Lasting in the Cyber-Economy

Have doubts about whether durable economic principles can hold up in today's business environment? Read this book.
Author:
Publish date:

Carl Shapiro and Hal Varian,

Information Rules: A Strategic Guide to the Network Economy

. Harvard Business School Press, 1998, 288 pages.

Care for a survival guide to the new cyber-economy? Have doubts over whether durable economic principles can hold up in today's frenetic business environment? You should read this book by two University of California economics professors.

Shapiro and Varian make the case for a new wired world that depends greatly on sturdy economic principles that applied at the end of the 19th century as much as they do now. Technology changes, say the authors, while economic laws do not.

The authors lead off the book with a timely example. They point to the current Netscape/Microsoft standoff (news of

Netscape's

(NSCP)

recent alliance with

America Online

(AOL)

came too late for publication) as a long-term war with only one clear winner:

Microsoft

(MSFT) - Get Report

. Companies like Netscape that depend on larger information technology leaders like Microsoft are "fundamentally vulnerable" in the new information economy.

Where have we seen this before? Aha! 100 years ago, local telephone companies battling Ma Bell faced a similar dependency when they tried to connect with Bell Telephone's long-distance service, an effort that led to too much interconnection dependence and a lot of failed local phone companies. Seeing history repeating itself, the authors coyly wonder if Netscape investors who bid the company's price up to breathtaking heights "appreciated its fundamental vulnerability."

For a couple of West Coast egg heads, Shapiro and Varian make a clear, concise, and compelling point about the need for companies to get online. Like Seybold in "Customer.Com," the authors hammer home the point in authoritive fashion using real-life examples to grab our attention. Take the case of

Encyclopaedia Britannica

, regarded as a classic reference work since Thomas Jefferson was getting naked with the help. The authors cite the early 1990's price for the full-volume set of

Encyclopaedia Britannica

at $1,600. But that was before Bill Gates bought the complete

Funk & Wagnalls

encyclopedia in 1992 and made it available on CD-ROM for $49.95. Are we surprised when Shapiro and Varian tell us that E.B. lost market share and had to scramble to create an online presence? No, but the point is well taken.

I wish I'd seen more examples of that kind of real-life analysis and less on the academic stuff on developing value-maximizing pricing strategies and understanding the strategic implications of lock-in and switching costs. But the book isn't written for economically challenged business writers like me. It's written for business executives who are looking to harness the new information economy for the betterment of their businesses.

Business executives would do well to read this book. But they should avoid bringing it up at parties if they want to be invited back.

Brian O'Connell is a Framingham, Mass.-based freelance writer who has contributed to the Boston Herald, Worth, Communications Week and many other publications. He was senior editor at DEC Professional magazine and contributing writer at LAN Computing magazine from 1989 to 1994. Previously he had worked at the Philadelphia Stock Exchange in the 1980s and as a bond trader on the fixed income trading desk of Delaware Funds. TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there from TheStreet.com.