Versioning 1Wen Zhou

Versioning What’s special about information products’

cost structure Implication of the cost structure for pricing What to do How to provide different versions The news industry

Versioning 2Wen Zhou

Outline

Cost structure Implication for pricing What to do How to provide different versions The news industry

Versioning 3Wen Zhou

Cost structure Large fixed cost, very small marginal cost

if delivered on the internet, marginal cost is even smaller

Fixed costs tend to be sunk once investment has been made, the seller will

behave very competitively Marginal cost stays flat even for very large

quantities capacity not constrained – behave very competitively

Versioning 4Wen Zhou

Outline

Cost structure Implication for pricing What to do How to provide different versions The news industry

Versioning 5Wen Zhou

Implication for pricing

Monopoly: can charge very high price Microsoft enjoys gross profit margins of 92%

Competitive market: price will be driven to marginal cost what matters is not the value customers place

on the product; it’s the cost and it’s the marginal cost

Versioning 6Wen Zhou

Pricing under competition Electronic phone books

first electronic phone book in1986: all phone numbers in NY area on CD

$10,000 a copy, sold to large commercial and government organizations

executive set up his own company, trying to cover the entire US phone companies refused to license digital copies of their listings Chinese workers hired at $3.50 a day to type phone numbers: 70

million phone numbers cost well below $1, but sold for hundreds of dollars competitors rushed to the business: no product differentiation:

soon the CDs were sold for only a few dollars

Versioning 7Wen Zhou

Pricing under competition

Classics delivered on the internet attempt to charge people or force readers to

register: will not succeed Encyclopedia Britannica

used to sell for thousands of dollars now free access to its web database

Versioning 8Wen Zhou

Outline

Cost structure Implication for pricing What to do How to provide different versions The news industry

Versioning 9Wen Zhou

Versioning

Definition: create different versions of the same core of information, and charge buyers accordingly indirect price discrimination

Particularly relevant for information products have to version: p=mc=0 easy to version: costless to create different versions

Versioning 10Wen Zhou

Versioning 11Wen Zhou

Internet Easy to identify consumers

IP address registration to use many online services Amazon’s attempt to discriminate backfired

Customized products: not easy to compare price re-configure, real-time/delayed stock prices, professional/regular

software online auctions

Individualized price: change price depending on stocks randomly vary price over time (intertemporal price discrimination)

Easy to search and compare prices

Versioning 12Wen Zhou

Versioning 13Wen Zhou

Versioning 14Wen Zhou

Outline

Cost structure Implication for pricing What to do How to provide different versions The news industry

Versioning 15Wen Zhou

Differentiation based on Timing/delay:

books: hard copy versus paperback movies: theater watching versus CD rental six months later stock quotes: real time versus 20-minute delay academic articles: Jstore 5 year delay

newer articles more valuable news articles: New York Times and Business Week: current

edition free, archives not free newer reports less valuable current edition has many substitutes no substitutes for old articles: writers, researchers

Versioning 16Wen Zhou

Differentiation based on Function

Lexis-Nexus: viewing free, download, store, duplicate, print are not

speed Mathematica computing speed IBM printer: 10 pages per minute versus 5 pages

TaxCut Deluxe highlights entries likely to catch the attention of IRS

user interface: Photoshop ($600), PhotoDeluxe ($50) image resolution: value-subtracted versions

Versioning 17Wen Zhou

Differentiation based on

Community: chat rooms, discussion boards, online computer games: reading messages is free

network effect: charge more for advertising when more people visit the site

pay membership fees to post a message, view photos, or email other members

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Differentiation based on

Others support: Netscape: instruction manual and a

free phone call to a support technician for $40 convenience: online access: unlimited versus

three hours per month annoyance: pay to turn off annoying ads

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• Pricing / versioning

• Lock in

• Network effect

• Compatibility / standards

Versioning 20Wen Zhou

Outline

Cost structure Implication for pricing What to do How to provide different versions The news industry

Versioning 21Wen Zhou

News industry

“The standard system of reporting, in which a journalist files a story that is broadcast or printed once and then put on a single proprietary website, is inefficient. The marginal cost of distributing the story more widely is close to nil, but the marginal benefit can be considerable.”

“Tossed by a gale,” The Economist, 5/14/09

Versioning 22Wen Zhou

Free or not Wall Street Journal: charge for certain types of news

rather than charging certain types of user Free

news about swine flu review of the new “Star Trek” film report on looming cuts at car dealerships

Not free Cigna Corporation’s pension plan Lockheed Martin’s quarterly lobbying expenditures lawsuit against a bottling company: improperly held board

meeting

Versioning 23Wen Zhou

Free or not

The fun articles are free; the dry, obscure stuff costs money broadly appealing articles draw readers to the website,

where they can be tempted by advertisers and by the Journal’s more selective wares

most people do not care about pensions in a Philadelphia health-insurance company, but those who are interested in such information are very interested

people’s willingness to pay for a story is inversely correlated with the size of its potential audience