Economics of Attention

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Economics of Attention

• 3

characteristic of info: Now info. is

available so quickly, so ubiquitously , and so inexpensively, everyone is complaining of info. overload.

• Economics of attention ; “A wealth of

information creates a poverty of attention”

Herbert Simon (Nobel Prize-winning economists)

• Information access is not the problem,

information overload is. Ex) Naver 지식창?

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Economics of Attention (cont’d)

• Information Overload

– Any idiot can establish a Web presence-and lots of them have. Have you? Ex) blogs, Facebook, Internet cafe [^kӕfeɪ]

– Finding/filtering useful info on the Internet is a problem. Real Estate: 3 critical factors. L-L-L!

– Selling viewers’ attention: Amazon.com paid $19 mil to AOL to gain access to 8.5 mill AOL members.; Wal-

Mart Television Network; Car and Drivers and BMW ads.

– Hotmail free e-mail with ads example.

– Focused 1-to-1 marketing and customized products.

3/22

Technology

• Infrastructure to store, retrieve, filter, manipulate, view, transmit, and receive

information; Infrastructure is to info as a bottle is to wine .

• Technology infra makes info more accessible and hence more valuable .

• No major change in info (magnitude or nature) itself. But major change in delivery

technology. Advent of Info Age.

• INTER(between)-NET!

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Internet, Intranet, Extranet,

Subnet

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Technology (cont’d)

• Do we have more info than before? NO. We “feel” like we have more information b/c there are more “accessible”

information than before due to introduction of the Internet.

• The static, publicly accessible HTML text on the Web is roughly 1.5 million books.

• UC Berkley has 8 mil books and the quality is much higher.

• If 10% of the materials on the Web is “useful,” there are about 150,000 useful book-equivalents on it, which is about the size of a Borders superstore.

• But the actual figure for “useful” is more likely 1 percent, which is 15,000 books, or half the size of an average mall bookstore.

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Technology (cont’d)

• Value of Web is in ease of access;

its easiness adds value to information.

• Ex) E-Mart (stock management through EDI; discount on slow- moving items), Samsung Medical Center (DB), Internet shopping.

• What if the wine industry came up with a bottle that gave its

customers easier, quicker, and cheaper access to its wine? Ex)

Pop machines (Vending machines)

Vending Machine

Pop machine

7/22

Technology (cont’d)

• Value of Web is in ease of

access; its easiness adds value to information. (cont’d)

• The bottle is only infrastructure but the infrastructure that can reduce cost and increase value (bottle design) is tremendously important.

• The information economy is

about both information and the

associated technology. ^Custom

Etched Wine Bottles

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Systems Competition (Tech as a system)

• System: Greek word systema = syn (together) + stema (make stand up): 조직화된 전체. Input + Output +

Feedback

• Ex) OS and Apps., Hardware and Software

• A single firm cannot offer all the pieces that make up an information system. (Ex: Galaxy with BaDa?  failed,

Counter Ex: Apple’s iPhone)

• Traditional Rules of competitive strategy : focus on competitors.

• In Info Economy, complementors (collaborators) are equally important, to sustain compatibility.

• If not compatible, system falls out.

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Systems Competition (cont’d)

• 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.

• Specially important in infotech.

• Will discuss this issue in Chapter 8, Cooperation

and Compatibility.

10/22

Systems Competition (cont’d)

• Microsoft-Intel: Wintel

– Intel: hard-wares (complementary chips) – Microsoft: soft-wares.

– The key was to commoditize (plug and play)

complementary products without eroding the value of its own core strengths( standardization). Also, to prevent the emergence of a strong rivals.

• Apple

– Integrated solution

– Worked better, but lack of competition and scale led to current high cost of production problems

• Sony VAIO.

A commodity is a good for which there is demand, but which is supplied without qualitative differentiation across a market. Ex) grains, petroleum, copper: no product

differentiation (Wikipedia)

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Lock-In and Switching Costs

• Opposite of Lock-Out

• Once you have chosen a tech, or format for keeping info, switching can be very expensive

• Example: CDs and LPs; Unix vs Windows vs Macintosh; CDMA and Qualcomm.

– Costly switch from LPs to CDs – Web will resolve these problems.

• Systems lock-in

– Hardware, software, and wetware (human brain) – Individual, organizational, and societal.

– How to use it or avoid it?

LPs

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Positive Feedback, Network Externalities, and standards

• Network Externalities: Value of network depends on number of users

• Positive feedback makes large network get larger.

– standard war: to make network work and initiate positive feedback, need std(can’t use different tech to lock-in!). But whose std? WAR!

1.Fax (patented in 1843. niche until 1980s).

2.Internet (1^st e-mail message sent in 1969. took-off in late 1980s), needed std protocol TCP/IP

3.Indirect (Virtual) network effects (Software; Macintosh vs.

Windows)

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Value of Network

leads to Positive Feedback

• Metcalfe(메-ㅌ캡)’s Law

(Robert Metcalfe, circa 1980)

• Value of Network =

n

n

• If

n

n

n

n

n

n

0 2 6 12 ...

1

-1 2

-2 3

-3 4

-4 ...

n

-n

14/22

Positive Feedback, Network

Externalities, and standards (cont’d)

• Growth is a strategic imperative, not just to achieve the usual production side economies of scale (producer side) but to

achieve the demand side economies of scale (consumer side) generated by network effects.

• How to use it for business strategy?

• The key challenge is to obtain critical mass.

• Once you have large enough customer base

(critical mass, momentum), the market will build itself.

• Having a superior technology is not enough to win. Need marketing tools such as penetration pricing to ignite the positive feedback and to gain critical mass.

Juggernaut breaking through walls: X-men

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Positive Feedback, Network

Externalities, and standards (cont’d)

• Ex of penetration pricing) Netscape: Free. Thus, lost money on every sale. Then, how did it make money?

- Charge for customer support.

- Sell complementary goods such as server software for hefty price.

• Need expectations management to get critical mass.

– Product that is expected to become the standard will become standard. Ex) IE.

– Competitive pre-announcements (vaporware, iPhone 5s), could be two-edged sword(cut into your competitor’s sale but also your sale.)

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Positive Feedback, Network

Externalities, and standards (cont’d)

– Advertisement of Intel’s MMX(developed in the Fall of 1996, accelerating graphics) was done after Christmas season.

• The timing of strategic moves is even more important in the information industry than in others.

• Moving too early (w/o std) means making

compromises in technology for compatibility and going out on a limb without sufficient allies. (Ex:

Japan’s HDTV) No Positive Feedback Effect

• If too late, lose the whole market.

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Positive Feedback, Network Externalities, and standards

• Another way to achieve critical mass; Form an alliance with powerful groups of strategic

partners.

• Partners can be customers, complementors, or even competitors.

• Sky Team (Korean Air, Air France etc) vs. Star Alliance (Asiana, Ana etc)

• Bandwagon effect; 우세해 보이는 사람이나 팀을 지지하는 현상;

having everybody aboard (on board. cf. abroad).

* band·wag·on : n. 《미》 서커스 행렬의 맨앞에서 대열을 선도하고 분위기를 띄 우는 악대차(車) 《행렬 선두의》;(선거 운동·경쟁 등에서) 우세한 쪽

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Network Effects and Compatibility

• Whether you are trying to establish a new information technology or to extend the lifetime of technology that is already popular, you will face critical compatibility

decisions.

• Ex) Sony-Philips vs. Others for DVD. Even though Sony and Philips did not develop or control the best

technology for DVD, they were in driver’s seat to the extent that their patents (on original CD technology) prevented others from offering backward-compatible DVD machines.

• Not always need to keep Backwards compatibility. Ex) Nintendo64 can’t play older Nintendo games

19/22

Basic Strategies to achieve critical mass of network

• If u own valuable intellectual property but need to gain critical mass, u must decide whether to

promote ur tech unilaterally, in the hope that it will become a de facto (in fact) standard that you can tightly control, or to make various “openess”

commitments to help achieve a critical mass.

 Going it alone (Sony) : Competition for a standard

 Partnerships (VHS) : Competition within a standard;

participation in a formal standard-setting process

• Standard changes competition for a market to

competition within a market.

20/22

Basic Strategies to achieve critical mass of network (cont’d)

• Don’t plan to play the higher-stake, winner-take-all battle to become the standard unless you can be aggressive in timing, in pricing, and in exploiting relationship with complementary products.

• Rivalry to achieve cost leadership by scale economies and experience, a tried and true

strategy in various manufacturing context, is tame in comparison.

• Just ask SONY about losing out with Beta in the

standard war against VHS.

21/22

Policy

• Understand the rules of the game (antitrust law) and environment; IP policy

• Competition policy; collide with antitrust law in three areas of M&A, cooperative standard setting, and monopolization.

– M&A: Acquiring a direct rivals is illegal.

– Cooperative standard setting: competitive

standard setting is good, cooperative standard setting is bad and illegal. Ex) gas price

– Monopolization: Sherman Anti-Trust Act (1890)

• To keep markets competitive.

22/22

Information is Different…

but not so different

• This book is not about trends , but about models .

• This book is not about vocabulary , but about concepts . Ex) cyberspace.

• This book is not about analogies , but analysis ; Business strategy is business strategy. Analogies can be misleading.

Analogies can be an effective way to

communicate strategies but dangerous way

to analyze strategies.

23/22

Big Picture

Information

Technology:

Ease of Access System Management

Information System (MIS)

Characteristics of Info.

1.MC=0: Consumer Value-based Pricing 2.Experience good

3.Econ of Attention

Systems Competition

Cooperation & Compatibility Lock-in : recognizing

managing

Positive Feedback, Network Externality(effect)

Standard

Diff. Pricing Versioning

Chap.2 Chap.3

Chap.5

Managing IP

Chap.6 Chap.7

Chap.8

Chap.9

Gov’t & Policy

Chap.10

Chap.4

24/22

Allmorgentliches Verkehrschaos

Martin Mißfeldt, 20.03.95, 39,2 x 29,5 cm, Rapidograph und Gouache auf Papier

iMaGes Of cHaOS Decreased causality No pattern

Increased disorder Increased entropy

25/22

Bit-legging

• Bitlegging (v): Downloading copyright-

protected digital music files from the net. As illegal as bootlegging, but the sound quality is better

• Leggings are any of several sorts of fitted clothing to cover the legs. Originally leggings were two separate garments, one for each leg.

• Bootleg or bootlegging usually refers to making, transporting and/or selling illegal alcoholic liquor or copyrighted material; the term originates from concealing flasks of alcohol in the legging of boots.  copying LPs

• Bit: binary digit.

Flask Hip Flask

LP & Turn-table

26/22

Stigmata (聖痕, 1999)

• Frankie [to Father

Kiernan]: Jesus said... the Kingdom of God is inside you, and all around you, not in mansions of wood and stone. Split a piece of wood... and I am there, lift a stone... and you will find me.

• Ubiquitous!

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ARPANET(1977)

Excerpt: 발췌하다.

IMP(Interface Message Processor)