Digital products

 

This weekend I will be taking a trip up to Dublin to accept an award for my master’s thesis. I’m looking forward to it, but it strikes me that I have never mentioned much about it in this blog. So here’s the basic idea. 

We live in a world of physical supply chains. If you want a product, a whole load of people are involved in making sure that it is available when you come in to a shop to get it. Some months or even years ago, people had to mine or harvest all the components or ingredients. Other people worked in factories to refine it, mill it or make it. Yet more people drove the stuff around to different locations. Presumably there was a place where final assembly was required. Then the products were stored in warehouses and finally distributors and retailers got involved to that it could be bought by you.  Lots of people. Lots of complexity. Lots of cost. Lots of things that could possibly go wrong. 

But some products – digital products – don’t seem to require this complexity. They have these unique, almost magical qualities that physical products don’t have. They can replicate themselves perfectly and with ease (i.e. copy / paste). The production of an additional copies does not require any new materials – there’s no resource drag. Digital products move around the internet for free and at high speed. This means that in the world of digital products there is no need for purchasing, manufacturing, transportation, assembly or any of the other related functions needed to support physical products. 

There are a number of different approaches to manage digital supply chains. First of all, there is the “pseudo physical” approach where people treat digital products as if they were physical. They limit distribution through DRM or copy-protection. They apply restrictive licensing. They threaten dire consequences against incorrect usage. They run complex processes to distribute keys to authorised individuals. It’s complex and messy. Customers get frustrated by them. Lawyers love them and given the recent history of the music business, this strategy is being forced into a long, painful retreat as file-sharing and peer-to-peer networking becomes more commonplace. 

The opposite side of the argument is super-abundance: a digital product, by its nature, cannot be controlled. Once it’s out there, it’s wild – downloadable by anyone. What I discovered was that companies are adapting to this. They still make money by wrapping their digital products into physical supply chains; by customising them so that they can’t easily be used by other people even if they were free to download; by using them to complement other (paid) services; and by using advertising based models. 

Digital products represent a big opportunity for companies, because all the infrastructure necessary to duplicate and distribute them is increasingly tending towards zero. The downside is that the price of digital products is also being forced towards zero, so sellers of digital products need to radically rethink how they organise their supply chains if they want to make money for themselves. 

And that, in a nutshell, is my thesis. Clear as mud?

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