardized vocabularies (thanks in part to
  ISO 9000) allow information-driven decentralized
  production
• Better, cheaper communication infrastructures
  permit precise tracking of people, money, things

47
Example FedEx
48
Example Auctions

• Ebay
• Buy from individuals
• Reputation system
• Swoopo
• Buy from firm
• Pay for bids

49
Example eBay
50
Example Swoopo
51
Example DOS to Windows 3.1
52
Example DOS to Windows 3.1
53
SUPPLEMENTAL SLIDES
54
More about pricing strategies

• How do consumers reveal preferences?
• Markets are poor information-generating systems
• Consumer preferences can only be signaled through
  the market
• Shortcomings of usual marketing models time lags
  and income differences
• Market research often poses problems
• Fixation on the ideal demographic precludes
  considering other markets
• Assumptions about Pareto distribution (the
  80/20 rule) often precludes marketing to the
  tails, where amazon.com and Netflix profit (see
  C. Anderson, The Long Tail, 2006)
• Sellers and database firms invasions of privacy

55
Examples Software

• Proprietary Software
• Apple end-to-end experience software
  hardware
• Microsoft choice emphasis on
  softwareOpen-source software
• Open-source software
• The new IBM
• Problems scalability, tech support, user skill
  base