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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 e

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.

elliotec 5y ago
> the distribution cost is basically 0 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?
- legalcorrection 5y ago
  Marketing is not a distribution cost.
- seizethecheese 5y ago
  “Basically” is doing a lot of legwork, but yeah it’s a lot cheaper than almost anything else
- vineyardmike 5y ago
  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.
gumby 5y ago
> Software still has the lowest marginal cost... 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.
- sirsinsalot 5y ago
  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.
  - emteycz 5y ago
    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.
    - folli 5y ago
      Can you elaborate on where and how that was tried? Seems very interesting.
      - emteycz 5y ago
        All of Eastern Europe pre-1989, and most of the same countries for few years post-1989, until they realized this is going nowhere and privatized.
        verinus 5y ago
        not only eastern europe. 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...
oceanplexian 5y ago
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.
WJW 5y ago
> 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.
simonh 5y ago
>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.
- sokoloff 5y ago
  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.
  - simonh 5y ago
    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.
    - sokoloff 5y ago

elliotec 5y ago

> the distribution cost is basically 0 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?

legalcorrection 5y ago
Marketing is not a distribution cost.
seizethecheese 5y ago
“Basically” is doing a lot of legwork, but yeah it’s a lot cheaper than almost anything else
vineyardmike 5y ago
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.

gumby 5y ago

> Software still has the lowest marginal cost... 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.

sirsinsalot 5y ago
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.
- emteycz 5y ago
  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.
  - folli 5y ago
    Can you elaborate on where and how that was tried? Seems very interesting.
    - emteycz 5y ago
      All of Eastern Europe pre-1989, and most of the same countries for few years post-1989, until they realized this is going nowhere and privatized.
      - verinus 5y ago
        not only eastern europe. 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...

oceanplexian 5y ago

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.

WJW 5y ago

> 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.

simonh 5y ago

>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.

sokoloff 5y ago
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.
- simonh 5y ago
  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.
  - sokoloff 5y ago