Strategic Computing and Communications Technology

CS294-3, EE290X, BA296-11, and SIMS 290-2

Spring 1998

Pricing of Digital Content


Kim Bui

Jimmy Shih

Suet-Fei Li

Pushkar Ranade


Content *

Pricing of digital content *

Abstract *

Introduction *

Pricing of Information Content *

Previous Blunders in Content Pricing *

Previous Examples of Successful Pricing Model *

The Economics of Information *

The Information Economy *

An Example of Information pricing using Hollywood Movies *

More Pricing Options than Ever Before *

General Pricing strategies *

Strategies for Selling Information Content over the Internet *

Background Literature *

Analysis *

Strategies due to the Efficient Delivery of Information *

Strategies due to the Reduction in Transaction Cost *

Strategies due to the New Value Added to the Information *

Strategies due to the Economy of Scale on the Supply Side *

Strategies due to the Economy of Scale on the Demand Side *

An Example *

Recommendation *


Company Profile: *

The Company *

Industry analysis *

Recorded Music Industry Overview *

Aggregate Market Trends *

Dis-intermediation: *

Customers: A lot of niches, with differing listening preferences. *

Regulatory: There are enormous regulatory issues, which inhibit market growth. *

Industry structure drivers (Porter framework) *

Bargaining Power of Suppliers: Strong suppliers. *

Threat of Potential Entrants: High threat of entrants. *

Barriers to Entry: Easy to enter the market. *

Threat of Substitute Products: High threat *

Competition Among Existing Firms: Increased competition *

Current Strategies Being Used *

Strategies for Success *

Enforce Intellectual Property Rights: *

Creating a Customer Magnet: *

Segment Customers to Offer Personalized Service and Product: *

Promote Self Regulation: *

Case study: National Museum of American Art *

Company Profile: *

Industry Analysis *

Current Strategies being used: *

Advertising: *

Versioning: *

Adding additional value to the digital information: *

Recommended Strategies: *

Use the Web to gather information about your customers for marketing purposes. *

Continue to add value to the information content using advanced digital technology *

Personalize the museum visit for virtual visitors and apply price discrimination *

Case Studies: Pricing Online Stock Quotes: *

Company Profile: ( *

Industry Analysis: *

Current Strategy: *

Personalized Pricing and Versioning: *

Promotional Offers/Collaborations and Revenue Sharing with other companies: *

Maximize use of Internet/Minimize transaction costs: *

Price Discrimination: *

Evaluations: *

Recommendations: *

Lessons Learned: *

Case Study: Internet News: Strategies for pricing news content on the Internet *

Company Profile: *

Industry Analysis: *

Present Strategy: *

Use brand reputation to attract customers: *

Sell to groups of users/Corporate and site licenses: *

Value Added Service: *

Evaluations: *

Recommendations: *

Lessons Learned: *

OTHER Strategies for Consideration: *

Use Superdistribution *

Use Microcommerce *

Combine Versioning with Microtransaction: *

Look to the Telcos for Billing Systems *

Conclusion *

Appendices *

Appendix A: Fourteen Characteristics of Information: *

As a Commodity: *

Market Failure Related Characteristics: *

Non-Market Related Characteristics *

Bibliography *





In this paper we examine how digital information should be priced in a network world. The goal of this research report is to examine how information content providers can win in a networked digital economy. We begin our analysis by analyzing the unique nature of information followed by a discussion of the general strategies for pricing information content. We also look at how pricing strategies are affected by the Internet and the increase digitalization of content.

With this understanding of information in a network economy, we develop a model for showing how content should be priced. We then select four case studies to validate our model. Finally, we conclude the paper with some lessons we have learned from our four case studies.


No doubt about it, the Internet is hot! There are more than 25 million U.S. households with Web access, and an additional 22 million through U.S. businesses, government and educational institutions, plus approximately 8 million foreign users. This brings the total current worldwide estimate to more than 55 million Web users.

The advent of the Internet combined with a world where more things are being digitized has created a new economic paradigm called the network economy. In this economy, technology improves dramatically every year while enhancing competition by offering entrants new ways of competing against established firms. In this network economy, consumers are conditioned to count on drastically superior quality for lower price over time. Content, hardware, and software prices in the network economy will eventually settle down to nearly zero, while features and performance continue to expand and improve. Who would have ever imagined the day where a major software company would be giving away its source code for free?

Pricing of Information Content

In the emerging digital economy, there are many possibilities to price digital information content and services. Currently, consumers of information content buy movie tickets, rent videotapes, subscribe to magazines, cable television and internet access and license application software. These revenue models are directly being challenged by the proliferation of digital media. As content assets are rapidly being digitized and migrating to computer networks, content publishers must now cope with an increasingly complex array of pricing alternatives and strategies

Previous Blunders in Content Pricing

We are blessed with the hindsight of numerous content pricing blunders that took place in the early 1980s. The old pricing paradigms of the past do not work in our new digital network economy. In fact, we have seen that misjudgments in the pricing of media content are both common and costly. The two classic examples are the pricing of videotext service and pre-recorded movies.

In our first example, attempts to sell consumer oriented videotext services in the early part of the 1980s failed due in part to a pricing structure that was more expensive and more complicated than traditional substitutes such as magazines and newspapers. Even those who are in the media business have failed to understand the complexity of pricing information content.

Secondly, when the VCR first made its mass-market debut in the early 1980s, many Hollywood executives attempted to establish the VCR as a first run release window. These executives assumed that consumers would be willing to purchase video movies at more than $70 each. As it turns out, this strategy failed miserably until the advent of movie rentals and lower prices.

Previous Examples of Successful Pricing Model

To the benefit of all of us, a market for consumer oriented information services and digital content did emerge in the 1990s. This was made possible through the unbundling of components associated with on-line services and the practice of incremental pricing and versioning of information. For example, unlike the ill-fated videotext service of the 1980s, the successful launch of America Online and explosion of the Internet did not require consumers to purchase a stovepipe device such as a dedicated terminal. Instead, these new information purveyors piggybacked their services and products on the PC platform that consumers had already purchased for other reasons. At first many on-line service provider charged a usage fee to access their service. This is how America Online and Internet Service Providers make most of their revenues. Before AOL adopted an unlimited use fee strategy, customers paid a fixed price to access the service for a certain number of hours per month. Any additional hours of usage over an above their allotted time would be charged to their accounts. However, AOL realized that in the long run time based fees make less sense. According to Armstrong and Hagel, on-line service providers "will need to maximize the number of members and encourage them to spend increasingly more time on-line - posting messages on bulletin boards and chatting" in order to make their service attractive to others. Usage fees do not encourage members to venture on-line and discourage them from lingering there. For this reason, Armstrong and Hagel believe that most electronic communities will eventually turn away from usage fees.

The pricing and distribution of home movie rentals is another example of a successful strategy for managing information content. The home video industry skyrocketed when entrepreneurs figured out that consumers were willing to rent a movie for a few dollars a night rather than paying $70 to own the movie forever. Figure 1 shows the impact of home video rentals on the growth of motion picture entertainment in recent years.

Figure 1, Source: Veronis, Suhler & Associates

As in many other industries, once pricing for home videos is driven down to near impulse purchase levels, the content suppliers can increase their chances of building critical mass and creating positive feedback. Disney's pricing of its first home movie release of Lady and the Tramp at $14.99 established a new reference point for home movies, which was quickly copied by all the other studios.

In addition to bringing down the cost of home videos to impulse levels, the major studios have done extremely well in versioning their content. Figure 3 shows how the studios are using versioning to create new revenue streams for their motion picture content. There now exist a plethora of new channels and avenue of distribution that motion picture content producers can exploit in reselling and repackaging their content.

Figure 2, Source: Kagan Report 11/11/96

The Economics of Information

The Information Economy

We are moving into a new economic wave driven by information. Like all new economic waves, we need to develop a framework to study and analyze the key drivers of our economy. Previous economic models are well adapted at understanding the manufacturing and selling of tangible goods such as widgets and cars. However, we need to develop a commercially robust way of buying and selling easily copied intangible goods like electronic data and digital content.

In a paper submitted to the Office of Technology Assessment of the United States Congress, Professor W. Curtiss Priest offers an economic framework for understanding the unique nature of information goods. Professor Priest argues that information has different characteristics from most physical commodities. In his paper, "An Information Framework for the Planning and Design of 'Information Highways," Dr. Priest propose a new framework for understanding the unique value of information. Dr Priest's 14 different properties of information represents a great starting point in helping us quantifying the impact that information has on our new economic wave. For the purpose of our project we have isolated six properties of information that will guide us in developing our pricing strategies (see appendix A for a summary of all fourteen points).

These six characteristics of information make it necessary to treat information different from other economic commodities and therefore being able to price it effectively. The outcome according to Priest shows there are many ways in which information will be under-produced without adequate property rights and pricing alternatives. In order to solve some of the inherent problems of information such as appropriability, transaction costs, and to encourage more information about information, Priest suggests that we must use intellectual property rights. However, the assignment of rights also exacerbates the economic problems of information when there are high social returns to the easy and free access to information.

An Example of Information pricing using Hollywood Movies

1. High Investment to Reproduction Cost Ratios

One of the biggest appeal of network based digital content is that the marginal cost of producing an additional unit for consumption is virtually zero. Once the content producer cover their fixed costs, all incremental revenues go straight to the bottom line as show in the case of a Hollywood blockbuster movie.

Figure 3. Source: Kagan Report 3/21/97

In the example of motion pictures movies, the producers would like to extract as much revenue from their investment as possible. For example, the production and development cost between a blockbuster movie and a break-even movie are generally the same. Blockbusters are more profitable because all the incremental revenues flow directly to the bottom line once the production costs are covered. Therefore, movie producers would like to milk their cash cows as long as possible and promote their content into different channels and segments.

2. Inappropriability

Since one of the major consequences of inappropriability is the under production of information since it is difficult to exclude people from using information who have not paid for it, the studios have been active to enforce copyright laws and licensing arrangements. As the cost of high quality duplication equipment continues to decline, major Hollywood studios have cracked down heavily on video piracy.

3. Indivisibilities (of supply)

Purchasers of movie entertainment are confronted with an all-or-nothing option. For example, in order to see the amazing car chases in the French Connection, we must purchase or rent the entire film. There currently does not exist a market that can sell us a particular scene in a movie.

4. Uncertainty and Risk in Production

Landmark Hollywood films like Titanic and the upcoming Lethal Weapons Part IV would not have been financed if there does not exist an alternative distribution channel for the studios to diversify their risks. The use of versioning can make a box office dog into a cash cow for the studios. The classic example of this has been the recent set of Kevin Costner movies. Despite being box office flops, Waterworld and the Postman went on to make money for the studios in foreign release, pay per view, airline viewing, and home videos. Without these alternative distribution channels, it would be difficult for the studios to invest in another Kevin Costner movie.

5. Information/Knowledge

Since watching a movie is an experience good, moviegoers are more likely to choose a movie based on their familiarity with the content of the movie. The less a moviegoer knows about a particular actor or director, the less likely they will attend the showing. This helps to explain why certain Hollywood actors and directors can command such an astonishing salary. The studios have invested heavily to develop a reputation for producing movies with mass appeal. For example, James Cameron is reportedly being offered $50 million plus a percentage of the gross proceeds for directing his next project Planet of the Apes.

6. Transaction Costs:

This has great implications on how we should price digital content in a network economy. Under this scenario, once transactions on computer networks become secure, it will be possible to sell individual content pieces for pennies a piece to extract the maximum value out of content. We call this microcommerce which we will examine in greater detail later the paper.


More Pricing Options than Ever Before

As publisher of information based content enters the networked digital economy, they are faced with a broad spectrum of pricing options. At one extreme, consumers can purchase a media product (such as a book or music CD) and obtain the right to use that product forever. At the other extreme is a transactional model found in video game arcades and pay per view television. In between these alternatives are various subscription, licensing, and utility models that content producers can apply to the pricing of digital content. Despite the fact that network computing and digital technology has perplexed content producers, digital technology and computer networks are helping content companies to better price their information product. New advancement in transaction databases and processing systems are making is easier for content companies to apply different pricing models to fit changing market conditions. A utility-based model combining basic rates, premium services, versioning, and transaction fees has great appeal to many content producers. A major challenge for content producers is to avoid overly complex pricing schemes common in industries with high fixed costs, which can confuse and frustrate consumers and thereby hinder the growth rate of these new business opportunities. For example, we have all experienced the frustration in buying airline tickets following the deregulation of the industry. Instead of adopting a value pricing strategy, the airlines embraced a highly complex pricing structure in an effort to differentiate their services. At one time, American Airlines had over 500,000 different fares on its reservation system.

With so many pricing options to consider, we now turn to an examination of pricing strategies rooted in economics.

General Pricing strategies

Due to the nature of digital information, a traditional uniform flat rate pricing scheme would not be efficient enough to extract sufficient surplus. In today's competitive business environment, industries have heterogeneous customers that demand differential services and products. The costs of conducting business also vary widely across customers. Therefore, it is crucial for companies to develop flexible pricing strategies that accurately target at the needs of specific customer segments. In other words, price discrimination needs to be carefully and widely implemented in regards to pricing information. In the following section, we will discuss the classic definition of the three categories of price discrimination in Economics (Varian, 1992 ) and how they should be applied to pricing information content.

First degree price discrimination involves the seller charging a different price for each unit of the good in such a way that the price charged for each unit is equal to the maximum willingness-to-pay for that unit. This is also known as perfect price discrimination. In this type of discrimination, pricing is mainly based on the value of the product to the consumers and not on the actual cost. Different customers have different price sensitivity and expectation. Some customers are only interested in the product if they consider the price a bargain, while some are willing to pay extra money to obtain supreme products and services. Therefore, products and services should be differentiated and customized to increase their values to individual consumer. In order to efficiently apply personalized pricing, market research should be conducted to study the customer's profile, their interest and need. Promotions are good ways to estimate the price sensibility of different customers as well as the market response to price changes. In the context of digital information, due to its very low distribution and reproduction cost, marketing could be more individualized and interactive. Information could be "mixed and matched", i.e. fully customized, according to the customer's demand and past purchasing record.

Second-degree price discrimination is to charge consumers different prices depending on the number of units of goods bought, but not across consumers. This involves such practice as quantity discount, where the revenue a firm collects is a nonlinear function of the amount purchased. This is also known as nonlinear pricing. A common way to apply second degree pricing is group pricing; i.e. pricing policy directly based on group identity. There are four reasons to target groups rather than individuals: Price sensitivity, network effect, lock-in and sharing. First, different groups have different price sensitivity. Second, network effects occur when the value to an individual depends on how many other members of his group use the product. Third, if a group has already chosen a particular standard product, the switching cost to another brand would be high due to the costs of coordination and re-training. This results in lock-in. Fourth, information intermediaries sometimes are needed to help the group to manage and organize the information. This is called sharing. Market research should be conducted to identify different groups and their specific needs. Then tailor-made pricing strategies should be applied to target their individual need. In the context of information content, for example, software companies should offer quantity discount and site licenses arrangements to reduce transaction cost to a group. In addition, certain promising groups, such as students and young uses, should be specifically targeted to create "lock-in" and build customer loyalty. Information bundling (offer complimentary goods) should also be used if it reduces the variation in willingness to pay. Electronic information should contain features that differentiates it from the printed version: it should be searchable, sorted etc.

Third-degree price discrimination is to charge different consumers different prices, but each consumer faces a constant price for each unit of goods purchased. This is probably the most common form of price discrimination. Versioning is an important tactic to optimally serve different market segments by offering different versions tailored to their need. Versioning could also enable self-selection: to let customers select the version that is the most suitable to his/her need. Obvious, to successfully carrying out versioning, we first need to identify the dimensions of the information product that are of great value to some customers, yet of little importance to the others. Then you need to use these dimensions, such as delay, user interface, image resolution, speed of operation, format, capability, features, and comprehensiveness to version your product. The number of versions provided is highly situation dependent. Normally that should include a low-end and a high-end versions and maybe something in the middle. Note that there should be significant gap between versions to prevent high-willingness-to-pay consumers from purchasing the low-end counterparts. In the context of digital information content, information products should be versioned so that the customers could perform self-selection.

To ensure the success of the business and maximize the profit margin, all three degrees of price discrimination should be applied extensively in the marketing strategies. From the above analysis, it is obvious that in order to carry out all categories of price discrimination, it is crucial to know who your customers are, what their specific needs are, the cost of serving different groups of customers and apply market segmentation, differentiation and personalize pricing accordingly. After sufficient information on the customers has been gathered, different pricing strategies need to be made to target different market segments: a focused or niche strategy aimed exclusively at the most cost-sensitive market segment (the customers who are looking for bargains); and a focused or niche strategy directed at the most quality-driven customers (the customers who are willing to pay for supreme services and products) (Clemons & Weber, 1994). This implies that firms should add superior values and serve the high-profit customers well to keep them as well as cut the service to the unprofitable ones to save cost.

Strategies for Selling Information Content over the Internet

Background Literature

Companies selling information content over the Internet can use price discrimination to extract surpluses from consumers. These companies can also use the Internet to add new values for their customers. Companies can use the following strategies discussed in the literature to take advantage of the Internet technology.

According to Ghosh (1998), the Internet has created four new opportunities. First, through the Internet, companies can establish direct links to customers to complete transactions. Second, the Internet technology lets companies bypass others in the value chain. Third, companies can use the Internet to develop and deliver new products and services for customers. Fourth, companies can use the Internet to become the dominant players in the electronic channel of a specific customer segment, controlling access to customers and settling up new business rules. But Ghosh (1998) also mentions two dangers created by the Internet. First, companies risk damaging their existing distribution relations. Second, companies risk losing their established brand reputations on the Internet.

Evans and Wurster (1997) point out that the Internet allows rich information (in bandwidth, customization, and interactivity) to reach a large audience. Companies used to bundle their information content together to amortize the high distribution cost. But now companies selling information content over the Internet can unbundle their content because they are no longer constrained by the high distribution cost. Evans and Wurster (1997) also point out that lower distribution cost makes traditional sources of competitive advantages like strong sales force and supreme brand obsolete. Finally, Evan and Wurster (1997) predict that providers with broad information product lines will lose grounds to the more focused specialists because the Internet allows information to be unbundled.

Rayport and Sviokla (1995) explain that companies can use the Internet to develop and deliver new products and services. They suggest adding new value by helping customers gather, organize, select, synthesize, and distribute information.

To succeed in cyberspace, Kiely (1996) explains that companies need to sell unique products. Companies can make their products unique by bundling together products and services that hitherto have been available only separately.

Armstrong and Hagel (1996) point out that companies can provide value by organizing electronic communities to meet multiple social and commercial needs. They explain that companies establishing communities on the Internet can own a specific customer segment across the full range of its interests and needs.

Dyson (1997) explains that companies can only influence, not control, their corporate images on the Internet. Dyson (1997) suggests that companies should be honest with their customers about their actions.

Kiely (1997) mentions that companies should gather information about customers for marketing purposes. But to gather information, companies should forewarn consumers about how the gathered information will be used, offer customers the choice about how they want their information to be used, safeguard the gathered information, and provide customers access to the gathered information. Finally companies can give customers discounts in return for gathering information about them.

Deighton (1996) explains that the Internet allows companies to market to individuals. Companies can gather and remember responses from individuals. To carry out interactive marketing, companies need good Web designs to give customers reasons to stay at their sites. Companies also need good technical skills to make sure their Web sites can handle their customers' loads. Finally, companies need to spend a lot of effort to create exciting content so that customers will want to come back to their sites.

Shapiro and Varian (1998) offer many suggestions for selling information content over the Internet. They suggest using price discrimination to extract consumer surpluses. They suggest bundling products with complementary goods to create more values. They suggest using on-line advertising as an additional source of revenue for selling the content. They suggest taking advantage of the economy of scale to become the cost leaders. They suggest using free sample of build a customer base. Finally, they suggest that companies should try to maximize the value of their information instead of over-protecting it against piracy.


The Internet has created many new strategies for companies selling information content over the network. There are four reasons why these new strategies are possible. First, the Internet makes the delivering of information more efficient. Second, the Internet reduces the transaction cost of doing business between consumers and suppliers. Third, the Internet allows companies to create new values for their customers. Fourth, the Internet allows companies to take advantage of the economy of scale on both the supply side and the demand side. Companies can use these four advantages to devise new strategies for selling information content over the Internet.

Advantages of Selling Information Content over the Internet

1. Efficient Delivery of Information

2. Reduction in Transaction Cost

3. New Value Added to the Information

4. Economy of Scale on the Supply Side and the Demand Side

Strategies due to the Efficient Delivery of Information

The Internet allows companies to send rich information to a large audience at a very low cost. Lower distribution cost allows companies to have personal interaction with their customers. Companies can deliver personalized information like personal newspaper for each customer. Lower distribution also allows companies to unbundled information. For example, the music industry no longer needs to bundle songs together. Each song can be sold separately over the Internet. Finally, lower distribution cost makes it easier for others to pirate information. But companies should not over-protect their content with too many anti-piracy devices because these devices can reduce the value of the information by making it too difficult for their customers to access the information. Instead, companies should maximize the value of the information by using creative strategies to take advantage of the lower distribution cost. One strategy is for companies to view the content as free and charge for the additional services added. For example, some newspapers give away their content for free, but charge fees for searching and retrieving articles from their archives.

The following is an analysis of microcommerce, an idea of using microtransactions to sell goods or services ranging from a few cents to a few dollars. In the past, microtransactions were economically prohibitive because these small transactions cost more than the price of the goods. But the Internet has lowered the distribution cost for selling information content over the network. Thus we see microtransactions as being the nucleus of a strategy to broaden digital content commerce. Microtransactions work on the basis that the cost of processing transactions is near zero. Therefore, content producers can generate more revenue by selling a wider variety of information goods in small quantities.

While the enabling technology for microtransactions does exist, the major challenge for content producers is to persuade consumers to start using them. For example, if customers buying information content have to jump through too many hoops, they will lose interest in these transactions and will find alternative sources for the content. Therefore, it is imperative that the content providers adopt a simple process when using microtransactions.

We believe that many Web-based content publishers will begin using microtransactions to allow them to sell per-unit purchases and short-term subscriptions. By leveraging the value of microtransactions, content producers can sell content by the piece and eliminate the need for consumers to purchase the entire content. By offer customers selective access, information content providers would alleviate the common complaint customers have about buying information content that often is bundled with lots of irrelevant information.

Strategies due to the Reduction in Transaction Cost

The Internet lowers the transaction cost of doing business between consumers and suppliers. The Internet reduces consumers' transaction cost by making it easier for them to compare prices. With access to price information, consumers on the Internet have lower switching cost and search cost. Therefore, companies should customize their products so that they don't need to compete solely on prices.

The Internet also allows companies to charge customers a fee based on actual usage. Usage fee is possible because the Internet reduces the transaction cost on monitoring usage. For example, before the Internet, software providers can only charge their software per copy regardless of how often the software is being used. Now, the software providers can also charge a usage fee based on the actual usage. There are three advantages of having an access fee and a usage fee. First, companies can attract more customers with a lower access fee and then use the usage fee extract surpluses from them. Second, two fees allow companies to give consumers the option to decide later how often they want to use the product. Third, usage fee gives suppliers incentives to constantly improve their products. Finally, companies can even give access away for free and charge only for usage. Then companies can benefit from superdistribution where word of mouth can help advertise their products.

The Internet also makes it possible for information providers to supply directly to customers without having to go through several middlemen. For example, a writer does not need to go through both a publisher and a distributor to reach his audience. However, he still needs one middleman to help consumers identify good content. To eliminate some of the middlemen, companies can either acquire the skills of these middlemen or form allies with those that have these skills.

The following is an analysis of superdistribution, an idea of freely distributing the content and then charge customers based on actual usage. Superdistribution proposes to build an information age market economy around the difference between manufactured goods and information goods (Cox 1995). It is difficult to replicate manufactured goods and monitor their usage. In contrast, it is easy to replicate information goods and monitor their usage in a computer network. In the superdistribution model, each computer in the network will report the usage back to the content provider. Superdistribution incorporates meterware into the digital content to make the information useless except on machines that will report its usage.

Under superdistribution, vendors can distribute digital content for free in expectation of a usage-based revenue stream (Cox 1995). Superdistribution approach allows information to flow freely, without the resistance from copy protection (Cox 1995). Supporters of superdistribution argue that using copy protection and complex software licensing are the wrong approaches for dealing with easily replicable information goods. In contrast, superdistribution takes advantage of the ease of copying by encouraging free distribution of digital content.

Strategies due to the New Value Added to the Information

The Internet technology has created new opportunities for companies to add new values to their information content. For examples, companies can help their customers better gather, organize, select, synthesize and distribute information. Companies can use the Internet to provide valuable new services inexpensively like building electronic communities. But each additional value added by one company weakens the business proposition of another company in a small way.

Another way to add value for customers is to sell complementary products related to the information. For example, a company can bundle its cooking recipes with their ingredients. By bundling complementary products, companies can provide one-stop shopping for their customers. Companies can also let customers bundle their own products. For example, a music company can let its customers bundle the music they want in a CD. So companies should take advantage of these new business opportunities created by the Internet to increase values for their customers.

The Internet has created a new medium for suppliers to advertise their products. Suppliers need good content to attract customers' attention. Therefore information providers can use their content to sell on-line advertising to generate more revenue.

Strategies due to the Economy of Scale on the Supply Side

On the Internet, companies can become the cost leaders by taking advantage of the economy of scale. For example, a content provider can take advantage of the economy of scale to make its product better and cheaper. On the Internet, there is a strong first mover advantage for being the first company to serve a particular market. Only a few companies are needed to serve a particular market. Finally, companies can take advantage of the economy of scope to create synergies with other parts of their business.

Strategies due to the Economy of Scale on the Demand Side

Companies should take advantage of the network effect offered by the economy of scale on the demand side. Network effect is important because people in a virtual community want to interact with other people. To take advantage of the network effect, companies need to first establish their brand identities on the Internet. Since information is an experience good, brand identity is very important because it provides confidence in the quality of the information. Companies can spend a lot of money on advertising to establish their brands. Companies can also use free sample to establish a customer base. For example, when CNN News first appears on the Internet, it gives its content away to attract viewers. Another way to establish brand identity is to form partnerships. Companies can sell their information through well-established channels on the Internet. For example, companies can leverage the size of a big Internet Service Provider to establish their brand identifies. Or companies can ally with other companies to create a cascading value chain. After establishing its brand identify, a company can take advantage of the network effect to lock its customers in and extract rent from them.

An Example

Companies can devise new strategies based on these four advantages to sell their information content on the Internet. For example, companies can combine versioning with microtransactions to extract consumer surpluses and alleviate the information overload problem. Using these two strategies, information providers can offer short-term subscriptions in three flavors. First, they can offer unlimited access in a brief time period. Second, they can offer limited access by restricting the total amount of information that customers can obtained in a brief time period. Third, they can charge the information according to usage in a brief time period. This example just illustrates one of the many possible strategies companies can use to sell their information content over the Internet.


The strategies a company should use for selling its information content depend on two factors. First, they depend on whether the information is static or dynamic. Static information does not change with time while dynamic information does. Examples of static information are music and images. Examples of dynamic information are stock quotes and newspaper. With static information, a company needs to worry about others pirating its information because there is demand for repeat view. With dynamic information, a company does not need to worry as much about piracy because timeliness of information is very important. The second factor depends on whether the company enjoys market power or not. An example of a dominant firm is Microsoft in the desktop operating system. An example of a small firm is in selling music CDs. A dominant firm can use its market power to extract surpluses from consumers. A small firm, on the other hand, lacks the market power to price discriminate. Therefore a small firm needs to differentiate its products so that it doesn’t need to compete solely on prices.


Static Information

Dynamic Information

Dominant Firm

Can use price discrimination to extract consumer surpluses. Need to worry about piracy.

Can use price discrimination to extract surpluses. Don't need to worry about piracy.

Small Firm

Should differentiate its products. Need to worry about piracy.

Should differentiate its products. Don’t need to worry about piracy.

We illustrate our recommended strategies by picking one company from each category. We pick the National Museum of American Art in providing museum content as an illustration of a dominant firm selling static content. We pick in providing music content as an illustration of a small firm selling static content. We pick the Wall Street Journal in providing financial news to illustrate a dominant firm selling dynamic content. Finally, we use in providing stock quotes as an illustration of a small firm selling dynamic content. For each of our case study, we first describe the company and the environment it faces. Then we describe and evaluate the current strategies used by the company. Finally, we end each case study with a set of recommendations for the company.


Static Content

Dynamic Content

Dominate Firm

The National Museum of Art in providing museum content

The Wall Street Journal in providing financial news

Small Firm in providing music content in providing stock quote information


The dj.COM Case Study

Company Profile:

Company: Founded March 1996, privately held

Product: TheDJ Web Radio, TheDJ Player Application, TheDJ Interactive, FacePlate, and TheDJ Media Server

Markets : Online Music Broadcasting, Entertainment.



1209 Howard Ave

Suite 200

Burlingame, CA 940101

Service: Internet-exclusive "Radio Stations", delivering 60 continues music channels, ranging from Chicago Blues to New Age, to Big Band.

Harness the power of the Internet to bring entertainment to a new level, displaying song information as music is played, providing dynamic links to purchase music on-line. ( is revolutionizing the traditional radiobroadcasting model by delivering multiple channels of continuous music programming to the desktops of thousands of users. The company is an example of a small firm offering static content.


Static Content

Dynamic Content

Dominate Firm

American Art Museum in providing museum content

Wall Street Journal in providing financial news

Small Firm in providing music content in providing stock quote information

The company is leveraging both its proprietary client server technology and the rapid growth of the Web to create a cyber community of music listeners. The Company's management believes this cyber community will provide tremendous potential for online advertisers and music merchandisers. Moreover, the site will offer record companies an alternative channel for promoting, selling, and collecting listener demographics.

We feel that the DJ is well positioned to take their business model one step further by selling musical content directly to their listeners. In this case study, we will look at how the DJ is currently delivering music over the internet, examine the current state of the music industry, and develop recommendations on how to create a sustainable competitive advantage in a digital information economy.

The Company ( is one of the first Internet "Radio Stations", delivering 60 continuous music channels, ranging from Chicago Blues to New Age to Big Band over the Web via Real Audio streaming software. The DJ harnesses the power of the Internet and other technologies to bring entertainment to a new level, displaying song information as music is played, providing dynamic links enabling on-line purchasing, and allowing real-time listener feedback.

TheDJ enables a level of music format segmentation absolutely unobtainable through radio broadcasting. For instance, even though it is possible (although unlikely) for radio stations to cater exclusively to the Blues, there are not enough listeners familiar with this genre to appreciate further segmentation of say Chicago or Delta Blues. By providing over 50 channels of quality music, TheDJ enables its listeners to enjoy this level of content diversification. Additionally, TheDJ's presence on the Internet furnishes content providers with a vehicle for reaching unlimited amount of listeners on a global scale.

Internet-only ventures like TheDJ are realizing that being first to market and undercutting current price and distribution channels are not a sustainable competitive advantage. In the amount of time it takes a startup to develop a brand and gain sufficient market share, traditional vendors are able to acquire the technology they need to enter the Web marketplace.

For TheDJ to succeed in a market brimming with potential entrants, it will have to present a value proposition that goes well beyond entering the market first with whiz bang technology. TheDJ must begin to target very narrow market niches or to form partnerships with traditional vendors that enable both organizations to offer an array of services to customers, both on-line and off-line.

Customer loyalty is extremely important to the long-term success of TheDJ. With low barriers to entry and increased fragmentation of web users, competition on the Internet is intense. Customer acquisition is becoming more expensive as the economy moves towards a new paradigm called the network economy. Consumers are conditioned to count on drastically superior quality for lower price over time.

Industry analysis

Recorded Music Industry Overview

In 1995, the recorded music industry generated over $12.3 Billion in revenue in the United States alone, comprising approximately 30% of the world-wide market for music. Compared to the $7.5B earned in 1990, the industry has reported a five-year growth rate of approximately 10.3%. However, while the industry has reported an increase in earnings, the overall trend in annual growth has been on the decline.

While sales have been growing, the Record Industry Association of America (RIAA) speculates that CD revenue growth has been exhausted. CD sales grew only 2.1 % during 1994 and this stagnation is primarily due to the fact that since the creation of the CD, no new music technologies have successfully penetrated the consumer market. Therefore, revenue from the sale of CD's has been largely restricted to the purchase of new releases. In fact, the RIAA predicts that CD sales will continue to grow at a modest rate of 10%, the current rate for new compact disc releases. Analysts predict that over-all Industry revenue will continue to increase at a slow 5-7% largely because the lack of technological developments'.

Aggregate Market Trends

There are several market trends that are influencing the delivery of music across the Internet. All of these trends play an important role in selecting the strategies the needs in order to create a sustainable long-term competitive advantage.


Heralded as the death of the salesman, disintermediation promises to bring down cost while enhancing customized service to the consumers. The Internet is fostering a new generation of middlemen – electronic agents that provide the information and technological resources to make sales happen over the Web.

Already, new online music start ups like N2K and Liquid Audio have been approached by recording artists who are contemplating bypassing the major record labels and releasing their own music directly to the end user using the Web. The music industry could easily become the first major packaged goods product to make the transition from atoms to bits.

Customers: A lot of niches, with differing listening preferences.

Fragmentation: Over the past several years, music listeners have become increasingly fragmented with the increasing popularity of Alternative Rock, Hip Hop, Urban, Country, Gospel, and the general aging of the music listening population. There is not a high probability that one genre of music will capture enough of the market niches to be as broadly popular as key music genre in the past.

Regulatory: There are enormous regulatory issues, which inhibit market growth.

Digital Performance Rights. Due to the complexity of monitoring over 30,000 Internet music sites, major performing rights organizations favor blanket licenses for digital transmission. However, the technology to sample music on the web is being developed to create a fairer metering system and to provide a more accurate gauge of royalty payments.

Industry structure drivers (Porter framework)

Bargaining Power of Suppliers: Strong suppliers.

Record Manufacturers: There are six major record labels, Bertelsman Music group, EMI-Capitol Music, MCA Music Entertainment, PolyGram Holding Inc., Sony Music Entertainment, Warner Music Group. These six record labels control over 85% of the music market. Besides manufacturing facilities, the major record labels also own distribution companies. Therefore, the recommended strategies should address the fears and concerns of this very powerful supplier group. Without a clearly defined policy to protect the interest of the record labels, the growth of an on line music delivery industry will be severely hampered.

Threat of Potential Entrants: High threat of entrants.

Internet-based radio stations. As audio-streaming technology becomes more pervasive and begins to rival the sound quality of traditional broadcast radio, more players are likely to enter TheDJ's marketspace.

Barriers to Entry: Easy to enter the market.

There currently exist few barriers to entry for Internet radio broadcasting. One of the great advantages of starting a radio station on the Net is the ability to bypass the Federal Communications Commissions license fees, investments in radio transmission towers, and other capital expenditures. For example, the going rate for an FM license in a major metropolitan area is about $22 million, compared with the $250,000 worth of hardware and software tools required to create an internet broadcast site with international reach.

Threat of Substitute Products: High threat

The biggest threat of substitutes comes from the traditional radio broadcasters and CDs. Whether music on the Internet is a passing fad or not remains to be seen. However, traditional media have shown a surprising resilience in the face of new technologies.

Nevertheless, the largest substitute threat for TheDJ is the Internet itself. As the Internet becomes more interactive and multimedia rich, customers will be driven to new sites offering richer content and improved performance. In this view, TheDJ must contend with the possibility that it may eventually lose out to the medium that spawned its existence.

Competition Among Existing Firms: Increased competition

There are currently more than 32,000 Web sites devoted to music in one way or another. Sites featuring musical acts make up more than 26,000 sites. The majority of these sites contain tour information, music sound clips and other artist minutiae. Competition among sites is heating up, as site visits becomes the key revenue driver.

Most music sites generally fall into two different categories: genre and music guides.

  • Genre sites - includes sites constructed by N2K Entertainment and cater to a particular type of musical taste. These include Rocktropolis, Jazz Central Station, IUMA, SonicNet, and Classical Insights.
  • Music Guides feature large amounts of searchable content including bands, record companies, radio stations, music stories, concert dates, record charts and magazines. Some of the most popular sites include the All Music Guide ( and the Ultimate Band List (


Current Strategies Being Used

The's current strategy revolves around selling advertising fees to support the site and helping its partner to sell more CD's.

Transaction fees: The DJ has primarily focused its efforts in establishing partnerships with music industry retailers. It has partnered with music retailers to allow its listeners to purchase a CD containing the songs being broadcast over the network. These partnerships generate revenue for the DJ via commissions for each transaction referred by the Company.

Advertising Revenues: Using the DoubleClick Internet advertising agency, the DJ began selling Ad space for banners on its web site. The web site registration capture specific consumer demographic information and musical preference that enables advertisers to target customers with focused product messages.

We believe these strategies are confined to the economic models of the previous decade and do not leverage some of the unique characteristics of the information economy. We are recommending strategies that will help the to become more profitable and more successful in the digital information world given its current position as a small firm selling static content. The strategies we are recommending take advantage of the unique opportunities inherent in information goods and will leverage off the DJ's unique position in the on-line music industry.

Strategies for Success

In examining the position in our strategy matrix (a small company producing/distributing static content) we know that our strategies should be focused on enhancing the legitimacy of the company as a content source and develop a value proposition for being in the on line business. Value must be created for static content otherwise the benefits of being on-line would not accrue to the content provider. In other words, new features must be developed to enhance static content in a digital world. With these features in mind, we are recommending the following strategies for pricing and managing information content for the

    • Enforce Intellectual Property Rights
    • Creating a Customer Magnet
    • Segmenting Customers
    • Personalize Products and Services
    • Promote Self Regulations

Enforce Intellectual Property Rights:

Since one of the key market failures of an information good is its inappropriability, it is essential that strategies should be adopted to protect the legitimate owners of the content. To counter outright piracy, a number of solutions have been proposed, foremost of which is "digital watermarking." Digital watermarking encapsulates a music track copyright data with the audio (plus lyrics, cover art, and liner notes) in a single master file. A digital watermark consists of an inaudible piece of binary data that is randomly imbedded in an audio file. When a copy of an original file is made, the watermark readily identifies it as a copy and provides information about the original purchaser. In the example of distributing music over the Internet, Watermarking of digital music tracks is essential to protect the legitimate owners of a piece of music. The should adopt watermarking software for distributing music on-line. Watermarking technology is being developed by Internet audio companies like Liquid Audio, ARIS Technologies, and Solana technology Development Corp. For the watermarking will help to deter wholesale copying of digital music and uphold the rights of the content producers.

Creating a Customer Magnet:

The's unique position of offering their customers a direct link to their site puts them in a unique position to become a powerful new force in electronic commerce. By being a source for music aficionados to congregate on the web, the can serve as a customer magnet for music content distribution over the Internet. Even though the does not own the content it distributes, they are in an enviable position to control access to suppliers and subtly sway customers' choices by promoting or ignoring individual record labels. As a customer magnet for music on the Internet, the can extract rents from record labels in addition to selling content. For example, the site can offer visitors a choice of practically any music track by connecting to the sites of the major record labels. In return for this service, the can charge a rental fee to the record labels for having strategically placed links and banners on its site. In this type of a model, "the customer magnet would own the connection, the access, and the direct interface to the customer. Industry participants, such as the record labels would have to operate through the magnet."

Professor Shikar Ghosh from the Harvard Business School argues that "over time, a customer magnet could become the electronic gateway to an entire industry."

Segment Customers to Offer Personalized Service and Product:

The must segment its customers in order to develop a profitable pricing structure. The company can segment its customers based upon usage patterns. For example, the "Passive" listeners are customers who use TheDJ in the background while performing other tasks. While some of these customers still maintain TheDJ Player on their screen, the majority of these customers minimized TheDJ and are never exposed to or click on ads, the main source of TheDJ's revenue. The "Active" segment of customers seeks an interactive experience of music information, chat, etc. while listening to music. Active listeners are more willing to interact with the site and have a higher willingness to pay for premium features. Figure 2 shows a possible breakdown of the different customer segments that the can pursue.

Figure 2 - Market Segments

Passive Users

Active Users

Usage Pattern

Listen to music in the background while performing other tasks for long periods

Listen to music while interacting with song lists, information, contests, music search, etc.

Location of Use




Typical System Characteristics

High Bandwidth Connection

Multimedia PC

Low Bandwidth Connect. (28.8-56.6)

Multimedia PC

Benefits Sought

Large Music Selection

Unobtrusive & Fast Interface

Organized, Pushed Music

Large Music Selection

Fun, Cool Interface

Interactive Experience

Customer Loyalty



Customer Cost (to supplier)


(bandwidth & development)


(development & bandwidth)

Customer Revenue






In the case of the, customers in each different segment seek different products. The passive customers want music without hassle. They want to listen to music while working on their computers. They value a large music selection and an interface that allows them to choose easily the type of music they want to hear with minimal additional interaction. They want to learn about new music but they want it to be exposed to it without the cost of their time. While many of them proclaim high enthusiasm for products that meet their needs, they are more likely to switch to a new product than the active users. Active users seek interactivity and a relationship with the product. They want to listen to music, look at CD artwork, learn about the artists, actively seek out new music, and interact with others. Once they have developed a relationship, they tend to be very loyal to a particular company or product and are willing to pay a subscription fee to the site.

Promote Self Regulation:

A strategy is needed to reduce the transaction of distributing music content on a network. Since transaction cost represents the additional costs incurred by the producer in appropriating the value of information, a strategy for keeping transaction cost at a minimum would significantly promote the growth of Internet music delivery. Companies like Intersect are offering a new monitoring service called Music Report. This new service is designed to search for and report on the use of audio over the Internet. MusicReport uses a proprietary technology called Audio Video Scan that searches the internet for Audio Layer 3 (MP3), RealAudio and other file formats commonly used to deliver audio over the internet. Intersect provides customizable reports, which identify file source, plus a list of audio and video files loaded on the site. This type of monitoring and self-regulation would legitimize the Internet music delivery industry in the eyes of the major music producers and would contribute to the overall growth of the industry.

Case study: National Museum of American Art

Company Profile:

Company: Founded 1980 by Congress

Collection: 37,500 art works of all media spanning 200 years of American art history.

Location: 8th and G Streets NW

Washington, D.C.

Services: Exhibition, research and public educational programs

The National Museum of American Art of the Smithsonian Institution ( is the largest resource in the world for the study of American art. Its collection features Colonial portraiture, 19th-century landscape, American impressionism, 20th-century realism, American crafts, contemporary photography, to name a few. At present, in its virtual museum, visitors can take on-line exhibition tours, read the free online magazine, ask questions on American art, view the on-line Publications Catalog and place order for the CD-ROM and goods in the museum store. Due to its prestige and the static nature of its content, we are using it as a case study for dominant firm providing static information.

Industry Analysis

Museums nation wide are facing decreasing attendance rate and increasing art price. Together with the cut on government sponsorship on art, museums are forced to seek innovative ways to attract visitors and generate additional revenue. Some museums see the emerging dominance of digital information technology as a potential solution and have created their own virtual entities online. Currently, numerous Web sites are set up by museums to increase publicity, attract visitors and promote their merchandise. The so-called Virtual museum is like a romance between a stiff member of the old establishment and a young free spirit. For some visionaries, the romance looks very promising and the Internet technology has the potential to add a new dimension to and hence revitalize the nation's museums.

Jamieson McKenzie, director of technology for the Bellingham, Wash., school system remarked: "In a virtual museum, You pick the events. You explore. No need to follow the path or read the explanations of some expert. You are in charge. You create the experience, and there are no guards watching you. You can rest when you want to, snack when you want to, and stare without somebody setting off their flash camera or bumping you," The result, McKenzie said, is that "virtual museums can be more fun, less formal, more inviting, more hip and less intimidating because bits and bytes can dance better than marble."

On the other hand, some critics are more skeptical. As the director of information for the Davis Museum at Wellesley College Peter Walsh said "The Web is too new -- and museums too old, I suppose -- for the nature of their relationship to be clear at this point." As a result, currently any Web exploration is experimental. In the following section, we are going to use the National Museum of American Art as a special case to study dominant firms selling static information.

Current Strategies being used:

The following is the list of current strategies implemented by the National Museum of American Art:


The museum offer the virtual visitors experienced good by providing glances of its exhibition through photos, audio and movie clips. It also publishes a free online journal American art that covers issues on the artists and works that are related to the current exhibitions. The exhibition map and a preview of its CD-ROM are available as well. In addition, art information specialists at the virtual reference desk respond to questions about American Art and using print and electronic resources. All the above "free stuff" is to lure visitors to visit the real museum as well as advertise for the online merchandise.


The virtual museum uses versioning to price some of its goods. For example, the visitors can see several paintings from its exhibition "Singular Impression" for free. But the images are small and the interface is primitive. To obtain a rich, comprehensive portrait of the art and artists in the exhibition, the visitor has to pay for the CD-ROM, which features a wealth of accessible, interconnected information and an elegant interface. Similarly, although the free American journal provides some background information and some commentaries, the visitors have to buy books and other publication to get more detail and comprehensive knowledge.

Adding additional value to the digital information:

Museum marketers also utilize advanced digital technology to provide additional values to the exhibitions in their Web sites. Some virtual galleries contain video clips of the artists painting the artwork while some craft exhibitions have embedded 3-D animation of the sculptures. The visitors can also listen to the director’s welcome and short introductions to some exhibitions. Special image and audio processing software are needed for the above tasks. The Web site provides the links to audio and visual software providers such as RealAudio and apple QuickTime as well as Web browser upgrade sites. This way the Museum can also collect advertising revenue from the above companies.

Recommended Strategies:

In examining the NMAA’s position in our strategy matrix (a dominant firm distributing static content), we know that it is already well established as a highly reputable presence and hence has its own pool of loyal patrons. We think they should use the Web to reach beyond their traditional audience to cultivate a broader, or perhaps entirely different, set of patrons. This implies that they should not just use the Web site as the equivalent of a brochure, a guidebook or an advertisement. Instead, The Web should be used to know the visitors, to personalize and customize the services and to add values and virtual experiences to the online visit. We believe the full potential of Internet technology is far from realized and recommend the following strategies for the virtual museums:

Use the Web to gather information about your customers for marketing purposes.

Web technology should be utilized as a learning tool for museums: to learn what appeals to the visitors, what piques their curiosity, what they would like to buy in the museum store and what might compel them to visit a real museum etc. And then the information should be used be improve exhibitions and services to attract visitors and increase revenue. The Virginia Museum of Fine Arts recently launched on its Web site a cleverly conceived area called "You're the Expert" that asks surfers to step into a museum executive's shoes. Visitors could decide how to light a piece of sculpture, evaluate a potential advertising campaign for an upcoming exhibition, create a title for a new show, write a label for a recent acquisition, or select an appropriate frame for a painting. As they navigate the site, they also serve as part of an online focus group that helps the museum learn what audiences respond to most strongly.

Continue to add value to the information content using advanced digital technology

Although NMAA has some animated and audio contents in its collection, its Web site still largely consists of text and plain photo shoots of some artworks. Much improvement could be done to enrich the virtual experiences. According to Hsin Hsin Lin, a Singapore-based artist who has built her own cultural institution on the Web, "Visiting an art museum on the Web is an experience of emptiness, of 'not-being-there.'" Even so, she said, a virtual museum must have enough appeal to attain, retain and sustain visitors' interests, just like a real-world space. "Be it 2-D or 3-D, an art museum must provide rich content in text and in images," Lin said. "The Web site's color scheme, lighting conditions, ambience and ease of navigation will translate every click into an experience."

Personalize the museum visit for virtual visitors and apply price discrimination

Internet technology should be used to support personalization and customization of the museum visit. For example, the visitor should be able to use the search engine to gather all the paintings of a particular subject or by the same artist. To adjust a visit to individual visitor’s personal taste and preferences, museums should adopt a visitor-aware information systems, which respond to what a user is viewing. Furthermore, they should use "user-sensitive" information presentations to track a visitor's path and relate the object in front of him to others he has seen. The customization of museum visits hence could enable price discrimination: to offer differential services and hence apply personalized pricing schemes. For example, the museum could offer customized CD-ROM on American Impressionism to a visitor who spends a long time in the Impressionism gallery.

Case Studies: Pricing Online Stock Quotes:

Company Profile: ( is a private corporation, founded in 1993 to provide quality financial market data to Internet users. This includes delayed and real-time current quotes on stocks, options, commodity futures, mutual funds, and indices, for U.S. and Canadian markets. also provides real-time business news, earnings forecasts and reports, market analysis & commentary, fundamental (balance sheet) data, annual reports, intra-day & historical charts, weather information, and company profiles.

Some of the top brands in the financial community provide data to users, including Reuters News, Standard & Poor's (S&P), Zacks Investment Research, PR Newswire, First Call, BusinessWire, Nelson's Publications, and Trendvest. Users can also automate the tracking of multiple portfolios and can receive relevant real-time news and stock price alarm notification in their e-mail inbox.

Industry Analysis:

The business of supplying stock quotes online has benefited tremendously by the proliferation of the internet and fast computer networks. The importance of real time information about stock market indices, stock quotes and related financial information cannot be underestimated.

Although dynamic in nature and similar to other news in that respect, financial information differs from common news in that it essentially comes from a unique source, the stock market. Thus, providers of such content have to ascertain that their content is in some way more attractive than their competitors'. This is thus a commodity product and a great deal of versioning, personalized pricing and unbundling; the key strategies in pricing digital content as discussed earlier are employed by the various suppliers. To add to this, another daunting task for new entrants in the market is the dominance of traditional brands. Although stock quotes are essentially the same information regardless of the provider, brand names do make a considerable difference. These factors impact the pricing strategies employed by the various providers.

With the proliferation of the Internet to millions of homes worldwide and the rapid increase in the number of small investors, the demand for day to day information from stock markets all around the globe has increased rapidly. This has spawned a whole new industry, with many suppliers of online financial information. The rate at which financial information changes introduces new and complicated problems to suppliers of such information. As with all other cases, suppliers of financial information must now cope with a complex array of alternatives for pricing this highly dynamic digital content. This study is aimed at examining and evaluating pricing strategies employed by one supplier, Information of this nature, especially stock quotes and stock market indices comes under the general category of 'dynamic' information content.

A close look at industry today reveals that the market structure is more of a competitive one, with no clear market leader. There are many 'back end’ suppliers which do not directly market content but instead provide content to browser companies like Yahoo and Excite which in turn market this content under their own name as Yahoo Finance ( In addition there are numerous 'front end' suppliers like (, AT Financial ( and 4WallStreet ( which market content themselves. thus finds itself in a fiercely competitive market for dynamic content.


Current Strategy:

Personalized Pricing and Versioning: is using second and third degree pricing strategies mentioned earlier to gain market leadership. This is a classic case of how the same information can be sold over and over again to different customers, depending on how fresh it is and other accompanying features.

Promotional Offers/Collaborations and Revenue Sharing with other companies:

As a promotional offer, the company offers a 30 day free trial of its standard package. The company also has promotional offers and a collaboration with Datek online (, a company, which specializes, in online stock trading.

Maximize use of Internet/Minimize transaction costs:

Subscription and billing are strictly online and thus the company is maximizing its revenues by making full use of the Internet.

Price Discrimination:

Many special packages are offered at different prices for the casual user to the serious user. Site licenses are also available for corporate use. The various packages offered are :



Basic Service


Qnews Service


Extra Service


Premium Service


Market Pulse Service


As an example, the Extra Service provides the following in addition to many other customized features:

    • Unlimited delayed security quotes for U.S. and Canadian exchanges on over 12,000 stocks; 100,000 options; 300 indexes; 500 commodity futures; and 7,500 mutual funds.
    • LIVE Portfolios and Charts, dynamically updating as the market moves. Four Customized portfolios that allow you to track up to 200 securities.
    • End-of-day portfolio alerts via e-mail, including end-of-day prices and news headlines for your portfolio.
    • Full text news from 500 news sources, including Reuters, Dow Jones Online news, PR Newswire, Business Wire, and AP Online News.



The main strategy followed by is personalized pricing by product differentiation and versioning. Essentially the same information is sold to different users for different prices.

1. By offering different packages for different kinds of users over a range of prices (Basic Service to MarketPulse Service), the company is trying to adjust its products to get consumers to self select. This is an important strategy to adopt for maximizing online sales.

2. Since all transactions are online, maintenance and transactions costs are minimized.

3. Registration is required at the web site. This enables the company to collect valuable information about users. In addition to the standard information like mailing address and contact numbers, a few survey questions are also asked which enable the company to improve their services.

4. The market is naturally segmented and the company does a good job at providing different versions for different segments.


For the kind of market that it is in, is following a successful pricing strategy in keeping with published academic studies. As long as it is careful and ensures to keep its prices competitive with its competitors, it should not have a problem sustaining its present market position.

1. Bundling complementary information as the company does presently might not be the best way to extract revenue from the market. Bundling makes sense if it reduces variation in willingness to pay (Varian and Shapiro,1998).

2. The company could try a nonlinear pricing model to let consumers build their own bundles. Quantity discounts would also allow consumers to pick the package they want at a reasonable price.

3. This being a commodity market, the company should be very aggressive, but at the same time avoid greed. It should exploit economies of scale and grab market share. Adding value to their products by superior organization, users interface and timeliness would be a great help.


Lessons Learned:

For a small firm selling dynamic information content, the following strategies could be useful:

    • Differentiate products by personalizing the information and the price
    • Versioning
    • Minimize transaction costs by making maximum use of Internet
    • Collect data about the market using online registration, promotions and other marketing techniques


Case Study: Internet News: Strategies for pricing news content on the Internet

Company Profile:

Dow Jones & Company, Inc., ( is a leading publisher of business news, information services and community newspapers. Established in 1882 and with nearly 10,000 employees worldwide, corporate revenues exceeded $1.9 billion in 1993. Corporate headquarter is located in New York.

The Wall Street Journal (, the company's flagship product publication, is a global business daily. With The Wall Street Journal Europe, published in Brussels, and The Asian Wall Street Journal, published in Hong Kong, worldwide circulation is more than 1.9 million. The company's other publications include Barron's, Far Eastern Economic Review, National Business Employment Weekly, The Asian Wall Street Journal Weekly, the Wall Street Journal Classroom Edition, SmartMoney and American Demographics.

Dow Jones' position as the pre-eminent publisher of business and financial news and information extends well beyond the printed page. Many of the above titles are available on the Internet, including The Wall Street Journal Interactive Edition, the largest paid circulation subscription site on the entire World Wide Web, which has more than 200,000 paid subscribers in less than two years of becoming a paid-subscription site.

Industry Analysis:

Over the last few years, major news organizations all over the world have launched web sites. Print and broadcast news groups advertise their web sites relentlessly. The popularity of the Internet and its ability to deliver breaking news has grown manifold in a very short period of time.

A large majority of web traffic is surfing for news and information, according to Pete Neupert, Vice President of News and Publishing for Microsoft. He reports that out of the 20 million users of the Internet, 53 percent are news consumers and MSNBC, the online portion of NBC news, has over 4 million visitors per month. Also, Editors and Publishers report in one study that 90 percent of all executives use the Internet as their primary source for daily business news. This suggests that the "business" of news on the Internet is an important factor.

Currently news organizations all over the net are not waiting on print or broadcast to release breaking news. Editor and Publisher ( cited in a recent report that one-third of the newspapers online are posting news on their web sites before they are published in print.

News on the Internet thus presents a very lucrative market. Like all other information content, online news also faces peculiar problems of pricing content. This is a survey of a leading online news provider, The Wall Street Journal and an evaluation of its pricing strategies.

This is a market dominated by many major players and comes under the general category of dominant firm-dynamic information content. Similar to the stock quotes market, this one too is a case where essentially similar information is provided by many suppliers. In such a case, product versioning becomes difficult and the suppliers rely more on brand reputation to attract customers. However, news can be categorized and hence segmented into specific suppliers like The Wall Street Journal (, which dominate the financial information market are highly successful.

As a comparison between usage of online and hard copy news products, the following figures could be useful:



Page views/week

CNN Interactive

12 million


10 million

USA Today

13 million



Daily Circulation of hard copy news products:

Wall Street Journal


New York Times


Los Angeles Times


Because of the abundance of online news providers, it is considerably difficult to devise competitive pricing models. A survey of most popular news sites shows that almost all of them provide free news services. Given the fact that brand reputation is very critical in attracting customers, online information providers go to great lengths to ensure that their readers get the same 'feel' reading their online versions as they do when reading their printed versions. A good example of this is The Wall Street Journal's website which is strikingly similar to the original newspaper.

Present Strategy:

As mentioned earlier, most popular online news services offer free service. Exceptions to this are San Jose Mercury News ( and The Wall Street Journal ( WSJ charges a subscription fee to read the online versions.

Such a strategy is viable given the reputation of the newspaper and the market segment which it targets. However, WSJ sees to it that their users get their money's worth. A few features of the online version are noteworthy.

Use brand reputation to attract customers:

The company has taken great effort to design its website in such a way that readers get the same feel when they read the online version as they do when they read the hard copy (print )version.


Using the personal journal, subscribers can get the news and quotes they want, track their investments or monitor their competitors.

Sell to groups of users/Corporate and site licenses:

WSJ also offers corporate accounts for more than 100 users in an organization.

Value Added Service:

Nearly every time a company is mentioned in an Interactive Edition story, it's hyperlinked. If one clicks on a link, one can find a Detailed Quote, with a link to a complete Briefing Book -- a comprehensive portrait of the company's business, financial results, stock performance, and all the Journal's recent coverage. A 14 day searchable archive is available. The online version is carefully indexed and easily searchable. As an Interactive Edition subscriber, one is entitled to free searching in the Dow Jones News/Retrieval Publications

Library, an amazing resource of the world's top business publications, including 5,000 trade and business newswires, magazines, transcripts and newsletters. It's also the exclusive archive of The Wall Street Journal and other Dow Jones publications.

Though the online version does not rely heavily on advertising for revenue, The Wall Street Journal earned an estimated $4,295,500 in ad revenue (YTD June 1997).


It is clear that WSJ is making full use of pricing and versioning strategies for marketing its online version. Referring back to the general strategies discussed in earlier sections, these are justified strategies given the kind of market the company is in.

The company requires registration and important information from users like zip code, age and gender. This enables the company to validate credit card information and also collect user demographics.

The company uses clever versioning and pricing strategies and offers discounts to users. For example, subscribers of the paper version get a discount for the online version since they get less value from the online version.

However, the company does not offer the paper subscribers discounts for archived editions. They realize that the archives are equally valuable to the paper subscribers, if not more.

The company also uses network effects to lock in customers. Using its reputation as the premier source for business and economic news, the company has created the 'Newspapers in Education' Programs to students of Business and Economics. These students are most likely to become regular subscribers once out of school. Not only do the students get discounts, but also faculty members whose students purchase subscriptions get free subscriptions. This greatly enhances their reputation and ensures sustained readership.


It is clear that in the category of Internet news providers, pricing policy is not very well defined. A great deal of revenue comes from advertising and other factors like brand identity play an important role. The Wall Street Journal is following a successful strategy to price its online version.

One avenue that the company can follow is to version its product along a variety of dimensions. For the casual user, a ‘low tech' version sans graphics, and other features might be more affordable. Such a version would be very inexpensive to publish, at the same time can appeal to the more casual user and add to the company's revenues.

The company could also try nonlinear pricing and let its users build their own bundles. This might increase their customers' willingness to pay. In other words, the company should adjust the characteristics of its product to get consumers to self select.



Companies selling information content on the Internet need to understand the difference between information goods and manufactured goods. These companies also need to take advantage of the opportunities created by the Internet technology. For example, these companies should create new strategies to add new values for their customers. Companies need to embrace the Internet technology because the Internet commerce will become more and more important with advent of a more secure payment system. Technologies like digital cache and encryption will make selling and buying information content over the Internet a lot easier. We conclude our paper with our recommended strategies.

Strategies for a Dominant Firm Selling Static Content

A dominant firm selling static content should fully utilize the Internet technology to reach beyond its tradition audience to cultivate a broader customer base. It should aim to expand the market for its information and worry less about others pirating its content. Its Web site should be more than an advertising and publicity bulletin board. Instead, it should serve as an efficient tool to gather useful customer information, add value to digital information content, and apply price discrimination.

Strategies for a Small Firm Selling Static Content

Small firms selling static content should strive to become a customer magnet. Value creation in this realm requires a broad selection of content and segmenting the users into strategic segments. The customer magnet would own the connection, the access, and the direct interface to the customer. Content producers would have to operate through the magnet. Also firms competing in this environment needs to develop strong relationships with their enthusiastic customers. Active customers tend to be very loyal to a particular site and are willing to pay a subscription fee to the site.

Strategies for a Dominant Firm Selling Dynamic Content

A dominant firm selling dynamic information content should use price discrimination to extract consumer surpluses. It should let its customers self-select by versioning its products along a variety of dimensions. In order to price discriminate effectively, the company needs to know its customers well. A dominant firm should also use the Internet to add more values for its customers. For example, it can let its customers bundle their own products.

Strategies for a Small Firm Selling Dynamic Content

A small firm selling dynamic content should personalize its content so that it can charge different people different prices. Since the firm lacks market power, it should use online registration, promotions, and other marketing techniques to collect data about its customers to that it can better version its content. Timeliness of dynamic information is very important, therefore, the firm should use the Internet to deliver its content to its customers as soon as it can.



Appendix A: Fourteen Characteristics of Information:

As a Commodity:

    • Intrinsic Co-production: Information is not typically the object of consumption such as cars, oranges, and sheet metal. In formation has an instrumental value in that it aids in attaining a desired outcome. Therefore, information is a co-producer of outcomes. As an intrinsic co-producer, information does not deplete with use.
    • Time Constrained Consumption: For content to be deemed informational it must affect the choices of an individual. To affect choices, the receiver must take time to assimilate the information. This process involves reception, memorization, thinking, and reflecting. (Even the process of synthesized experiences, such as watching a movie, takes considerable time.)
    • High Investment to Reproduction Cost Ratios: The initial costs for creating information are high relative to the costs of reproduction. This contrasts sharply to most other goods where the production of multiple units of a good require considerable factor inputs of capital, labor, and materials. The development of information is labor intensive. For example computer animated film footage used in the Motion Picture Titanic can cost $2000 a second to produce. This characteristic has great implications to the issues of intellectual property.
    • Relevance, More Variable Across Consumers: The implication of this to property is striking. Basically a producer of information gets "one shot" at his consumer. The market segments for information as a commodity are much more tightly drawn than for other goods. Information can be packaged and repackaged to fit the particular circumstance of the consumer.

Market Failure Related Characteristics:

    • Public Good
      • Inappropriability: is the difficulty in taking possession of the worth of something. One of the major consequences of inappropriability is the under production of information since it is difficult to exclude people from using information who have not paid for it. Therefore, if the producer of information cannot appropriate its full market value, the producer will only produce information where he can recover costs and make a profit.
      • Non-depletability
    • Externalities: The non-depletability aspect of information leads to positive externalities. This means that the positive effects of information are not accounted for in its price. The transaction costs of tracking the positive effects of information are likely to be high thwarting any attempts at adequately quantifying the true value of information.
    • Indivisibilities (of supply): Information users are confronted with an all-or-nothing option: they may either acquire the whole amount of information available at the prevailing price or buy no information at all. For example, in order for us to read the movie reviews in the San Francisco Examiner, we have to purchase the entire paper. As a result, information must be purchased in lumps; even though these lumps may be vastly greater than the information actually sought.
    • Economies of Scale and Scope: Priest define the economy of scale and scope with regard to the production of information as decreasing unit costs when the scale of operation is increased and decreasing costs associated with joint production.
    • Uncertainty and Risk in Production: Information content providers will not produce information when risks and uncertainties are present. When risks increases to the point that the produce lacks the ability to diversify enough to assure a success, the producer will withdraw.
    • Information/Knowledge: This definition infers that information is an experience good. The less the buyer knows about a product, the less likely they buyer is to purchase it, or to purchase it at the correct price. Therefore, to counteract this problem, producers of information rely on "brand recognition." Producers of information must develop a reputation for the value of their information. According to Priest, property rights will enable the producer to attain higher appropriability and thus will encourage the producer to provide more information about information.
    • Intangibility: For consumptive goods such as dinner for two at Chez Pinesse, the price of the good is a reasonable proxy for its marginal utility. For information goods, the price may have little resemblance to its marginal utility. Information derives its utility by changing the efficiency of achieving outcomes by changing choices. Therefore, there are many forms of information, such as education, that affects many potential outcomes and are largely non-monetizable.
    • Transaction Costs: This represents the additional costs incurred by the producer in appropriating the value of information. Transaction costs involves the costs of negotiation, contracting, and enforcement which exist even when exchange is bilateral. Priest argues that as we attempt to reduce indivisibility by breaking information into pieces, we increase transaction costs as we attempt to appropriate its value.

Non-Market Related Characteristics

    • Intrinsic Relationship to Human Welfare: The linkage between human welfare and information can be drawn by the following characterization. Human welfare is a product of individuals and groups achieving desired outcomes. Information is intrinsically related to human welfare in that it inherently facilitates the achievement of outcomes. Since information is universally positive to human welfare, information should be easily and freely accessible to the public. However, property rights for information with regard to human welfare are incompatible. While it may be necessary to provide property right to encourage the production of information, the holding of information as property thwarts its free and unfettered use in achieving human welfare.
    • Intrinsic Relationship to Freedom and Privacy: Information is the greatest champion of freedom while at the same time hampering privacy. For example, governments of oppressive regimes that restrict freedom find that they must restrict communication of information. As a result, information has a direct affect on the range of choices available to the individual.



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