As I was buying a digital “gift” (aka icons) on Facebook for Caterina who just had her baby, I saw that the one I wanted to buy was a limited edition (100,000 only! Buy now!) and it cost $1. I don’t know how many of these Facebook sells each month, but it is easily a side business with the highest margins since all you need is to hire a cheap graphic designer in China, and then some social network where giving this stuff is easy. Then I remembered my Econ 101 days when I taught the undergrads the golden principle of modern economics P=MC (price = marginal cost). Obviously this is in a perfect market, but its still interesting to think about the marginal cost of digital goods, since you’d think its close to 0. Once you’ve uploaded that icon, it pretty much just requires that the servers continue to run so that 2 people can buy – send - receive. So at $1 an icon – that’s a pretty nice profit margin, as long as you got that social network – of course.
yes, but there is also competition. I can send my friend a 3rd party application ‘booze’, or ‘vampire bite’ or whatever.
The problem with digital goods is that the MC is zero, and when there is competition the price will also go to zero.
Um, does any software not have practically the same profit margins? I mean, once it’s developed, of course. Even continuing development is funded by “support” contracts.
If you want to ignore the costs associated with developing the platform, marketing, and running Facebook, then yeah, those icons are %100 margin. But most 010101010 things are, if you factor in only the costs of replication as costs.
Yes – you’re right. Its not any different for most software, except the icons/gift business has its own unique dynamics like – artificially created scarcity (limited edition icons for example) that drives up prices, and there aren’t a lot of support costs to icons (vs. enterprise software).
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