The upshot is that Britannica had locked itself into a product that was expensive to produce, and a direct sales force that needed its commissions. The marginal cost of Britannica was $250 for production plus $500 for the salesperson’s commission. In contrast, the CD-ROM encyclopedia costs $1.50 to produce.

Encarta’s seven million words easily fit onto a CD-ROM, with room for illustrations, but technology couldn’t accommodate Britannica’s 40 million words. Britannica finally put together a text-only CD-ROM version thus causing the sales force even greater disorientation. To generate the $500 commissions of the printed version, the CD-ROM alone sold for $1,000. Sales kept dropping, losses mounting and in 1996, the company was sold for less than half of its book value.

The sinking of Britannica provides four important lessons for businesses. First, our own culture can blind us to a new reality. Britannica’s top management assumed that, because Encarta was not much more than a child’s toy from the standpoint of “scholarly value,” it was not to be taken seriously. Management just couldn’t conceive that the definition of its industry had changed.

Britannica’s sales force realized that the parents bought a set of encyclopedias to relieve the guilt about not doing enough to help their children’s performance in school. Unfortunately, scholarly top management didn’t really want to know why their customer bought, nor were they forward thinking enough to want to make any changes.

Britannica’s competitor became the personal computer which cost about the same as their set of books. The computer now relieved parent guilt about giving their children the 21st century tools needed to succeed.

The second lesson is that established businesses are at a disadvantage because they are the incumbents. They are saddled with yesterday’s sales and distribution systems, bricks and mortar, brands and core competencies all of which may be the wrong ones for today’s competitive challenges. Insurgents, such as Encarta, and now Wikipedia have the advantage because they have no traditions or established mind-set to slow down their thinking.

Third, this is not just a threat, but also an opportunity. Every incumbent, under traditional business definitions, is free to play the insurgent under some other definition. This shift requires real vision, an ability to let go of the past and bold moves.

Finally, this is not an isolated story. The whole game of selling encyclopedias collapsed. Sales of encyclopedias of all kinds are one-thirtieth what they were in 1990. We in the business community must constantly reinvent ourselves or, as in this and many other cases, go the way of the dinosaur.

Encarta and many other companies, for example, eBay and Amazon.com, contain lessons on the new economics of information. They demonstrate how new information technology can come out of nowhere and demolish the strongest of brands, the most focused of business models, and the most stable of industries.

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