Case 4
Selling Encyclopedia Britannica

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Serious parents used to purchase their children a shelf filled with Encyclopedia Britannica. This prestige reference work was the market leader for two centuries, despite commanding a premium price which peaked at about £1,300.

Seeing a fall in the price and availability of home PC's, Microsoft decided to produce PC software for an encyclopedia called Encarta, at a fraction of the price of Britannica. Encarta was not only cheaper but the software was portable and often easier to use than a book set, given the electronic hyperlinking and speed of access to information. To see how to order the current $64.95 CD, visit the Microsoft Encarta Website. Britannica was not threatened by a new entrant to the 32-volume book business but by a new technology that changed the nature of the niche. A few months after the launch of Encarta, Britannica quickly responded to Encarta's entry. It had been planning it's own CD-ROM and released this to the market. Being originally aimed at libraries or other institutional users, this CD version was expensive at first but, recognising the potential of the home user market, EB now prices very competitively. To see material on the CD version of EB, visit Encyclopedia Britannica. In 1998, Britannica took the decision to disband its book sales force: those consumers using computers often pay little attention to traditional sales methods.

Some lessons of this case study? Once upon a time, Encyclopaedia Britannica enjoyed considerable market power. In part this was based on the once-off costs of amassing the huge volume of information for the encyclopedia. Although new editions needed a little updating, information on the Roman empire or the geography of South America could be carried over from previous editions.

Britannica therefore enjoyed scale economies that made it difficult for new entrants to compete. They were then able to use their hard-won position of market leadership to enjoy an element of monopoly profit. Since the demand curve for £1,300 encyclopedias was probably fairly inelastic, setting marginal cost equal to marginal revenue then led to a large markup and a high price. Digital technology changed all this. Although the once-off costs of assembling the information remained large, the marginal cost of further production and sale fell almost to zero. No more encyclopaedia salesmen in the foyer of Foyles (a old-fashioned London bookstore) and production of expensive 32-volume sets of books. This sharp fall in marginal cost meant that marginal revenue could be driven down substantially, allowing many more copies to be sold. The fact that CDs now retail at between £50 and $65 shows just how large this change was.

Temporarily, Encarta got a technical edge and completely undercut Britannica's old market. But Britannica did not have to collect new information, merely change the medium through which its existing information was presented and distributed. Once it had released it's own CD, it was able to get back in the game.

Note too that Encarta also offers dictionary services. Similar forces are therefore at work in the traditional market for dictionaries. The unabridged Oxford English Dictionary has also become available in CD form, currently retailing at just under £300. This high price may indicate that OED has not lost its monopoly position to the same extent, but also reflects the fact that the demand for full-length dictionaries remains quite small. Even avid fans of the hardest Sunday crosswords usually only required a (much shorter) one-volume dictionary to check their solutions. Interestingly, the 2000 disc edition of Britannica includes the New Oxford Dictionary of English free.