Copyright 1997, David G. Messerschmitt 5/12/97 1Summary of issuesSummary of issuesDavid G. MesserschmittDavid G. MesserschmittCS 294-6, EE 290X, BA 296.5CS 294-6, EE 290X, BA 296.5Copyright 1997, David G. Messerschmitt 5/12/97 2Goal of courseGoal of course■■Identify and understand issues which are Identify and understand issues which are important determinants of the success or important determinants of the success or failure of new technology and technology-failure of new technology and technology-laden products in the computing and laden products in the computing and telecommunicaitons industriestelecommunicaitons industriesCopyright 1997, David G. Messerschmitt 5/12/97 3Information economicsInformation economics■■Telecommunications and software products Telecommunications and software products have some important characteristics:have some important characteristics:––Network effects, such as positive consumption Network effects, such as positive consumption externalitiesexternalities––Path-dependent effectsPath-dependent effects––Lock-in and switching costsLock-in and switching costs■■These lead to difficulties in establishing a These lead to difficulties in establishing a new product, winner take all, etc.new product, winner take all, etc.Copyright 1997, David G. Messerschmitt 5/12/97 4PricingPricing■■Software products, chips, and networks Software products, chips, and networks have high fixed costs (development, capital have high fixed costs (development, capital expenditures) and low marginal costsexpenditures) and low marginal costs––Competitive markets drive prices toward Competitive markets drive prices toward marginal costsmarginal costs––Complex pricing strategies, including Complex pricing strategies, including versioning, price discrimination, etc, are neededversioning, price discrimination, etc, are neededCopyright 1997, David G. Messerschmitt 5/12/97 5Pricing (con’t)Pricing (con’t)■■Network pricing options:Network pricing options:––FixedFixed––UsageUsage––CongestionCongestion––QualityQualityCopyright 1997, David G. Messerschmitt 5/12/97 6RegulationRegulation■■Government regulation is prominent in Government regulation is prominent in telecommunications, becausetelecommunications, because––Traditionally viewed as “natural monopoly”Traditionally viewed as “natural monopoly”––Desire for “universal service”, with the cross-Desire for “universal service”, with the cross-subsidies that entailssubsidies that entails––Interconnection is in best interest of customers, Interconnection is in best interest of customers, but might be avoided as competitive strategybut might be avoided as competitive strategyCopyright 1997, David G. Messerschmitt 5/12/97 7StandardizationStandardization■■Standardization is an common process in Standardization is an common process in these industries:these industries:––One response to mitigating network effectsOne response to mitigating network effects––One option for inter-organizational designOne option for inter-organizational design––One way to deal with or enable industry One way to deal with or enable industry fragmentationfragmentation■■Standardization may be increasingly Standardization may be increasingly avoided with Java-like approachesavoided with Java-like approachesCopyright 1997, David G. Messerschmitt 5/12/97 8Human factorsHuman factors■■To be most successful, technological To be most successful, technological products should minimally interfere with products should minimally interfere with the user and their taskthe user and their task■■As the cost of technology decreases, total As the cost of technology decreases, total cost of ownership issues will increasingly cost of ownership issues will increasingly dominate buying decisions, including dominate buying decisions, including training and administration coststraining and administration costsCopyright 1997, David G. Messerschmitt 5/12/97 9Industry fragmentationIndustry fragmentation■■The industry is increasingly fragmented into The industry is increasingly fragmented into smaller economic entities, for several reasons:smaller economic entities, for several reasons:––Success of the venture capital modelSuccess of the venture capital model––Increasing system orientation, with need to integrate Increasing system orientation, with need to integrate diverse technologiesdiverse technologies––Horizontal integrationHorizontal integration■■Inter-organization design becomes necessary, and Inter-organization design becomes necessary, and takes the form of standardization, joint ventures, takes the form of standardization, joint ventures, and consortiaand consortiaCopyright 1997, David G. Messerschmitt 5/12/97 10Major case studiesMajor case studies■■The home electronics market requires the The home electronics market requires the convergence of the consumer electronics, convergence of the consumer electronics, computer, and telecommunications industriescomputer, and telecommunications industries■■Technology-enabled remote collaboration has not Technology-enabled remote collaboration has not been as successful as one might expectbeen as successful as one might expect■■The network computer is a proposed paradigm The network computer is a proposed paradigm shift in desktop computingshift in desktop computingCopyright 1997, David G. Messerschmitt 5/12/97 11Some major inter-relationshipsSome major inter-relationshipsInformation economicsPricingHuman factorsStandardizationRegulationIndustry fragmentationCopyright 1997, David G. Messerschmitt 5/12/97 12Relationships (con’t)Relationships (con’t)Information economicsPricingHuman factorsStandardizationRegulationIndustry fragmentationEstablishing a market in the presence of network effects may require subsidy, free distribution, etc.Copyright 1997, David G. Messerschmitt 5/12/97 13Relationships (con’t)Relationships (con’t)Information economicsPricingHuman factorsStandardizationRegulationIndustry fragmentationStandardization is one way to negate network effects by allowing interoperabilityCopyright 1997, David G. Messerschmitt 5/12/97 14Relationships (con’t)Relationships (con’t)Information economicsPricingHuman factorsStandardizationRegulationIndustry fragmentationWinner-take-all, lockin, etc., may encourage regulatory intervention to maintain competitive marketCopyright 1997, David G.
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