Information as a Commodity: How to value information

Note: This abstract of the Info 2000 presentation was prepared, and the lecture was given prior to the late 2000/2001 dot-com stock market crash. Since then some examples given have changed their pricing models - notably the Encylopaedia Britannica. Nevertheless, many of the basic principles outlined still hold.

As the Internet has grown, there has been a corresponding growth in the accessibility and numbers of online information sources. As well as the traditional business-to-business type sources, many new information sources, more relevant to consumers have arisen. Many of these have opted for a low-cost or free price strategy. This has resulted in a perception that information content in general is low value – a perception that information providers need to challenge.

Although the laws of supply and demand and considerations of price elasticity have been used to set prices, it has been producers rather than consumers who have traditionally established the actual price using their understanding of the market and business expectations. In the Western world, prices tend to be fixed – with little scope for negotiation, especially for goods and services sold to the general public rather than businesses. The Internet has changed this – with the growth of auction sites (eBay, QXL, etc.) or buyer co-operative sites (Mercata, LetsBuyIt, Adabra, etc.). As yet, these models have not been used for selling information – although the buyer co-operative concept could conceivably be used for information purchases. Nevertheless the Internet has led to a new price model for selling information where the information is available at no or minimal cost, with revenue principally obtained from advertising. This model was the primary one used in the early days of the Internet – and is still used by many newspaper sites world-wide. The fact that this model can work for high value content can be justified by the success of commercial television, as one example among many. The model takes two formats – passive, whereby the user accesses the information and is exposed to advertising in the process, and "push" where the user specifies the type of information wanted. This is then supplied to the consumer directly, alongside advertising. Some other variations exist – where the user can switch off advertising for a fee. This makes the service similar to fee based products, except that the charges are normally minimal and may only cover variable costs.

Essentially, the value of information can be broken down into a number of components:

1. the cost of production
2. the cost of dissemination
3. the value to the purchaser

This last element - the information's added value, has historically been a key driving force for pricing information. However with the rise of the Internet, two elements in this value chain have changed. The cost of dissemination has reduced dramatically for web providers – giving a competitive advantage to new providers who do not have the complex infrastructures of the traditional hosts. However, perhaps more important is the value of the information to the purchaser. When there were only a few sources for obtaining information online, and accessing these required advanced search skills, the value of information was high – and providers could charge accordingly. Today, many information sources are free. It is possible to obtain current information at a price of, perhaps, $5 or more per item, from an online host supplier such as Dialog and the same information for nothing from the source provider, such as a national or regional newspaper's web site. Furthermore, there is usually no requirement to pay an up-front sum for access to the free site, unlike with the traditional providers. Also important is that the free information can even have additional value as the newspaper story may include graphs or pictures and link to other stories on the same topic from the same source. Thus the information purchaser may save time purchasing information from traditional suppliers but obtain lower value. This alters the consumer's perception of the value of information – and will prompt the purchaser to look for cheaper alternatives. Information providers have attempted to combat this process by establishing fixed cost subscription services offering unlimited information across the business for a significant annual payment. However the rise of new competitors such as Northern Light offering over 6000 sources and specialist sources for stock exchange information, patent data and news at minimal or no cost threatens even this approach. The ease of finding information on the web means there is likely to be very little customer loyalty. Customers will use the most appropriate source for their needs – and as cheaper sources appear, these will often be chosen to the detriment of higher priced providers, unless such providers offer additional advantages. Although time and ease of use will be factors, the nature of the Internet reduces the importance of these elements, leading to information cost becoming an overriding factor. Further it becomes easier to compare the prices of services – effectively pricing becomes more transparent, further increasing competitive pressures Essentially information is becoming a commodity – and providers who concentrate on their role as information suppliers rather than emphasising their specific brand strengths are likely to lose out. An object lesson here is the Encyclopaedia Britannica. With a business model reliant on a direct sales force, and charging $1,500 for its 32 volume set of books, Encyclopaedia Britannica was losing sales to newcomers such as Microsoft's Encarta – despite having, perhaps, the best brand name in the encyclopaedia business. In 1997, Britannica switched to a CD-ROM version and started recovering ground – selling the CD-ROM product for only $125 or less. Around the same time, Britannica launched an online product with an annual subscription price of only $85. This was taken a stage further in October 1999, when Britannica announced a free web version including links to relevant web-sites and news feeds from suppliers such as the Washington Post. The key involves returning to the information value chain – drastically reducing the cost of dissemination and looking at ways of adding value, even if the only differentiating factor between providers is the brand presence. In some cases, this may even mean re-inventing the business, enhancing customer relationships and/or looking for ways of obtaining revenue that do not involve charging for information