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TR: What industries do you see as being the most threatened by the Web, or conversely, having the most opportunity to gain by learning the new rules?

Varian: CD-ROMs and the Web allow for a much cheaper way to distribute huge volumes of information. This forces traditional companies to radically rethink their strategies. Look at the encyclopedia business. Encyclopedia publishers have decades of experience selling at high prices to a small number of buyers. Now along comes the Web, making it possible to reach a much larger market-but also forcing a drastic reduction in price. It’s very hard to give up those high-priced sales in the hope of getting a lot of low-priced sales, but that’s what these companies have to do. The same goes for distributors of nationwide telephone directories. Just 10 years ago, the first CD phone directory sold for $10,000 a copy. Now you can buy one for $3.99-or get the numbers free on the Web.

TR: How do you recommend that companies get the most out of their intellectual property in the Web era?
Varian: Many companies fall into the trap of thinking that they should maximize the protection of their property. Your real goal should be to maximize its value. When videos first came out, the movie industry was frightened out of its wits. Moviemakers tried to preserve the old business model by selling only to the high end of the market. Hollywood didn’t realize that low-price, mass-market videos could be very profitable. Now, video sales and rentals account for more than half of Hollywood’s revenue. On the Internet, you can increase the value of your products to the consumer by making your terms and conditions more liberal. Of course, this means you might sell less of it. The question is which of those effects will dominate.

TR: Having just published a book, you’re in a position to test this out for yourself.
Varian: Yes, and we recently signed a contract with Rocket E-Book to publish the book in electronic form. Clearly there’s a danger there-people might copy the text and give it away, undercutting book sales. On the other hand, electronic books have a huge potential, and the users are the sort of technological leaders that we’re after, so we think it’s very sensible. We’re also posting a chapter on Amazon.com: If you want people to consume your information, you have to give them a good idea of what you have to say.

TR: A lot of Web businesses are offering “personalized” service, which requires that they gather information about each customer. Do you see a conflict between personalization and privacy?
Varian: I think there’s only an apparent conflict. The real question is whether the firms truthfully disclose what they will do with the information; consumers have a right to know how information about them is going to be used. If those uses have sufficient value to them, and they trust the technological and legal infrastructure to make sure that their information is used in a secure way, both buyers and sellers can be better off with some information disclosure. It’s hugely beneficial for people who supply things to me to know quite a bit about me-as long as they don’t abuse that information. Right now we’re in a transition stage where we don’t have the institutions to guarantee that trust, so there is some abuse of the system. Ultimately, this is going to require some regulatory oversight.

Shapiro: We’ve been waiting for industry to get its act together and do this on a voluntary basis. If they don’t work something out pretty soon, government will need to step in. But intervention ought to be light-handed-aimed at providing options and flexibility rather than restrictive mandates.

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