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SuperCo uses many small suppliers to ensure it has access to a large variety of recipes,
but relies on a key supplier for 50% of its ready-meals by sales volume. This firm, with
a turnover of over £750m in 2002, has grown principally as a supplier to the supermarket
sector and has a dedicated factory for SuperCo, guaranteeing confidentiality and
exclusivity. This trust has enabled SuperCo to move from business plans of typically
three years to longer terms of five years, and implement joint investment plans. These
plans range from non-contractually based agreements in which SuperCo agrees to
“deliver a volume of business to a manufacturer for five years and the manufacturer
invests in a dedicated factory,” to arrangements to supply small firms with technical
assistance in return for access to new recipes. For this process to be effective the retailer
must ensure that its quality standards and processes are adopted and integrated with its
packaging and, crucially, own-brand marketing strategy. Information needs to be passed
between the partners in this network. The “relationships in this sector are different than
when you are working with the big branded suppliers as we work very closely with ready-
meal suppliers and the confidences that we tell them we wouldn™t do on the branded side.”
This is especially significant for small-scale suppliers where the retailer is their sole client.
This series of very close relations binds the network firms into mutual dependencies. In
the case of large manufacturers the relationship centers on negotiation over exclusivity
agreements, the use and development of dedicated manufacturing centers, and the co-
ordination of new hygiene technologies and processes, such as the development of
specific packaging systems. Relations with smaller firms were characterized more by an
exchange of hygiene technician staff to co-ordinate basic standards and to transfer
technological information, especially information about production systems from manu-
facturers, from the retailer to small producers.
Knowledge is developed and disseminated throughout the innovation network. The
process of working in a network is itself important knowledge. Relations in the innovation
network are “fluid and dynamic” within and between firms. SuperCo™s chilled ready-meal
innovation unit is part of the fresh foods division and incorporates buyers responsible
for recipe development and has a permanent team of 26 people. SuperCo staff and supplier
staff spend around 50% of their time in each other™s firms and meet in other locations.
Flexibility and face-to-face contact are important when “some of the factories now are
like large hotel kitchens, because it has become more and more specialized and the runs
have become smaller.” Far from the picture of adversarial price-based negotiation
between suppliers and retailers which was partially responsible for the Competition

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148 Mowatt

Commission enquiry into the activities of supermarkets in the UK, network relationships
where complimentary assets (consumer information for new product; the ability to
flexibly supply new quality recipes) are mutually beneficial to both firms and vital for the
supply of life-span goods.

The Extension of Innovation Networks
In the preceding two sections we have examined how firms in two distinct sectors have
been able to use innovation networks to produce and supply high-value niche products.
A key element of this strategy has been for firms to be able to identify end-consumer
desires. The ability to assemble project-based teams to source, design, manufacture and
deliver products is in itself a key element of competitive success in the digital era. This
flexibility has also enabled firms to be able to extend innovation networks, exploiting key
consumer knowledge by offering additional products and services. In the example of the
magazine industry, the spread of services from magazine production into supplying
services to consumers was acknowledged. Similar observations can be made in the
supermarket sector. Some supermarkets, for example, have exploited their proximity to
consumers and their ability to innovate branded products through contractors to enter
the magazine market. The retailer J. Sainsbury, for example, uses its contract publisher
New Crane to offer The Sainsbury™s Magazine. This magazine had a circulation of 278,043
copies in the first half 2003 (ABC data) and although only sold in Sainsbury™s supermar-
kets, it competes directly with magazines offered by mainstream publishers. In this way
coordinators of consumer-critical information are able to compete across industrial and
market areas outside of their usual line of business. This underlines the complexity of
competition in the contemporary period.

Shift to Consumer-Driven
Life-Span Competition in Analytical
The ability of the firms in these two industries to leverage critical consumer information
to drive innovation through the use of networks presents challenges for our understand-
ing of innovation and organisation in the digital age. It has been suggested that the role
of knowledge in the digital economy has led to “New Innovation Regimes” (Windrum,
2000) in seeking to explain innovation in “knowledge-intensive services.” This perspec-
tive demonstrates that Schumpeterian approaches to innovation, first concentrating on
the role of the individual in the innovation process (entrepreneurial capitalism) and later
conceptualised in terms of the action of large firms upon innovation and the ownership
of knowledge by big business, is limited in dealing with firms in the digital economy. From
the evidence presented in this chapter it should be clear that rather than acquiring

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Impacts of the Digital Economy 149

innovative capacity by internalising entrepreneurs as predicted by Schumpeter, firms are
increasingly able to coordinate and control innovation through networks. The networks
described are not only inter-organisational but bring in individuals and the end-
consumer. A key feature of these networks is that the central hub firms co-ordinating
information and innovation ” magazine publishing firms and supermarket retailers ” are
managing many simultaneous networks with large numbers of suppliers. The analysis of
these collaborative relationships is problematic for a transactions-cost approach to the
organisation, with its central concerns of establishing the legal boundaries of the firm,
make or buy decisions in production, bounded rationality and opportunism (Williamson,
1995), in attempting to understand the operation of these firms and competition between
Ekinsmyth (2002) has argued that the magazine publishing industry is project-based, and
although this analysis focused on the operation of single magazine titles, our findings
have borne this out. I argue that many new consumer-sector, project-based organizations
are essentially concerned with life-span products, with a necessary focus on temporary
and shifting patterns of alliances in production. From an analytical economic perspective
recourse to a legal-ownership definition of the firm as recently argued by Foss (2002) does
not further our understanding of production systems ” surely the purpose of firm™s
activities ” where due to the transient nature of activities internalization is unlikely.
The digital age has made new systems of innovation possible which are neither within
nor outside of the legal definition of the firm, but managed through complex network
arrangements. From this perspective the boundaries of firms are less important than the
information flows that the firm controls. An approach to the analysis of firms offered by
Casson (1997) allows us to conceive how resources outside of the ownership of the firm
are potential strategic assets providing that firms can control them. Digital economy
project-based, life-span firms as examined in this chapter are also problematic for
conventional analysis as they are based on generic technologies. Unlike traditional R&D
in manufacturing, where the focus is on the development of idiosyncratic assets
developed through bespoke design, many features of the innovation systems that we are
examining here are based on generic systems and even in some cases freely available
software. For the “pervasive technologies” of the digital age (Cantwell and Noonan,
2001) their value rests not in their uniqueness, but conversely, in their availability to all
partners in the value-chain (Nicol, 2001).
Network study approaches have attempted to move beyond a simple transactions-cost
framework (see Ebers, 1997, for a review) and incorporate conceptualizations of the trust
relationships that are important in innovation networks (Lane and Bachman, 1998,
provide an overview). However, the value-chain and innovation systems in the indus-
tries illustrated also incorporate information directly from end-consumers, and few
analysis of consumer-driven innovation to date treats the final consumer in these “edge”
markets (White, 2002), as the majority of transactions within an industrial economy are
those between firms involved in intermediate forms of production and related services
(the customer is often taken to be another supplier or firm in the value chain). However,
the communication potential of current technology allows firms to greatly increase their
information reach. Consumer-driven competition makes it more likely that firms will
extend their innovation networks to final consumers, and that the features described in

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150 Mowatt

these industries may be generalized across the economy more widely. Network analysis
also often attempts to describe long-term or embedded social relationships rather than
the dynamic short-term ones that characterize innovation networks for life-span goods.
The challenge for economic analysis is to explain empirical realities with theories that can
deal with the complex nature of firms and production systems in the digital economy.

This chapter has examined how two distinctly different “low-tech” industries have been
able to embrace new forms of information management and complex network forms of
organization in response to the use of new digital technologies. The common themes in
examining the innovation process in both sectors is the importance of firms being able
control and observe information flows through the use of information systems to engage
in consumer-driven innovation. The key driver of innovation is the ability of firms to
transform the critical information about consumers into knowledge about consumer
preferences coupled with the ability to supply these needs through network arrange-
ments. The products offered are more likely to have a short life-span, and this will be
recognized from the outset.
This ability has transformed competitive pressures within traditional industries from
those conditioned by the economics of production to the ability to engage in consumer-
driven innovation. In the food industry the large retailers in the UK have successfully
challenged the dominance of food manufactures in several key product areas and
founded several new, highly profitable, own-brand-dominated product markets such as
that represented by chilled ready-meals. The manufacturing in this case is undertaken
not by the food manufacturers or the retailers but by many small flexible companies
encompassed by the retailer™s innovation network. In the publishing industry the
advantage held by magazine companies whose competitive success had been founded
on the ownership of production evaporated with the advent of DTP and ICTs. Competi-
tive advantage in this industry shifted from economies of scale in production to firms able
to innovate new magazines and services desired by end customers. Large incumbent
firms have found that they can refocus their activities around consumer-driven innova-
tion and establish a competency in managing knowledge leveraged through extensive
networks of contract journalists and specialists. In both cases external experts and
suppliers are crucial in supplying the information that the core firms in the network can
transform into knowledge about consumer requirements.
Traditional economic approaches to analyzing the operations of firms find temporary and
trust-based networks challenging. The focus on ownership and boundaries is of limited
utility for understanding innovation networks. A key challenge for the firms in the digital
economy is for firms to determine how to control the crucial, consumer-based information
that drives the innovation of new products and services. Firms that offer little in the way
of value-adding activities may find that they are unable to prevent firms from squeezing
their margins. Firms far from sources of consumer information may find that they are
increasingly beholden to retailers for distribution. Participation by small suppliers and

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Impacts of the Digital Economy 151

contractors in innovation networks provides new opportunities for access distribution
and growth through collaborative partnerships. The systems described in this chapter
present new challenges for competition authorities and our understanding of the theory
of the firm, which should seek to extend network-based analysis. Further detailed study
is needed into other empirical examples of new and existing industries characterized by
consumer-driven, life-span products.

The empirical work for this project was supported by a Leverhulme Trust Institutional
grant. The research itself is indebted to the managers who were interviewed for this
project. The analysis of the work also owes great thanks to Howard Cox who has co-
authored several papers on networks and business history with the author, and Stuart
Young who has analysed the questionnaire results with the author and Howard Cox.

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154 Schneider

Chapter VIII

Digital Products
on the Web:
Pricing Issues and
Revenue Models
Gary P. Schneider
University of San Diego, USA

Products that exist in digital form can be bought, sold, and, in some cases, delivered,
online. The pricing issues that arise in the sale of these products are different from those
that sellers face when pricing physical goods and can lead to interesting opportunities
for devising revenue models. The success of revenue models for companies that sell
digital products depend on the nature of the product, the characteristics of the buyers,
and the traditional practices in the industry. This chapter examines the nature of
digital products, their pricing issues, and the efficacy of various revenue models that
have been implemented by companies that deal in digital products.

Digital Products
Some products exist only in digital form, such as software and certain types of information
databases. Many more types of products exist in physical form, but can be digitized.

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Digital Products on the Web 155

These products include many forms of intellectual property such as text, pictures,
photographs, architectural drawings, choreography notes, sound recordings, and video
recordings. In some cases, digital products arise from the transmission of other digital
products, as in the case of telephone and fax transmissions.

Defining Digital Products

Krishnamurthy (2003) defines a digital product as anything that can be digitized and
includes such items as “advertisements” and “financial assets” such as stocks or bonds.
This overly broad definition contrasts with Choi and Whinston™s (2000) definitions of
knowledge-based and knowledge-enhanced products. Choi and Whinston (2000) in-
clude “information, knowledge, news, databases, software, literature, arts, and other
forms of human creation” in their definition of knowledge-based products and any
products that can be “enhanced by knowledge, networked, and customized” in their
definition of knowledge-enhanced products. Note that these “goods” as defined can
include sales of what might have been called “services” in the past.
Ease of use of digital products can be affected by changes in the underlying technologies
used to transport, deliver, or provide the end-user experience associated with the
product. In some cases, the underlying technology can create a digital product from a
traditional physical product or service. Some examples of traditional physical products
that have been converted in this manner include:
• Newspapers converted to news Web sites (Krumenaker, 2003)
• Magazines and journals delivered on Web sites (Barsh, Kramer, Maue and
Zuckerman, 2001)
• Computer games presented as online experiences (Moon, 2001)
• Audio recordings of music or spoken words (for example, lectures) presented on
Web sites (Manjoo, 2003)
• Financial market reports converted to financial information Web sites or Internet-
delivered information feeds using, for example, technologies such as Really Simple
Syndication (Gillmor, 2003)

Characteristics of Digital Products

Most digital products have common characteristics that identify them as digital prod-
ucts. These characteristics distinguish them from physical products or intangible
products without a digital existence, such as financial instruments. These characteristics
• High fixed cost to produce the first unit, but low marginal costs to produce
subsequent units,
• Quality is difficult to judge without actually experiencing the product,

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