Information Rules: A Strategic Guide to the Network Economy.

— This "new" Internet economy isn't that new: it is still governed by the standard economic principles. What is new is the emphasis on such concepts as lock-in, cost of switching (how much time, money, and effort a customer must expend to switch from one competitive product to another), the importance of intellectual property rights, standards, the impact of network effects, and positive feedback. In The Invisible Computer I distinguished between substitutable and non-substitutable goods. This book provides a richer and deeper discussion of the issues. Shapiro and Varian are economists at UC, Berkeley. This book is must reading for those who wish to understand today's business wars.

Although I find the analyses in Information Rules cogent, I felt more and more disturbed as I read the book, starting halfway through and increasing as I got to the end. The reason? The complete lack of morality. The authors are pure economists who see the interplay of companies and business strategies as economic games to be analyzed as quaint exercises for the reader. There is no sense that the customers so blithely talked about are more than economic numbers, that they are people. Customer service, treating customers properly, even the time-tested management theories of one-to-one marketing where the customer really does matter are either bypassed or analyzed solely in terms of economic impact. Whatever happened to doing right because it was right, not because the economics worked out?
Thus, if you have loyal, dedicated customers and you are about to introduce a new product that will make all their investments obsolete, what do you do? Answer-- soak them-- after all, those dummies are loyal, they will follow you no matter what you do to them. Charge your loyal customers the most, but offer discounts and other enticements to those who are not your customers to induce them to switch. (If you must, disable something so you can justify the price difference.)

This, by the way, is exactly how Apple Computer has always treated its most loyal customers. And it is the trick that IBM used in its Series E laser printers: they added a part that slowed up the printing speed of the cheaper model from 10 pages/minute to 5 so that they could charge a lot more money for the same printer that didn't have that part.

Exploit the power of lock-in to make it difficult for them to switch away. (Notice how Microsoft Office readily imports files from all of its competitors (lowering the cost of switching from them to Microsoft) but it does not offer such easy ways of writing files readable by the competitors (making the cost of switching from Microsoft high). The same story is repeated with regard to "open systems," the development of international standards, and other business tactics. There is no sense of right or wrong, only economics.

Pointer to the book at >