Software still has the lowest marginal cost - the distribution cost is basically 0, unlike things like CDs. And unlike a movie or album, the value that can be extracted via software is much higher. There's tons of make-once sell-lots products, but you need factories and supply chains and all that crap, not just a cat6 connection. If you want to serve more customers, you need to buy more CDs. Streaming is better for content distribution, except the content still has limited value created (so limited price) since its often consume-once and has a limited life span - and digital content is basically "tech" even if its not quite SaaS. Tech is what it is because of how easy it is to create, and how much value it generates, and how low the marginal costs are. Nothing physical compares.
I interviewed for a team at <Big Co> that was part of a 100 person org. They generated about $1B for the company by creating a portal to (essentially) sell access to the company's existing data. They said most of what they spent that 100 people on was building integrations into existing b2b enterprise apps so other companies could ingest it easier. The per-person value created (extracted?) at this org is astonishing, especially since most of those 100 people didn't actually add value to the root product, beyond making it easier to use.
I invite you to switch sectors to the pharma world. I worked on a program for a drug planned to be sold at $2,000/dose with a projected cost of $0.0025/dose. That figure included amortization for all the manufacturing equipment, QC etc and raw materials.
Having friends in pharma too, I never hear anything about the commercial end that I don't find disgusting. I get that like any business the goal is maximizing wealth, but feeling empathy for the "customer" makes the margins and decisions seem sickening.
Honestly, the idealist in me says healthcare/pharma/research should be publicly owned and operated.
Pharma has the additional problem of inelastic demand. Deciding to purchase a candy bar or not is qualitatively different from deciding to purchase cancer treatment or not. Personally, I extend your idealism to any good that has highly inelastic demand. Using markets to price goods efficiently is not a goal I have in mind when I'm considering the distribution of these type of goods.
The problem is that the production cost for a dose of medication (at least as long as it's a chemical synthetization process) is extremely low... but the cost of bringing it to market extremely high. Only a rare fraction of candidates makes it through the first stages of research and validation, and of what remains a large part gets rejected in human trials. All of these trials are expensive, especially the human ones.
And that one successful medication has to pay for all the trials of all the other candidates that didn't make it... and all the low hanging fruits have long been picked. What is remaining now is stuff for rare viral diseases (not just Covid vaccines that work effectively against mutations, but also HIV, Ebola and similars), cancers and multi-resistant bacteria. All of this has been going on for decades and news of actual marketable products are much rarer than news about promising cancer or whatever treatment ideas.
Everyone loves to dunk on pharma (with reasons, see e.g. Skhreli or the bullshit regarding insulin patents), but the core problem is the sheer cost associated with developing pharmaceuticals.
I'm sorry, but i've heard first-hand of instances where drug research is terminated because it looked to yield a cure ... then funding funnled to those that produce a treatment, rather than a cure.
Cures are not profitable, treatments that don't cure are.
So yes, everyone loves to dunk on pharma and should.
I don’t think of it as idealism when the market skews so backwards and people are dying who shouldn’t have. Insulin prices being raised so high that people “ration” doses and have died. It’s a hundred year old medication!
It costs one billion dollar(often much more) to go from zero to market for a new pharmaceutical product. Often there even is no product at the end. Of course there has to be big payday if it succeeds.
I would love world where this would be possible - no gate keeping and no value extraction, only saved lives.
But cynic in me tells me that this is not possible - too many people who know how to build and operate things dreams about having always more stuff and power and is too afraid of loosing it. The consumption treadmill is always hungry for more. I personally am guilty of this - I always calculate how I can accumulate more value so I have a freedom (a kind of power over my fate) and can provide more unnecessary consumption for my family.
Couldn't a pragmatic approach be a market with mix of private and publicly owned companies healthcare/pharma/research companies? Private companies can continue maximize wealth, but now competing with publicly owned companies which have "empathy for the customer". That might lower the prices in the market.
I’ve thought about this. I think one model would be to have successful treatments be “bought out” for public use through an appropriately priced awards process. So the pharmaceutical company would know with certainty that their costs and even profit targets would be satisfied upon success. Have the award process promise 2x their costs, or their costs plus a $somePercent premium above cost. Maybe one option comes with some public grant process along the way. Upon completion the underlying medication gets either publicly produced if market participants don’t satisfy demand and otherwise allowed to be produced by anyone.
I think something like that the government side is more akin to good accounting practices than heavy handed regulatory oversight.
We tried that in Europe and it was really the worst thing that can happen. Public funding is a good idea, public ownership is a really bad one. Even the German healthcare system is a combined system of public funding of privately owned healthcare providers.
The biggest problem of pharma is IMHO lack of competition. The field is over regulated - some of it is for good reasons, but perhaps it went too far.
here in Austria we had several companies that were state owned. Problem was, that then there is politics coming into play and hiring is not about business facts but politics.
This resulted in highly inefficient companies as the objectives did not align any more...
Exactly. Also, firing established people who stop contributing is impossible (they'll plead "it's political"), and hiring new people for good wages is impossible too because "that's not according to our tables of wages" (both of these problems are not theoretical, every state company here today has them).
> didn't actually add value to the root product, beyond making it easier to use
What a peculiar thing to say. A product that is too difficult for anyone to use has zero value in the market, no matter how valuable it would be if it could be operated. Making a product easier to use increases the amount of people it can be sold to, directly adding value.
Imagine if the only way anyone could use a browser was to write your their compiler first, the web would never have taken off. There is tremendous value in making things easier to use.
Digital distribution is cheap-er but definitely not free. I worked at <Big Co> and delivering HD or 4K video around the world at scale is extraordinarily expensive. Plus the sheer amount of engineering resources required to run such a thing is on another level than stamping out plastic discs.
>They generated about $1B for the company by creating a portal to (essentially) sell access to the company's existing data.
You are completely discounting the cost of creating and maintaining the underlying data. You can't just write that off as zero. It also doesn't matter if the data generates other sources of revenue, that's great but you still don't get to write the cost off against one revenue stream and not another, the only fair way to account for it is to split the cost across all revenue streams.
The marginal cost of selling the data is effectively 0, since the difference between selling "zero data" and "one data" is 0, and the difference between "n data" and "n+1 data" is also 0.
The sale of data was essentially "free" to the business as a revenue stream, it cost them almost nothing extra to sell the data (again, beyond building a portal and integrations). You CAN discount the cost of data maintenance, from the sale business since the core business (also profitable) is already factoring in the cost. You can't double-count the costs, and accounting DOES let you pick-and-choose where to apply those costs.
For average cost analysis across a portfolio, yes. For marginal cost analysis, the question is “what’s the difference in cost between n and n+1 units?”
Whether other streams succeed, fail, or don’t exist doesn’t change the cost to make the n+1 unit.
That's technically accurate, but the justification for the existence of this team and product (and their real cost base) cannot be predicated solely on the n+1 cost calculation. Suppose the other revenue streams do fail, now without this specific team and product the data set generation and maintenance would be completely uneconomic. In that situation the N+1 calculation will tell you to maintain the team and product no matter how expensive the underlying data set is.
OP was implying that this product was insanely profitable because you can ignore the cost of the underlying data set. I'm saying that makes no economic sense because marginal costs aren't the only costs.
To see how absurd it is, consider that the marginal cost of an n+1 visitor to Disneyworld is probably significantly negative, because they will buy things at concession stands and eat at the restaurant thus generating revenue even if the ticket is free. What are the implications of that for the ticket price you should charge for that visitor? Pretty much nothing because the fixed costs utterly dominate. Yet Disneyworld will run promotions and discounts and bundle deals with hotel stays and even flights. None of that will make any sense whatsoever if all you fixate on is the marginal cost of printing the ticket.
A critical part of any non-trivial business situation is understanding what question to ask for what reason.
When deciding “should we make the incremental effort to expose an already existing dataset as a new product?” you are quite reasonably going to look at different data than if you want to know “overall, how profitable were our data products in aggregate last year?”
That’s the main point of the article we’re discussing: how things get weird when marginal costs are very close to zero.
How do you figure? Surely you know the magnitude of ad spend on software products, not to mention hosting and scaling infrastructure. We're not shipping cd's to every mailbox anymore but a typical marketing budget + Heroku/AWS cost is likely far higher for a typical growth SAAS startup than AOL was dumping on their physical distribution methods in the early 2000s right?
In this case, it was 0 ad spend but large b2b negotiations, so yea theres still quite some acquisition cost, but thats not really part of those calculations.
Any major company that owns data centers, they have large contracts with peering for networking, which is pay-per-bandwidth not pay-per-byte.
I interviewed for a team at <Big Co> that was part of a 100 person org. They generated about $1B for the company by creating a portal to (essentially) sell access to the company's existing data. They said most of what they spent that 100 people on was building integrations into existing b2b enterprise apps so other companies could ingest it easier. The per-person value created (extracted?) at this org is astonishing, especially since most of those 100 people didn't actually add value to the root product, beyond making it easier to use.