9 INFORMATION PRODUCTS Chapter Introduction Information products - PDF document

CHAPTER 9: Information Products -Peter O’Grady 1 9 INFORMATION PRODUCTS Chapter Introduction Information products are likely to have a significant market in the new few years. Such products include software, data and databases. They are characterized by having, at their core, information that can be digitized as data. Associated with these information products are the allied products that manipulate the data, such as fax machines and the computer appliances discussed in the previous chapter. Information products are diverse in nature, ranging from web brows- ers to data routers and from word processing programs to Zip drives. Since they usually have software as a main constituent, they are nec- essarily complex products (as discussed in Chapter 7). Modularity

2 The Age of Modularity PART III will therefore be an essential ingredient of information products. An additional factor that compels the use of modularity is that informa- tion products will often be required to be part of an overall system and will be required to link with other portions of the system through standardized interfaces. For example, the Iomega Zip drive must link with the computer hardware (through a parallel port or through an in- ternal drive interface) and the Zip drive software must operate with the computer operating system. The Zip drive is therefore a complex product that forms a module with standardized interfaces to the rest of the system. Information products have four main marketing characteristics that give them a different behavior in the market from other products. The first characteristic is that they have low costs of reproduction, since they rely on digital data. It costs very little, for example, to copy a computer program or a database. A second characteristic is that the value of information products can often increase along with an i n- crease in the number of users, in what is termed ‘the network effect’. Users of e-mail, for example, experience increased benefits as more people use e-mail and there are more people with whom to exchange e-mail. The third characteristic is that users are prone to experience switching costs if they try to change technologies. A Mac user, for example, may have to experience the trials of converting files if they switch to a PC. This means that users can often be locked-in to a par- ticular technology although alternative technologies perform better. The fourth characteristic is that one standard will tend to rise to prominence in each product area, as a phenomenon known as tipping occurs. The result is a ‘winner takes all’ environment where one stan- dard dominates the others. Information products can also exhibit sudden, explosive growth as they are caught in a spiral of increased usage, leading to an enhanced overall value due to the network effect, which in turn leads to i n- creased usage and so on. An example is the fax machine, which was only used by a few companies as recently as 1982. As more compa- nies started using faxes, the usefulness of the fax machine grew to the

CHAPTER 9: Information Products -Peter O’Grady 3 point where it became an essential piece of business equipment. By 1989, almost all companies of any significant size had a fax machine. Similarly, internet-based e-mail was used by few companies in the early 1990s but achieved explosive growth starting in 1995, and by 1998 almost all major companies had internet-based e-mail. Standards are essential for information products and there is the ten- dency to migrate to a single standard for each product as tipping oc- curs. Where there are competing standards for a product, customers may be wary of purchasing out of fear that they might be left with a product that uses the non-dominant standard. For example, the 56K modem is undoubtedly useful since it allows communication at a higher speed than 28.8k modems. However, 56K modems were origi- nally developed with two different standards – the ‘K56flex’ standard from Rockwell and the ‘x2’ standard from U.S. Robotics. A fight between these two standards developed, with each company vying to make their standard the dominant one. Customers were reluctant to purchase either of these two products, fearing that they might be left with the loser in the standards fight. Eventually, both Rockwell and U.S. Robotics realized that neither standard would dominate the other and both decided to adhere to the open V.90 standard. Customers were then able to purchase 56K modems that adhered to the V.90 standard, knowing that this would be the dominant standard. The re- sult was that sales of 56K modems tripled. Chapter Overview Information products will be an important part of the economy in the future and since these products will tend to be complex, modularity will play a central role. This chapter describes how modularity can be used for these information products. The differences between infor- mation and conventional products are described. The manner in which module integrators and providers with information products will con- tinually form alliances with others in order to strengthen their position is described. Finally, the ceaseless quest for the dominant standard by module integrators and providers is discussed.

4 The Age of Modularity PART III The Chapter is divided into the following sections: How Are Information Products Different? This section gives an overview of the main differences between information and conventional products. Costly to Develop, Cheap to Reproduce The difference in the costs of reproduction between conventional and information products is described in this section. The issue of pricing information products is also discussed. The Network Effect This section describes the network effect, whereby the usefulness of an information product is often dependent on the number of other users of that technology. Switching Costs and Lock-In This section discusses the phenomenon whereby users can incur costs to change from one technology to another. These costs can act to lock-in a customer to a particular technology, even when alternative technologies are clearly superior. Positive Feedback and Tipping This section describes how the network effect can lead to a spiral of rapidly increasing sales for a product. The product can end up ‘tipping’ the market to become the dominant player. Modularity, Standards and Interfaces The issue of standards is crucial to the growth of information products and this section describes how standards are defined. The Future: The Quest for the Dominant Standard In a ‘winner takes all’ environment, such as that for information products, it becomes vital for module integrators and providers to be aligned with the dominant standard. In a changing world, new products will continually be developed with totally new stan- dards. Module integrators and providers will therefore be con-

CHAPTER 9: Information Products -Peter O’Grady 5 stantly striving to align with new dominant standards. This sec- tion describes the background to this ceaseless quest for the dominant standard. The Future: Alliances This section describes how module providers and integrators will be constantly forming new alliances to increase the sales of their products. How Are Information Products Different? As was discussed in the Introduction, information products differ from conventional products in four main ways: • Information products are usually characterized by being costly to develop, but cheap to reproduce . • They demonstrate a network effect, whereby the worth of the product increases with the number of users. • Information products can have substantial switching costs which lock-in the customers to a particular product by making it expen- sive to switch products. • Information products exhibit the effects of positive feedback and tipping , whereby a product can quickly take a dominant position in the market. Let us now look at each of these points in turn to gain a better under- standing of how information products behave in the market. Costly to Develop, Cheap to Reproduce The cost of products is made up of two main parts. The first part is the up-front cost of product development, which involves the costs of de- signing and producing the first version of the product. The second cost comes from reproducing the product and includes the costs of raw materials, purchased parts, manufacturing, assembly and distri- bution.