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 pr ice their goods and services. Instead of selling a bundle of content and ac cess through proprietary networks, these firms are shifting their distribut ion 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 pr efer the Internet channels to direct channels only if the access market is sufficiently competitive. Furthermore, maintaining a direct channel in addi tion to the Internet channels changes the equilibrium enough that the propr ietary content providers prefer having the Internet channels, regardless of the level of competition in the access market. Telecommunications technolo gy developments uniformly increase content providers' profit. On the other hand, the technology impact on Internet service provider profits is nonmono tonic: Their profits may increase or decrease as a result of lower telecomm unication costs. While initially the ISP profit increases as more customers are drawn to the Internet, it eventually decreases as the spatial competit ion becomes more intense. We also show that proprietary content providers s hould benefit from having some free content available at the Internet servi ce providers' sites to induce more customers to join the Internet.