Organizing Distribution Channels for Information Goods on the Internet

Rapid technological developments and deregulation of the telecommunications industry have changed the way in which content providers distribute and price their goods and services. Instead of selling a bundle of content and access through proprietary networks, these firms are shifting their distribution channels to the Internet. In this new setting, the content and Internet service providers find themselves in a relationship that is simultaneously cooperative and competitive. We find that proprietary content providers prefer the Internet channels to direct channels only if the access market is sufficiently competitive. Furthermore, maintaining a direct channel in addition to the Internet channels changes the equilibrium enough that the proprietary content providers prefer having the Internet channels regardless of the level of competition in the access market. Telecommunications technology developments uniformly increase content providers profit. On the other hand, the technology impact on Internet Service Provider profits is non monotonic: their profits may increase or decrease as a result of lower telecommunication costs. While initially the ISP profit increases as more customers are drawn to the Internet, it eventually decreases as the spatial competition becomes more intense. We also show that proprietary content providers should benefit from having some free content available at the Internet Service Providers’ sites to induce more customers to join the Internet. Acknowledgements: The authors gratefully acknowledge useful comments from Profs. Haim Mendelson, Robert Kauffman, Arun Sundarajan, several anonymous reviewers, and seminar participants at New York University, University of California at Irvine, and University of Rochester.