Information Rules: A Strategic Guide to the Network Economy, Carl Shapiro, Hal R. Varian1998-10-06 (; backlinks)⁠:

  1. Ch1: [The Information Economy: WP; author 1, author 2] Traditional rules of competitive strategy focus on competitors, suppliers, and customers. In the information economy, companies selling complementary components, or complementors, are equally important. When you are selling one component of a system, you can’t compete if you’re not compatible with the rest of the system. Many of our strategic principles are specifically designed to help companies selling one component of an information system.

    The dependence of information technology on systems means that firms must focus not only on their competitors but also on their collaborators. Forming alliances, cultivating partners, and ensuring compatibility (or lack of compatibility!) are critical business decisions…The history of the Microsoft-Intel partnership is a classic example. Microsoft focused almost exclusively on software, while Intel focused almost exclusively on hardware. They each made numerous strategic alliances and acquisitions that built on their strengths. The key for each company has been to commoditize complementary products without eroding the value of its own core strengths. For example, Intel has entered new product spaces such as chipsets and motherboards to improve the performance of these components and thereby stimulate demand for its core product: microprocessors. Intel has helped to create a highly competitive industry in component parts such as video cards, sound cards, and hard drives as well as in the assembly and distribution of personal computers.

    Microsoft has its following of independent software vendors (ISVs), and both companies have extensive licensing programs with original equipment manufacturers (OEMs). And they each have each other, an extraordinarily productive, if necessarily tense, marriage. It’s in the interest of each company to create multiple sources for its partner’s piece of the system but to prevent the emergence of a strong rival for its own piece. This tension arises over and over again in the information technology sector; Microsoft and Intel are merely the most visible, and profitable, example of the complex dynamics that arise in assembling information systems.

  2. Ch8: Cooperation and Compatibility: …Standards that “don’t quite work” are the bane of customers. It used to be that you were never quite sure exactly which video cards would work with which sound cards; your PC maker added value by making sure that the components in the system you ordered all worked together. Nowadays, pretty much all PC hardware works together because of efforts by Intel and Microsoft to promulgate industry standards. This has been great for Intel and Microsoft but has partially commoditized the PC OEM business, in which competition is increasingly based on being the low-cost producer and distributor.

  3. Ch3: Versioning Information: Bargain Finder is a case in point. Brian Krulwich, a researcher at Andersen Consulting, designed a little program that would search online CD stores for the best prices for music CDs. Bargain Finder was an immediate hit on the Web: it had more than 100,000 uses in the first two months it was available. But after a few months of use, 3⁄8 stores that Bargain Finder searched decided to prevent it from accessing their price lists.

    Remember the first lesson in Ch2? Avoid commoditization. The online CD stores didn’t want to compete on price alone. They wanted to compete on service and value added. By allowing Bargain Finder to look only at one dimension of what the stores offered, they ended up commoditizing their product.

    This sort of commoditization may be hard to avoid with Internet shopping. Services like PriceScan compile lists of advertised prices for computer equipment and consumer electronics. This is a great service for consumers, but it will make the retailing market even more cutthroat than it already is.

  4. Ch9: Waging a Standards War: Commoditizing Complementary Products: Once you’ve won, you want to keep your network alive and healthy. This means that you’ve got to attend not only to your own products but to the products produced by your complementors as well. Your goal should be to retain your franchise as the market leader but encourage a vibrant and competitive market for complements to your product.

    This can be tricky. Apple has flipped back and forth on its developer relations over the years. First it just wanted to be in the computer business and let others develop applications. Then it established a subsidiary, Corbis, to do applications development. When this soured relations with other developers, Apple spun Corbis off. And so it went—a back-and-forth dance.

    Microsoft faced the same problem, but with a somewhat different strategy. If an applications developer became successful, Microsoft just bought it out! Or tried to—Microsoft’s intended purchase of Intuit [Quicken] was blocked by the Department of Justice. Nowadays a lot of new business plans in the software industry have the same structure: “Produce product, capture emerging market, be bought by Microsoft.”

    Enter adjacent markets only if integration adds value for consumers.

    Our view is that you should try to maintain a competitive market in complementary products and avoid the temptation to meddle. Enter these markets only if (1) integration of your core product with adjacent products adds value to consumers or (2) you can inject substantial additional competition to keep prices low. If you are truly successful, like Intel, you will need to spur innovation in complementary products to help fuel growth.

    …When you’ve won your war, don’t rest easy. Cater to your installed base and avoid complacency. Don’t let the desire for backward compatibility hobble your ability to improve your product; doing so will leave you open to an entrant employing a revolution strategy. Commoditize complementary products to make your systems more attractive to consumers.

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