Given the healthy cynicism that the reader, circa fall 2001, now feels toward New Economy books, it’s refreshing to pick up a volume from 1999 that opens with a hearty dose of curmudgeonry. The authors of Information Rules: A Strategic Guide to the Network Economy, Carl Shapiro and Hal R. Varian, are both professors at Berkeley, and together they’ve written a surprisingly age-free book that holds up admirably in today’s bruised times: “The thesis of this book is that durable economic principles can guide you in today’s frenetic business environment. Technology changes. Economic laws do not.”
What distinguishes Information Rules is a rigorous attempt at quantifying change through economic models, as opposed to models-by-analogy. Since no one, certainly not New Economy business managers, has time to read books anymore, it’s best to cut to the chase, and get to the “takeaway,” as PowerPoint jockeys put it.
The takeaway in Information Rules is that what makes the New Economy new is the confluence of two powerful forces – supply-side economics and demand-side economics. The first, and older, force, supply-side economics, is the traditional effect of economies of scale. It simply states that larger companies tend to have lower unit costs. General Motors is a classic example of traditional economies of scale at work. What complicates things, however, is that companies have a natural “ceiling,” a point at which the complexity of running and maintaining the organization starts to undercut whatever economies of scale exist (again, General Motors is an example).
What really makes the New Economy new is the convergence of supply-side and demand-side economics into one powerful force. The trick is finding an industry that is naturally subject to this convergence of effects. Most are not, and probably never will be. Either they move too many atoms (General Motors, for instance), so the complexity of supply-side management will always stalk them and constrain growth, or they’re just too “virtual” and can’t function by being “closed.” This is the plague of so many dot-coms – in the attempt to get eyeballs, they never charged for anything, and thus, while enjoying certain demand-side effects, couldn’t monetize everyone’s attention. Examples of a company that enjoyed the “double whammy,” as Shapiro and Varian put it, are rare. They cite Nintendo (more than 100 million Game Boys sold to date). Others I would add: eBay, ICQ (now AOL Instant Messenger), AOL itself, Microsoft, and possibly Palm.
– strategy+business review
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