[Lecture Notes by Prof Yuen and possibly others 2000-2001]

Information Economy
-------------------

Why is the new economy so different? The cause lies in the nature of the
information products and services: they are complex but reproduceable. For
example the Windows operating system: it contains millions of lines of code,
some of which inherited from many years ago; yet thousands of shops around 
the world sell illegal copies of the system for US$20. The same applies to MP3
music, games CD-ROM, movie disc, IC chips, and even websites - complex yet
easily reproduceable, since they allow you to bring back their content and
associated software to your own machine to format and display it, and
you can easily keep these and copy them for your friends. 

The two features lead to a number of consequences:

First, the investment required for a successful product or service is very
high. This is obvious for large scale software like Windows, and for high
precision, complex devices like Intel processors, but perhaps less so for
websites since these are easy to bring up. It is however not at all simple
to organize a website-based business providing real services to a realistic
market in competition with both traditional and new economy players. There
has been a period when pioneering sites like Hotmail could thrive with a
poorly designed user interface and unreliable operation, and unrealistic 
sites like pets.com (which has since gone out of business) could attract
thousands of curious visitors and huge amounts of IPO money, but that was
just a transient phenomenon.

Second, the efforts are high risk but also high return: if a project does
not finish, the investment is completely lost, since there is usually little
that can be salvaged for a different project; further, if sales are less than
you expected, then you would have a hard time just recovering the investment.
However, a successful business can have very high profit margins because
the incremental cost of each additional sale is low, since it costs little
to produce an extra piece of software/chip, put another banner advertisement
on your webpage, or add a new customer or product to your existing web
shopping site. (Packaging up the product and delivering it is the costly part,
but that is old economy.) But, once serious competition arises, then the drop
in profit margin is very rapid too, since each competitor could cut the
price to the incremental production cost. An existing operation would fight
hard to maintain some form of monopoly to protect its past investment and
prolong the profits.

Third, when products/services are easy to reproduce, they are also easy
to modify and enhance; hence, competitors that previously service slightly
different market segments would usually expand to other segments and come
into direct competition, such as Microsoft offering browsers and online
services to compete with Netscape/AOL, and Oracle, a database company,
moving into network based office and enterprise products. It is
difficult for competitiors to live in peace controlling different territ-
ories.

Fourth, monopolies arise quickly because of the economy of scale. This is
not just true for software, chips, online shopping (more customers bring
more products, which bring even more customers), email systems, but also
for free information exchange and community sites: bigger means greater 
attractiveness and therefore more growth, or for starting a new company,
where attracting capital/talent usually depends on whether you already
have enough capital/talent. It is however extremely difficult
to maintain monopoly through uniqueness, unless one's design and implement-
ation teams are significantly more competent than others, enabling constant
enhancements ahead of all the competitors your success brings. While existing
monopolies ought to have an advantage in this regard too, large organizations
have their own problems in acting fast, spotting good ideas from the
grassroots level and not being overly swayed by vested interests.

Fifth, while starting a new product/service from scratch is difficult,
if some way is found to exploit the past investments of someone else, then
you can easily reproduce similar products and services at low cost. Hence,
infringements of a current monopoly are difficult to prevent. Yet, the
example of movies distributed on VCRs shows that easy reproduction can
also be a positive contributor to the business, provided the right
machinery, such as the video rental chains which are everywhere these days,
can be established and maintained. This is what is being tried by Bertelsmann
with Napster hoping to use it as part of a distribution control and payment
collection system, to turn poachers into game wardens.

Sixth, as technologies, products, services and monopolies come and go,
people have to invent business models, administrative processes and
legal controls on the fly, often solving problems which were already
not the most important ones by the time solutions were chosen and worked
out. Figuring out the interface between the old and new economy part is
usually the hardest task.

In short, the new economy tends to quickly go through a series of high
investment/high risk/high return, short term monopolies that somehow
get into unexpected problems because of the absence of well established
models and business frameworks. It makes a rapidly changing and highly 
stressful world.