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[P]
The Economics of Information Goods

By crothers in Technology
Mon May 13, 2002 at 05:01:04 AM EST
Tags: Technology (all tags)
Technology

"Information Rules" (1999, Harvard Business Press, $29.95) was written at the height of the dotcom craze as an antidote to the IT industry's hyperbolic declarations and muddled thinking. Clearly, not enough people read it. Authors Carl Shapiro and Hal Varian, distinguished professors in both economics and business at Berkeley, set forth the key economic principles that underpin the exchange of information goods. This is a not a dense economics text however. It is a practical guide to the information economy written for the business leaders and MBA graduates who were to revolutionize society. As such they use clear examples, short sentences and small words.


The venture capitalists have returned to investment banking and the MBAs have abandoned IT for the more traditional fields of finance, accounting and international trade. It is left to us technology lifers to implement the future. "Information Rules" is required reading for those determined not to repeat the mistakes of yesterday. An understanding of the basic economic principles that affect information goods will serve you well regardless of whether you ever intend to design a commercial information product or the business strategy for one. When considering employers, positions, or projects you will need to understand economics to evaluate the potential and vulnerabilities of the business model.

Finally, the k5 community should find it entertaining and stimulating to discuss applications of these principles to k5. Using k5 as a concrete example will concentrate our thinking and focus our discussion. Think of it as an open source business plan.

This is the first in a three part series on Information Rules. First, a few caveats. The authors unabashedly focus on how a business can maximize profitability often at a cost to consumers. Strategies like differential pricing, value subtraction, and lock-in may seem objectionable to consumers let alone open source enthusiasts. Disappointingly, no specific mention is made of open source business models. Perhaps this is part of the New Economy hype they hope to dispel. Or perhaps it is because OSS supporters don't buy $30 books on how to develop business strategies in the network economy.

Pure open source products do not involve an exchange of resources and thus are not a matter of consideration for economics. Business models that give away a product to create new markets for complementary products and services are the basis of the New Economy. The central myth of the New Economy is that new levels of value production and efficiency can be realized by employing the zero marginal cost of producing and distributing information. Professors Varian and Shapiro fail to debunk this myth on the one hand or provide strategies specifically to recognize and exploit it on the other. Despite this, Information Rules provides valuable lessons.

The first chapter is titled The Information Economy and covers the basic concepts. It should serve as a brief review for those who slept through the last five years. The authors introduce the topics of successive chapters in the first chapter and group them into three sections, Information, Technology, and Policy.

INFORMATION

The Cost of Producing Information

Information is defined broadly. Anything that can be encoded as a bitstream is information. The production of information involves high fixed costs but low marginal costs. In these [scenarios] cost-based pricing doesn't work: a 15 percent markup on unit cost of zero doesn`t make sense. Instead, they argue that consumer value must be the basis for determining price. Because consumers differ in their value for a given good, optimal value-based pricing incorporates differential pricing. Strategies for differential pricing are examined in chapter 2. Chapter 3. These claims deserve perhaps further attention than the authors provide. We will examine these claims and the strategies for differential pricing in Part Two of this series. Part Two includes a discussion of "versioning" information that was the impetus for the creation of this series of submissions. It is versioning that I think will be most relevant to kuro5hin and will I hope spark the most debate.

Managing intellectual property

The authors are on sympathetic ground in Chapter 4 when they argue that content owners are too conservative in protecting their intellectual property rights. Content owners should focus on maximizing the value of their intellectual property rather than maximizing the protections of it. They provide an array of interesting case studies from the business world to support this position. These will no doubt provide useful fodder for k5ers in their evangelical efforts.

Information as an "Experience Good"

The authors discuss one of the fundamental problems of selling information goods in Chapter 4 as well. Most goods are also experience goods in that they must be experienced to be valued. (Most) information goods are an experience good every time they are consumed like meals at a restaurant. How do you know that Kuro5hin will be as fresh and tasty tomorrow as it was today? Strategies for bridging the tension between giving away information to build demand and charging for it to recover costs are discussed in the section on rights management.

The Economics of Attention

The authors discuss the tantalizing subject of giving away content to sell attention. What a great idea. Create huge value for consumers at a one time, relatively small cost, give away the product and the watch the ad dollars roll in. Or in the words of the authors, "Selling viewers' attention has always been an attractive way to support information provision." It is a format that has supported the television, magazine, and newspaper industries. With the web's lower production and distribution cost and the tools the Internet offers to personalize marketing, clearly advertising has amazing potential to drive economic growth... And then it was 2000 and the wheels fell off. I will give you my idea of why it failed and then open it up for a free for all. This section is still the most provocative and fun to explore. I contend that attention is still valuable even if not used as initially imagined. More when we get into selling attention in Part 2.

TECHNOLOGY

Information goods are necessarily dependent upon the technological infrastructure that supports them. As the broadband buildout and subsequent bust has shown, technology is dependent upon information as well.

Systems Competition

Technology products are interdependent with other technology as well. Technology companies most often sell complementory components of a system. Traditional rules of competitive strategy focus on competitors, suppliers, and customers. In the network economy companies must focus as much on their collaborators as their competitors. "The key for each company [in developing alliances] has been to commoditize complementary products without eroding the value of its own core strengths." Companies that fail to appreciate the value of strategic alliances have only to look at the fate of Apple. The strategies in Chapter 8 are designed to help companies who are selling one component of an information system navigate alliances, system compatibility, and standards.

Lock-in and Switching Costs

The authors write that "lock-in arises whenever users invest in multiple complementary and durable assets specific to a particular information technology system." They give the example of a turntable and LPs, Qualcomm's cellular compression technology, and networking technology from Cisco or 3Com locking one into a format. It isn't clear to me whether the quote above indicates that lock-in is necessarily hardware dependent or whether it is one example under which it occurs. Their examples of lock-in are all hardware-based which would indicate the former. This is the closest they get to giving us a definition in the first chapter, but I have to assume that it is the latter. The authors` acknowledge Windows` lock-in and that doesn't have requisite system-specific hardware. Various *nix OSes run on Intel microprocessors, obviously. Perhaps the professors didn't consider them or don't consider them viable consumer alternatives.

They do recognize software components of a system have switching costs as well, as in the case of switching from Apple to Wintel software. Importantly, they also mention the sometimes overlooked "wetware" switching costs, the knowledge required to operate a system. Moreover, lock-in is a misnomer. It is not absolute. People were not "locked" in to LPs. Each new music format since LPs has been supplanted every decade despite high switching costs. It may seem pedantic to focus on a precise definition of lock-in as we can all recognize it when we see it. Or perhaps more correctly, we all recognize it once it is clamped around our ankle. Lock-in to legacy systems is very commonplace in the network economy and it isn't always as obvious as a stack of 8-tracks. Society seems to be locked into the QWERTY keyboard layout. Without a precise definition we may not be able to recognize, avoid, and exploit it (should you be so compelled by the dark side). I will go into why I think people fail to adequately recognize or cost out lock-in as well as give you my poor definition of it when we discuss it in Part III.

The authors explore lock-in and switching costs in Chapters 5 and 6. They examine the different kinds of lock-in, strategies to incorporate proprietary features into products, how to exploit lock-in when creating products and and how to avoid it. Since I have no recollection of the specifics of the chapter from my first two uncritical readings of the text I am as curious as you may be to discover what they have to say and if my theories match. I do remember being left with an unsavory taste in my mouth by discussions of strategies that brought negative value to consumers.

Positive Feedback, Network Externalities, and Standards

"When the value of a product to one user depends on how many other users there are, economists say that this product exhibits network externalities, or network effects." Phones, faxes, and email are examples given by the authors that do, but so are coding languages, currencies and kuro5hin (arguments to the contrary not withstanding). These are called demand side economies of scale as opposed to the supply side economies of scale that allow Dell to build computers more efficiently than I could.

So what does the growth pattern of a product that exhibits network effects look like? Long lead times followed by periods of explosive growth. Growth is a strategic imperative not just for production side economies of scale but to achieve the demand side economies of scale. Markets in which there are significant network effects are tippy. The key challenge is to obtain critical mass necessary to get the market to tip in your direction.

Expectation management is critical since the product that is expected to become the standard will become the standard. Product "preannouncements" have been used to affect this but much of the market is wise to "vaporware". Moreover, preannouncements also cut into your own current sales by encouraging people to wait for the new product. The timing of strategic moves takes on new significance in the information economy because of consumer expectations and the rapid evolution of technology. Moving too early may mean compromises in technology that form lasting impressions of the value of the product and stunt consumer acquisition. Just as importantly, without sufficient corporate alliances a product may fail to gain traction in the marketplace and meet the fate of Japan's MUSE high definition television format. There are critical compatibility decisions to be made. Critical mass is possible through powerful coalitions of strategic partners or formal standards, but they result in lower profits. Playing the winner take all battle to become the standard is a high stakes game and the public has become wary of buying a product when there are competing closed systems in a new market. Strategies for determining to what extent a product should remain "open" or "closed" are discussed in chapter 8.

POLICY

Finally, the authors discuss the Sherman Antitrust Act and how it affects competitive strategy. They suggest minor modifications to antitrust law that will ensure that it remains flexible enough to keep markets competitive in the future. One of the authors served as chief economist for the antitrust division of the Justice Department. The discussion of Microsoft's abuses may serve to wash from one's mouth some of the unpleasant taste from the preceding chapters' focus on maximizing profit at the expense of consumers. While it is clear to me that Microsoft has routinely abused its monopoly position it isn't clear where to draw the line between ethics and naiveté in business.

I am heavily biased toward free markets, capitalism, and libertarianism. It isn't clear to me what obligations I want businesses to bear in how they use their resources to maximize profit or how to create incentives to bear those burdens. I understand (finally) that the creation of consumer value is only incidental to their only responsibility of maximizing shareholder value, but I think they fail to look at a long enough time horizon. Or fail to be structured so as to require looking at a long enough time horizon. Or perhaps fail to assess the true cost of their actions. Or perhaps fail to appreciate that their job is not to maximize protection of their rights and revenue streams but rather to maximize the value of their assets. By the time that we have concluded our discussion I hope, perhaps naively, that we have developed policies that we as corporate officers could implement regarding how we use resources to maximize profits without exploiting consumers that do not put us at a competitive disadvantage. I encourage you to pick up a copy of Information Rules from your local library or bookseller in the next few days. Develop your own critique and contribute it to the group when we discuss differential pricing, versioning and lock-in in Parts Two and Three.

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Poll
This essay should have
o been edited down to one part. 10%
o been consolidated into one very long essay. 12%
o included specific examples from industries and businesses. 14%
o provided more direct applications to k5. 0%
o been less suicidally boring. 33%
o been offered as premium content on The Economist. 16%
o business!? what is a story on business strategy doing on k5? 12%

Votes: 56
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The Economics of Information Goods | 40 comments (28 topical, 12 editorial, 0 hidden)
Lock-in (4.80 / 5) (#1)
by Scrymarch on Sun May 12, 2002 at 07:11:17 AM EST

"lock-in arises whenever users invest in multiple complementary and durable assets specific to a particular information technology system."

Arguably the k5 reputation system is a soft form of lock-in.  People get to know particular users, and seek out their comments and diaries.  This brand recognition can carry over to other forums - say if you have the same user id on k5 and Radio Free Tomorrow (though both promote Scoop).  This works both ways - your RFT id is more valuable at the start because of your k5 id; but it reduces switchover costs because if you make a name for yourself on one forum you can switch over to another while retaining the name.

There are technological artifacts that don't get retained, though - like 2 years worth of diaries, or the list and links of every article you wrote.  There's also a mojo lockin if you value trusted user status, though because this expires after a month it's less of a factor.  (If you pre-paid six months of subscription there's a more traditional, non tech reliant business commitment.)  Lockin is way too strong for what I'm talking about here, but there are switchover costs in the sense of abandoned technical assets if you decide to make another forum your main public weblog hangout.

That these forces are as yet weak is somewhat demonstrated by k5 only having one paid employee and relying on a lot of donated hardware.  (Though that hardware itself is donated at least partially because of the advertisement value of supporting such a popular site.)

NB.  I'd love to be part of a spontaneous k5 book club, but my to-be-read backlog is already huge, I don't know that it's going to happen :)  I'll hotlist this article though.


Everything is a Monopoly (none / 0) (#38)
by youarenumber6 on Fri Jun 21, 2002 at 08:00:16 PM EST

<< Arguably the k5 reputation system is a soft form of lock-in. People get to know particular users, and seek out their comments and diaries. This brand recognition can carry over to other forums - say if you have the same user id on k5 and Radio Free Tomorrow (though both promote Scoop). This works both ways - your RFT id is more valuable at the start because of your k5 id; but it reduces switchover costs because if you make a name for yourself on one forum you can switch over to another while retaining the name.>>

Arguably, every human enterprise involves a form of "lock-in". That is, given any human enterprise of which I am a part, there will be a cost for me to change. In other words, everything is some sort of monopoly. So, for example, the local grocery store is the only one sitting on that particular location and Texaco is the only gas-station chain allowed to bear that name.

There is no such thing as a pure free market, it is merely an illusion which some people find useful. However, some monopolies are more valuable than others; some "lock-ins" are more restrictive than others. In arguments I have often had it pointed out to me that no one is forced to buy M$ software, hence they have no "monopoly". That's both true and false. It seems to me that the same argument could have been applied to Standard Oil equally well. No one had to buy their oil. In fact, M$ has a stronger "lock-in" than anyone else and that's the source of their exorbitant "uneconomic" profits.

Increasingly it is my thinking that we should approach economics solely from the monopoly perspective. Rather than being a situation with lots of free markets operating, it is in fact a situation with lots of monopolies interacting: some stronger, some weaker.

[ Parent ]

Monopoly (none / 0) (#39)
by Scrymarch on Sat Jun 22, 2002 at 04:12:33 AM EST

(Cool - a genuine use for my subscription features, seeing a new reply to an old comment ...)

Arguably, every human enterprise involves a form of "lock-in". That is, given any human enterprise of which I am a part, there will be a cost for me to change. In other words, everything is some sort of monopoly. So, for example, the local grocery store is the only one sitting on that particular location and Texaco is the only gas-station chain allowed to bear that name.

Good point, but it's still meaningful to distinguish situations where you have to give up a tangible investment to change.  This would be lock-in as I read it.  (Disclaimer: haven't read the book.)  When you decide to buy from the local Burger King instead of the McDonald's, you're not giving up any assets tied the McDonald's.  If you change supermarkets, however, you might be giving up any reward points you've accumulated with them.

There is no such thing as a pure free market, it is merely an illusion which some people find useful. However, some monopolies are more valuable than others; some "lock-ins" are more restrictive than others. In arguments I have often had it pointed out to me that no one is forced to buy M$ software, hence they have no "monopoly". That's both true and false. It seems to me that the same argument could have been applied to Standard Oil equally well. No one had to buy their oil.

What if you had a business with oil as an input?

In fact, M$ has a stronger "lock-in" than anyone else and that's the source of their exorbitant "uneconomic" profits.

Increasingly it is my thinking that we should approach economics solely from the monopoly perspective. Rather than being a situation with lots of free markets operating, it is in fact a situation with lots of monopolies interacting: some stronger, some weaker.

Interesting.  I wonder if such a treatment would help capture the "friction" in markets, reputedly not well captured in classic treatments of interacting rational agents, where you'd change software packages to save $1.  I wonder if such treatments already exist too - I'm not really up with the current academic thinking on the topic.

[ Parent ]

You know (3.00 / 10) (#7)
by medham on Sun May 12, 2002 at 05:55:16 PM EST

The reason you are heavily biased towards "free" markets, capitalism, and libertarianism? You enjoy sacrificing your autonomy to corporations.

Tomorrow you'll try to eat a snake with a big ole table-spoon.

The real 'medham' has userid 6831.

Re: You know (5.00 / 4) (#22)
by khallow on Mon May 13, 2002 at 12:26:56 AM EST

The reason you are heavily biased towards "free" markets, capitalism, and libertarianism? You enjoy sacrificing your autonomy to corporations.

What's your logic behind this statement? Just curious.

Stating the obvious since 1969.
[ Parent ]

Free Markets (4.60 / 5) (#25)
by Korimyr the Rat on Mon May 13, 2002 at 08:12:00 AM EST

 I think nearly everyone agrees that the ideal situation is one in which individuals have large economic freedom.

 This means, of course, that government should not place tight restrictions on individual or business transactions.

 However, large corporations, especially multi-national corporations, are expert at abusing "free" markets to maximize profits by hegemony, creative accounting, and outright fraud.

 Instead of arguing over "free markets" or "preventing corporate abuse", we should try to find a compromise that protects the individual both from the Corporation and the State.

 Just because individual shares of stock are owned by private citizens doesn't mean a corporation is a private entity, and it is especially not an "individual" and should not be protected as such. Stock is traded publically, corporate charters are created in accordance with national and international law, and they consist of thousands of employees and owners. This means that corporations are a part of the public sphere, and should be handled as a public matter.

--
"Specialization is for insects." Robert Heinlein
Founding Member of 'Retarded Monkeys Against the Restriction of Weapons Privileges'
[ Parent ]

Some comments (4.25 / 4) (#9)
by Jetifi on Sun May 12, 2002 at 06:23:28 PM EST

Hi there! It's a good article, and there are plenty of good points being made. That said, I have a number of comments.

Finally, the k5 community should find it entertaining and stimulating to discuss applications of these principles to k5. Using k5 as a concrete example will concentrate our thinking and focus our discussion. Think of it as an open source business plan.

I don't believe that Kuro5hin stands as a good example of the use of information for commercial ends. Textads, the paid-for Digital Identity spot, these aren't really cases of selling information - that's more about selling eyeballs, metaphorically speaking. Where economics comes in is where K5 acts as a broker for Advertisers and DigId. And I'm fairly sure Rusty doesn't think of us as consumers.

(As an aside, ''an open source business plan'' is an odd term. Open Source is generally used to describe a method of software development and/or distribution. The term here implies a business plan for selling open source software. It may serve to encapsulate the collaborative side of things, but it implies a whole lot more...)

The authors unabashedly focus on how a business can maximize profitability often at a cost to consumers.

It's an interesting perspective to take. But are you saying you want us to talk the most efficient methods for businesses to fleece us? I don't really like the word ''consumer''. The word implies a passive, couch-potato role, which is not what the Internet is all about.

The characterization of current commercial information exchanges as a simple deal between producers and customers has served business well offline. However it has crashed and burned horribly on the Internet.

The best sites on the web place the emphasis on interaction and communication. Arguably, this is what the Internet was built for - think Usenet, email, and then later the IRC and then the instant messaging explosion.

The ''consumer'', who's role has traditionally been a passive one, has now become a threat to large commercial information distributors, such as the music industry, simply by getting off their butts and distributing information themselves, regardless of legality.

Strategies like differential pricing, value subtraction, and lock-in may seem objectionable to consumers let alone open source enthusiasts.

Yes. And here I was expecting a ''but'' clause. People recognise these things when it happens to them. These strategies are objectionable to customers because they are seen, rightly so, as weaseling, underhanded, and, in extreme cases, morally bankrupt. It is these strategies that have cause the incredible resentment of companies such as Microsoft, Disney, etc., causing this sort of thing, and makes copyright infringement and piracy so palatable to Internet users. People are happy to screw over companies they dislike.

Pure open source products do not involve an exchange of resources and thus are not a matter of consideration for economics.

This ignores the fact that ''pure open source products'' are used as the basis for commercial operations, and therefore should most definitely be considered when studying the economics of information exchange, for example, when examining the finances of companies such as Red Hat.

Business models that give away a product to create new markets for complementary products and services are the basis of the New Economy.

Have I misunderstood this? I don't see Amazon giving away books and charging for wrapping paper. When Salon.com makes some of it's articles freely available, granted they induce people to subscribe. But by making those articles available, no market is created. I think there's some confusion here.

I don't believe that the ''New Economy'' differs in principle all that much from the so-called ''Old Economy''. The same principles of supply and demand, marketing, product life-cycles, etc. still apply. If ''New Economy'' signifies anything today, it signifies the crazed hysteria and gold-rush mentality of the late nineties.

Attempting to create markets by giving away products (such as the CueCat) has proven to be difficult. The whole idea was borne of the fallacy that all you needed to make money on the Internet was eyeballs, and the attention of surfers. The state of the banner-ad market, and the rapid proliferation of alternate business models, is an effective rebuttal to that.

The central myth of the New Economy is that new levels of value production and efficiency can be realized by employing the zero marginal cost of producing and distributing information.

I think it's more the case that ''the zero marginal cost of producing and distributing information'' is itself a myth. Even this guy acknowledges that production and distribution of information rarely has a non-zero marginal cost. The Internet has brought the marginal costs dramatically closer to zero, but still not zero.

Even disregarding the production costs, distribution alone uses bandwidth, which becomes increasingly important as your business gains customers, or eyeballs, or attention. Bandwidth isn't a zero marginal cost, yet. And the more dynamic your content (text < Web (HTML < Images) < Flash/SVG < audio < video), the more non-zero your distribution costs become.

With respect to differential pricing, it's been tried by companies such as Amazon, and it caused storms of protest. They stopped.

... we as corporate officers ...

Heh. I'm sure a lot of k5ers work for a corporation of some type. I can't speak for k5, but I come here to get away from that.

For parts two and three, I would encourage you to break up your paragraphs a bit. I'd say this article has it about right. If you look at CNN.com or BBC.co.uk, they have about 1 sentence per paragraph, which is a bit extreme. In addition to that, using links and/or references to back up your points tends to help sway your audience.

I'm reluctantly abstaining for this article. The second half in which you describe the chapters, is pretty good, but some parts grate, particularly the over-use of that word...

''The products you buy. The programs you watch. The car you drive. Your job. These are the things that define YOU as an individual.''
- Cop Shoot Cop, ''YOU the consumer!''



open source business plan (none / 0) (#14)
by crothers on Sun May 12, 2002 at 07:35:22 PM EST

open source business plan: a business plan for k5 that everyone could see the source of and contribute to. everyone could contribute ideas for possible revenue sources or what features they might pay money to have.

[ Parent ]
k5 as example of commercial information (none / 0) (#15)
by crothers on Sun May 12, 2002 at 07:41:27 PM EST

>"I don't believe that Kuro5hin stands as a good example of the use of information for commercial ends."

Rusty might call that the understatement of the year, but I disagree.

>"Textads, the paid-for Digital Identity spot, these aren't really cases of selling information"

I was suggesting that we might come up with additional revenue sources, and I think there are possibilities.

[ Parent ]
fleecing ourselves (none / 0) (#16)
by crothers on Sun May 12, 2002 at 07:51:36 PM EST

>"But are you saying you want us to talk the most efficient methods for businesses to fleece us?"

no. I said it to warn people that some of it might stick in their craws. I thought IT business strategies would make an interesting discussion for three reasons. 1. we can be aware of how businesses exploit consumers. 2. those of us in IT can discuss business strategies that don't suck quite as bad as those of the last few years. 3. fun applications for k5.

[ Parent ]
pure open source products (none / 0) (#17)
by crothers on Sun May 12, 2002 at 08:00:15 PM EST

>"This ignores the fact that ''pure open source products'' are used as the basis for commercial operations"

That is what my next sentence was trying to allude to, but clearly failed.

"Business models that give away a product to create new markets for complementary products and services are the basis of the New Economy."

Well, there is no New Economy at this point. It should have been closer to "Companies that give away ... are the basis for the business plans of the New Economy".

[ Parent ]
And here I was expecting a ''but'' clause (none / 0) (#18)
by crothers on Sun May 12, 2002 at 08:14:19 PM EST

"Strategies like differential pricing, value subtraction, and lock-in may seem objectionable to consumers let alone open source enthusiasts."

I put my attempt at the "but" clause at the end where the authors discuss policy. I take that opportunity to suggest that we consider how we would act. It isn't exactly a black and white issue as I hoped to go into. I didn't want to go into it in detail in the intro.

Here is what I should have put, perhaps: "but discussing them will allow us to consider how we would act differently and how we would engineer incentives that didn't put those who did at a competitive disadvantage. Moreover, these aren't always black and white issues and a discussion of them would allow us to navigate the gray without slipping into the black."

[ Parent ]
consumer (none / 0) (#20)
by crothers on Sun May 12, 2002 at 08:49:32 PM EST

I can appreciate you not wanting the word to define you as an individual or society at large. It doesn't. It merely defines the relationship. you hear it a lot because commerce is at the center of American culture (and the press for obvious reasons). We are a commercial society for better or worse. businesses need a word that identifies the people who buy or use their products. users? buyers? customers? is there a better word?

[ Parent ]
A better word? (none / 0) (#23)
by bodrius on Mon May 13, 2002 at 04:13:52 AM EST

Customer could be a much better word, because it defines a relationship during a particular transaction. It means another player in the market who's currently buying your product/service for their own purpose, but might as well sell you something in the future. They're spending money as a MEANS to get something else.

Consumer defines the nature of the other party in the transaction in a more permanent way. It means someone who WANTS to spend money, as a GOAL, their purpose in life.

"Customer" is not a superset of "consumer", as they imply entirely different, in some views opposite, attitudes to the transaction.

This may or may not be because of the words themselves, but that's how businesses seem to use them and that's how they differentiate their clients.

Notice that when a company sells their services to other companies they call them "customers", not "consumers", and they accordingly treat them with a different level of respect/service. They will probably still rip them off, but they will be more careful about it.

There's no fundamental difference that forces a private individual to be a "consumer", but most private individuals are happy to accept the passive role, and businesses are forced to be "customers" in order to survive in the market. Other businesses know this, and expect their client to be more intelligent and the sale to be harder.

Now, I'm not an economist, but I think free market theories assume everyone is a "customer" and a "producer" in this sense.

The Internet encourages this level playing field by providing individuals with free information to be intelligent "customers" in the market even if they are "consumers", and reducing certain costs dramatically to be "producers" in the same market.

Unfortunately, people are too comfortable in their position as consumers and corporations too dependant on them playing that role. That's why the consumer society was born in the first place.

Therefore, "consumer" happens to be the right word, however uncomfortable, to define the typical business relationship in either the Old or New Economy.
Freedom is the freedom to say 2+2=4, everything else follows...
[ Parent ]

Goal in life? (4.00 / 1) (#30)
by vectro on Mon May 13, 2002 at 11:45:20 PM EST

Hey now. I'll agree that a consumer is someone considering making a purchase. Someone who might have the will and ability to be on the consumption side of a transaction.

But to say that the word necessarily implies a life goal is a fallacy. I could say that I'm a swimmer, but that dosen't mean swimming is my goal in life --- in fact, it's more of a once-a-week thing.

A consumer is one who consumes a good. Don't read too much into the word.

“The problem with that definition is just that it's bullshit.” -- localroger
[ Parent ]

All right... (4.00 / 1) (#31)
by bodrius on Tue May 14, 2002 at 05:33:17 AM EST

I might have gone a bit too far with the "goal in life" bit, but my point is that the consumer is not just "considering making a purchase". The consumer has already decided to make a purchase, for no other reason than the purchase itself.

The pitch, then, is not in order to convince the consumer to buy something because it's useful for them, but to convince them that buying this particular something will be "cooler" or "more fun" than buying something else.

The consumer is someone with money burning a hole in their pocket; the customer is not. Their objectives in the transaction are markedly different, and the words must be read as different concepts.

Not only that, but this is part of what defines the consumer's lifestyle: its consistent, predictable and usually permanent.

As a customer of my ISP, I will pay for as long as I need their service and only for as much as I need. The ISP has to convince me I need to spend that money to get a decent connection, and if I get some other way to get bandwidth, I will not spend that money.

As a consumer, I will spend 50 bucks this week in books, computer games or random toys: I don't know what I will spend them on, but I know I will spend them. No one has to convince me to spend the money in the first place, they just have to convince me to spend it on their stuff. It may not be my "goal in life", but I can be trusted to spend that money on the market as much as I can be trusted to participate in my particular religious group, vote for my particular party, work at my particular job, or do anything that's particularly important in my life.

Freedom is the freedom to say 2+2=4, everything else follows...
[ Parent ]

No! (none / 0) (#34)
by vectro on Tue May 14, 2002 at 01:50:10 PM EST

While I will agree that some people buy things for the sake of buying things, I disagree that this is implicit in the word "consumer".

I am a consumer of groceries. Do I buy groceries because I like to spend money? No, I buy them because I want to eat. Does that mean that grocery stores don't compete for my business? No, of course they do. Does it mean that I know ahead of time exactly what I will spend my grocery money on? Not necessarily.

To go with your example, perhaps an individual would spend 50 dollars a week on "books, computer games or random toys" because he or she wants to be entertained (though that's quite a sum!). I don't think you can infer a consumer's motivations  because the exact purchase decision happens to be as yet unmade at a particular point in time.

“The problem with that definition is just that it's bullshit.” -- localroger
[ Parent ]

Consumer and customer (none / 0) (#35)
by bodrius on Tue May 14, 2002 at 02:23:02 PM EST

Whether this should be implicit in the word "consumer" or not is, actually, irrelevant. The point is that it IS implicit, simply because that's the way the word consumer is used in practical terms.

Businesses that deal with consumers deal with them in different ways than businesses that deal with customers. That's the difference I'm pointing out. And consumers respond to that treatment in a way that agrees with the businesses expectations.

The relationship you describe concerning groceries is a "customer" relationship. I would argue that relationship exists for certain kinds of groceries (those you buy because you have to eat) and not for others (those you buy for "entertainment"). People buy meat and junk food with different psychologies.

To get back with the example, sure, a "customer" may want to be entertained, and find out that it takes 50 bucks to get the entertainment he or she wants. But that would be an altogether different example... My "consumer" example implies that the decision was made to spend the money before analyzing the market (heck, that was the whole point of the example), and therefore the demand for entertainment is not satisfied by the product, but by the process of transaction. The purchase decision is made before-hand, and therefore we can find its motivations not in the product offered, but somewhere else.

Analyze the buying habits of most people. You'll find that they are both "customers" and "consumers", depending on the transaction, but that they are mostly "consumers".

They deal differently with electric bills and house payments than with DVD players, sound systems, or even home computers these days. That's why they're called "consumer goods": they are marketed and sold under different assumptions.
Freedom is the freedom to say 2+2=4, everything else follows...
[ Parent ]

A stove is a consumer good. (none / 0) (#37)
by vectro on Tue May 14, 2002 at 05:47:55 PM EST

... but that doesn't mean that the decision to buy a stove is made without examining the marketplace.

When companies talk about attracting consumers to buy their market, or whether or not a product will be accepted by consumers, or consumer spending, there is no implication made about the mindset of the money-spender.

A customer, I would argue, is someone who has already made a decision to buy. A consumer, on the other hand, is someone who potentially might buy.

Also, businesses can be customers but are generally not consumers, since a business generally only spends money in order to meet some other (financial) goal.

“The problem with that definition is just that it's bullshit.” -- localroger
[ Parent ]

Defining relationships (none / 0) (#26)
by Jetifi on Mon May 13, 2002 at 02:02:34 PM EST

I agree that offline the word consumer is appropriate, even if it's a title one accepts grudgingly. That said, I believe online is a different matter.

Online, either you're selling information as a service - think streaming video from CNN - or you're selling discrete parcels - think ebooks from Amazon.

In the first case, the term ''user'' is appropriate enough, in my humble opinion. In the second, it would be customer, although consumer will fit if you insist. I agree with a lot of what bodrius wrote.

However, as I said, the 'net is geared more towards communication (1-to-1 connections) than distribution (multicast on IP sucks), so maybe we should start looking at business models where ''consumers'' become ''participants''. So far, the only examples of this can be found in p2p programs.

It's interesting to consider how k5 might start charging for information. One of the main problems is that to sell information, you have to limit it's availablity, and this goes against the grain of a site that is almost completely open, and has decidedly anarchic tendencies. It makes for a nice thought experiment, though.



[ Parent ]
Customer? (none / 0) (#29)
by vectro on Mon May 13, 2002 at 11:42:53 PM EST

I think "customer" is specific to those who are already engaged in the action of making a purchase. Consumer, on the other hand, can refer to people "in the market".
The same problems occur with other words you suggest.

What's wrong with consumer?

“The problem with that definition is just that it's bullshit.” -- localroger
[ Parent ]

agreed (1.00 / 1) (#24)
by tps12 on Mon May 13, 2002 at 07:36:32 AM EST

I also agree that information rules.

Uh... (4.25 / 8) (#27)
by trhurler on Mon May 13, 2002 at 05:01:34 PM EST

"Some guys wrote a book. They were wrong, pretty much, in that they advocated strategies which were tried and which failed. Let's talk about it."

What a great idea. Look, I hate to break this to you, but the dot commers tried everything these clowns suggest, and the problem remains trivially simple: advertising is nothing more than a purely secondary revenue stream unless you have some very small maximum number of competitors in the ad provider market and nearly universal use of their services. Television fits that criterion, but cable TV starts to get iffy, so you're paying for it. The Internet never came close to meeting that criterion. Selling support to people for a product they already have is great, except that successful businesses won't need support(they hire people who know what's up,) and loser businesses are shitty customers because they tend to go out of business, ending your "ongoing" revenues. Differential pricing is used by everyone everywhere. Lock-in is a given for your average user; having learned one system, he's far too lazy to learn another, even if it is superior in every way. "Value subtraction" is something the computer industry has been doing more effectively than anyone else in history for a long time; we don't need some econ prof to blabber about it.

Crap, I tell you. Crap. Utter fucking crap.

You want to know how to get really filthy rich in software? Look at Microsoft. They did it the only way it can practically be done. Most of the dot com fortunes are gone, and the ones that aren't totally blown are a pittance compared to what some average Microsoft exec probably has in his 401k. Don't like Microsoft? Fine, go look at Computer Associates, or IBM, or any other vendor of suckage. The fact is, you get rich in software by selling shit that barely works to idiots who don't know any better and prosecuting them if they try to avoid paying for it. If that's not your cup of tea, then you either need to find a new line of work or get over trying to be rich by any means other than wise investments and lots of time to let them work. You still think open source is going to be the next big thing? Well, there's a simple problem then: you're an idiot. It will be a big thing, that's true - but it won't make you rich. Even the few who capitalized on the hype a couple of years ago are going to be suckling at the proprietary tit once again before much longer. You can't sell snake oil unless there's nobody selling anything that works. Open source is great for programs, but it is lousy for accumulating large piles of cash. Too bad nobody told esr in advance; we could have avoided a lot of silliness.

--
'God dammit, your posts make me hard.' --LilDebbie

well, no (4.00 / 1) (#28)
by crothers on Mon May 13, 2002 at 08:21:17 PM EST

Selling complementary services and products can't be equated with simply selling support. You are dead on regarding advertising, but selling attention to corporations is not the only option. It is a poor model for the internet.

Furthermore, most of the content on the web is free to all. Differential pricing is not used or not used effectively in most cases. It has been tried and dropped in a few high profile cases. In addition, you mistake switching costs for lock-in. Microsoft's email client, while widely used, does not have lock-in in net messaging technology as AIM shows. Speaking of blabbering about value subtraction, I was hoping we would be the ones doing the blabbering. The econ profs could provide us with a starting point in case we weren't all on the same page.

"The fact is, you get rich in software by selling shit that barely works to idiots who don't know any better and prosecuting them if they try to avoid paying for it."

well, no, again, as tempting as that hypothesis is. it helps to be the first to identify a market and then sell shit that barely works. but not always. it also helps to be the first to identify a blocking platform or commanding height and then sell shit that barely works on top of that. It also helps to get the idiots to ..., but I am getting ahead of myself.

Oh and guess what, I am an idiot. but it will take me at least a couple of years to prove it by your reasoning. [Insert obvious retort here.]

The point of this discussion is to look past the obvious. Despite the off the cuff nature of your comments you seem intelligent, and I look forward to your inciteful, if abrasive analysis of Part II. Thanks for playing and see you in Round 2.

[ Parent ]
Ah (5.00 / 1) (#32)
by trhurler on Tue May 14, 2002 at 12:02:26 PM EST

Selling complementary services and products can't be equated with simply selling support.
True, and yet uninteresting, as hordes of has-been software firms can attest. The only market big enough to make this really work well is Microsoft based PCs(lots of other people have tried, and you might note that they're no longer in business,) and if you sell something like this successfully there, they'll make a version all their own and drive you out of business.
Furthermore, most of the content on the web is free to all. Differential pricing is not used or not used effectively in most cases.
Most of the content on the web is not produced by commercial entities, and most people will not go to a web site at all if a perceived useful amount of the content isn't free. For most services, that pretty much means "all of the content." Look at the number of people who use the biggest pay web sites compared to the number who use relatively small free ones, and you find out that your average user simply will not pay for this sort of service.
In addition, you mistake switching costs for lock-in.
No, I really don't. The two are the same thing from anyone's perspective but an economist, and he only thinks they're different because he works in terms of definitions rather than looking at what's really going on. In reality, either one is a cost of moving away from a product; the only difference is that one is a bit more inherent and less created than the other. For an example of what you'd call lock-in, look at Windows itself. Even people who hate it still use it, because for a lot of things, there isn't anything else, or if there is, it is a Mac, which most of them hate even more.
Speaking of blabbering about value subtraction, I was hoping we would be the ones doing the blabbering.
Intel. Blabbering done. Trying to do the same thing to web content or whatever is insane. You might manage it, but you'll piss people off just as badly as if you made them pay for all of what you've got at whatever rate you might set. Commercializing the web(unless you have porn to sell,) is hard, not because of bad methods, but because people don't want to pay.
it helps to be the first to identify a market and then sell shit that barely works. but not always. it also helps to be the first to identify a blocking platform or commanding height and then sell shit that barely works on top of that.
Yes, but the point remains the same: every company that has succeeded in software or web content has done so by being big fast, blitzing the world with advertising(some of it less than honest,) and so on. So have most of the failures. There's no perceptible difference between those two camps in many cases. And of course, if there were much of a commanding height to hold on the web, Microsoft would already be there. Those pesky details like "getting funding" and "organizing" and so on - they've already done it all. They can set up shop for a new thing real, real fast. Faster than you can.
Oh and guess what, I am an idiot. but it will take me at least a couple of years to prove it by your reasoning.
So this "discussion" is "brainstorming for your new business?" Gee, great.

--
'God dammit, your posts make me hard.' --LilDebbie

[ Parent ]
gosh no (none / 0) (#36)
by crothers on Tue May 14, 2002 at 05:21:21 PM EST

good comments made. I rated it a 5. hopefully the second article will provide an adequate response.

Just to be emphatically clear though this wouldn't be "brainstorming for my new business". I hadn't even thought of it in that context. that is a tabled project that is almost anticommercial in nature, and I don't want discuss it. I shouldn't have mentioned it.

If there had to be an immediate focus for the discussion, I thought it would be brainstorming for k5 business models. I thought that would be entertaining as well.

[ Parent ]
Getting rich (none / 0) (#33)
by epepke on Tue May 14, 2002 at 01:03:42 PM EST

The fact is, you get rich in software by selling shit that barely works to idiots who don't know any better and prosecuting them if they try to avoid paying for it.

I gave you a 5 rating just for this quote. It's priceless and completely accurate.

If that's not your cup of tea, then you either need to find a new line of work or get over trying to be rich by any means other than wise investments and lots of time to let them work.

I have a quibble with this because it comes across as presupposing that the only thing ever to want to do in life is get rich. I don't particularly want to get rich. I want to make a six figure income without compromising anything significant, and since I've managed that, I'm OK. I count this as being well off, but not rich.

I mention this because people seem to have forgotten that the vast bulk of economic enterprise consists of smaller ventures where nobody ever becomes rolling in cash. A couple of small millionaires, perhaps. Microsoft's $40 billion cash seems impressive until you figure out that it works out to about $150 per capita. I've spent more than that on a single traffic ticket.


The truth may be out there, but lies are inside your head.--Terry Pratchett


[ Parent ]
very apt (none / 0) (#40)
by jago25 on Tue Aug 27, 2002 at 08:09:24 AM EST

How very very timely.

"You can't sell infomation" is still laughed at.

 There was a lot of places in the article that really articlulated how I feel about infomation in business.

 I does start to explain why Microsoft avoids selling infomation (.Net,lockins) while GNU continues what it's been doing; both not selling infomation.

 I'll definately be having a look at the book in the search for answers but I think I'll have to do some further research to study the properties of infomation outside the bounds of business.

 Thanks for the article.

The Economics of Information Goods | 40 comments (28 topical, 12 editorial, 0 hidden)
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