Copyright 1993 by Peter Huber. Electronic copies of this document may be distributed freely, provided that this notice accompanies all copies.

Whether stored on paper, celluloid, tape, disk or optical platter, information has always perplexed economists. It's obviously valuable stuff: Indeed, it's the most valuable stuff humans produce and consume. Except that we don't consume it. If I eat a cake, you can't eat it, too - that's consumption the old-fashioned way. But if I listen to Dolly Parton sing the achy-breakies, or use Simply Money to balance my checkbook, so can you, with no additional strain on Parton's larynx or CA's programmers.

That creates a conundrum. The old laws of economics say that the efficient price of a good is its marginal cost; the cost of creating one additional copy. That's about $7 for shipping and handling a floppy disk, even if it cost $10 million to write the program. But if the producer can never collect more than $7 a pop down the road, it will never invest the $10 million at all.

Next best is Ramsey pricing. Charge a steep price to people who adore Dolly Parton. Charge a bit less for those who like Parton so long as she doesn't sing "Stand By Your Man." Charge least of all to those who turn on Parton only for mental anesthesia when balancing their checkbooks. With adjustable pricing of this kind, producers can get a real return even while distributing the product down to the most marginal of buyers.

But to implement this kind of scheme you have to target our customers very precisely. Few customers will volunteer to be on the pricey end of price discrimination. Worse, price discrimination is illegal. In a classic case, IBM charged a fairly low monthly rental for its tabulating machinery, then imposed a premium on the heaviest users by requiring customers to buy its (overpriced ) punch cards. This kind of pricing may be the socially optimal way to spread the high costs of designing computing machines across a wide spectrum of users. Nonetheless, in a decision that was popularly thought of as a victory for consumers, the Supreme Court ordered IBM to discontinue the practice.

There's no way to avoid usage sensitive pricing in the info biz. So law or no law, you find some way to measure just how much each consumer really likes our product and charge accordingly .

Advertising is the crudest of these devices. Everybody gets to watch the Dolly Parton special on .NBC for free; those who are just glued to their chairs will perhaps buy a Veg-O-Matic and thus pay for the show. Hollywood uses other devices. Some fraction of the populace desperately wants to see Jurassic Park right away, so Holl-wood extracts $6.50 a head here first, then takes a second collection at video rental stores, which lets a whole family see the film for $3.

In other markets you start cheap and build up. Dolly Parton's agents will do anything to give her music away on radio. The mildly entertained thcn go out and buy a record. The smitten will pay any price to attend her next concert.

It's the same with software. The casual users buy a $99 spreadsheet and stop there; business users invest an additional $300 in upgrades that get pushed at them every time another Intel chip comes out.

These gimmicks work up to a point, but they are awfully clumsy. If software is so smart, why can't it monitor itself; keep track of just how heavily it's used, and then handle the billing? Dolly Parton can't gauge the passion of each individual fan, but software can. An intriguing proposal along those lines is set out by Brad Cox in the October 1992 Dr. Dobb's Journal . In theory, at least, all software could be distributed free, with payment linked to usage down the line.

Other industries are backing into related schemes, as they begin to explore powerful synergies between the hardware and software sides of their operations. Air travel depends on computerized reservation systems, but flyers are accustomed to making reservations for tree. Companies like American Airlines recognized some years ago they could pay for the essential software by using it to steer customers onto their flying hardware. They were promptly sued for doing so. Processing medical prescriptions is also supposed to be free, even though it costs a lot. So Merck pays $6 billion for Medco Containment Services, recognizing that managing 33 million prescriptions will be doubly profitable when tied tightly to the business of filling them. Count on hearing from the antitrust police here, too.

Almost every marketing scheme in the information industry today could be construed as illegal under our antiquated antitrust laws. Information just doesn't obey the ordinary laws of economics, so the people who sell it can't obey ordinary antitrust laws. Judges had better get used to that. What we're talking about here is the future of our entire economy.