Not free, not easy, not trivial – The warehousing and delivery of digital goods

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From an article in The Scholarly Kitchen.  Well worth reading the full text:

There is a persistent conceit stemming from the IT arrogance we continue to see around us, but it’s one that most IT professionals are finding real problems with — the notion that storing and distributing digital goods is a trivial, simple matter, adds nothing to their cost, and can be effectively done by amateurs.

In fact, a study done last year found that initiatives to move to cloud-based computing stalled most often because of higher-than-expected costs.

This notion of free data emerged recently in a comment thread here, but has been a consistent theme among dew-eyed idealists about publishing — that digital goods are infinitely reproducible at no marginal cost, and therefore can be priced at the rock-bottom price of “free.” Of course, this argument is implicitly cost-based, while the information economy works more rationally if it’s value-based, so the argument is fundamentally flawed at it outset. But, even if taken at face value, the argument doesn’t align with reality.

Digital goods have costs.

I’m not talking here about just things like the cost of electricity, which should be enough on its own to disabuse idealists of their vacuous notions of what makes the world go around. I analyzed this at length in another post earlier this year. Even beyond just their power requirements, digital goods have particular traits that make them difficult to store effectively, challenging to distribute well, and much more effective when handled by paid professionals

11 Comments on Not free, not easy, not trivial – The warehousing and delivery of digital goods

  1. There is so much BS here it’s hard to know where to start. But I’ll take a real world example. On the one hand, you have a ‘study’ that transferring 1 MB of data takes as much energy as 1 charcoal briquet, (which is where the ‘cost’ calculation comes into play.). On the other hand, we can look at the recently popular Megaupload, which was able to make millions of dollars in profits by providing free 200+MB download on the off chance that 1 out of 100 (a number I completely made up.) would click on one of the ads (so they get a few pennies.). They had subscription service as well, but most revenue was from the advertising. Without doing any more analysis on Megaupload’s finances, it’s pretty clear to me that cost of digital storage and delivery had to be far more negligeable than indicated here.

    Digital distribution is easy and so inexpensive you might as well say free. By comparison, processing and exchange of currency is expensive (over $.20 per transaction, usually) and complicated. Same with marketing and customer aquisition/retension. Strangely enough, that remains the case whether the goods being exchanged are digital or physical.

  2. That’s all well and good but most people still won’t see it that way, no matter how many times someone tells them. This is all about infrastructure costs.

    Just like people “think” roads are free ( ignoring the taxes collected from multiple sources to pay for those roads and the things to keep them going), people will still assume something like eBooks, that have a negligible physical presence, have no costs associated with them.

  3. @rashkae: I find it fascinating that claim BS but your argument is all based on sketchy guesses about how Megaupload was able to monetize their service, how much they made, and therefore how much it must cost for digital storage and delivery. A “study” of the facts is obviously BS given this reasoning.

    @Andy: I don’t think many people “think” roads are free. Any that do must live under rocks (to never here the multi-million dollar figures touted on the news for simple construction efforts). I also don’t see how there’s a parallel with this topic, as the cost of roads doesn’t generally impact the cost of any goods.

    What always drives me crazy is illustrated in this quote: “Of course, this argument is implicitly cost-based, while the information economy works more rationally if it’s value-based, so the argument is fundamentally flawed at it outset.” The cost of goods in a free market is never about the cost in creating the goods. It’s about what the customer perceives is the value of the goods. If the perceived value is higher than the cost of creating, storing and distributing the goods then profit is made. If the perceived value is lower, the goods are likely not going to be sold. But that perceived value has nothing to do with the costs involved. It doesn’t matter if some magical fairy makes digital warehousing and distribution free, the value perceived in eBooks is not changed by this. That’s why eBooks are selling just fine at even $24 price points in some situations. So arguing about the costs is really, quite frankly, a waste of time.

  4. It is not “free” to build a server farm. It is not “free” to maintain the equipment. It is not “free” to connect it to the Internet with limitless usage. It is not “free” to upgrade facilities. It is not “free” labour. It is not “free” sales and marketing. It is not “free” to create the software which runs the transactions. It is not “free” to attach customer sales and servicing to the product.

    It’s astonishing that folks can believe that storing, maintaining and moving data comes without a cost. It is true that the service can be “given away” but that doesn’t negate any of its costs.

  5. I personally don’t believe anyone thinks that digital goods cost absolutely nothing to store or distribute. But the cost in general are perceived as so low that they are basically negligible. So the cost to store and distribute the same amount of content digitally and physically (as a printed book for example) plays in totally different leagues.

    I think the problem rather originates from the fact, that the digital world creates much more content than what was ever possible before (See the twitter example in the original article).

  6. While it’s true that digital goods *do* have marginal costs, articles like that one are so overloaded with exaggerations that they’re useless to get across the message that those costs exist.

    Digital goods have to be available all the time. This requires a lot of infrastructure, more than a typical physical warehouse does. For instance, you can turn out the lights on a physical warehouse, lock the doors, and leave it for a week or more. With a digital warehouse available online, you need to staff it around the clock, provide power 24/7, and monitor the warehouse for problems and errors. Digital goods require much more expensive warehouses.

    Really? Staffed around the clock? Does anyone think Dropbox has a 24/7 team of customer service reps? Sure, they’ve got an on-call IT person around the clock, but that’s not the same as actually paying someone to be awake and active.

    Digital goods cost *MORE* to store than physical ones?!? Has this person ever seen the price of warehouses?

    Digital warehouses are more expensive to build.

    More expensive than what–a physical warehouse that holds the same amount of data? I disbelieve. A physical warehouse that holds 500,000 books is EXPENSIVE. A digital warehouse of the same number of ebooks–the same *exact* ebooks–can be a single hard drive. Does he think that all those Tweets could be printed and stored more cheaply than the digital files? Or is he talking about the expense of storing data that nobody every considered keeping before we had computers with 100+gb hard drives?

    Of course, there’s all that metadata management… but those expenses aren’t unique to digital content. Someone has to track shipments, storage dates, and contents of boxes in a physical warehouse, too. Those expenses didn’t increase when the method of tracking became “a spreadsheet” instead of “a sticker on every box.”

  7. rashkae wrote: “There is so much BS here it’s hard to know where to start. ”

    I agree fully. This is how I felt when I reached, exhausted, the end of the original piece of drivel.

    “the notion that storing and distributing digital goods is a trivial, simple matter, adds nothing to their cost, and can be effectively done by amateurs.”

    ?? I DO NOT believe there is such a notion, at least not one that is widespread among the public or users. I believe it is in the heads of IT people like Mr Anderson. Create a straw man and spend lots of billable hours showing how energetic you are knocking it down.

    “Digital goods have costs.”

    Of course they have costs ! FFS. What kind of numbskulls do Mr Anderson think people are ? This article of his is an incredibly boring, long, tedious diatribe that does nothing except establish that enormous, global, IT storage and delivery systems cost a hell of a lot of money …. ehhh ok. We all know that, and by we I mean EVERYONE, even the dog in the street.

    So what exactly does that establish ? and why does it justify such a bleating article ? It certainly is beyond me.

    It certainly does not establish that digital distribution is expensive when compared with physical systems. It is transparently not. The scaling clearly makes each transaction incredibly cheap when compared with their physical counterpart.

    Another ten minutes of my life I will never get back was spent following his links to his “The Outside Context Effect” theories. Another inanely boring and tedious attempt to analyse disruptive changes in the market caused by technical innovation. Unfortunately the attempt fails miserably and the attempt to use a blog post by Eoin Purcell falls on it’s face, as I pointed out in a reply to that blog at the time.

  8. “Not free, not easy, not trivial” but insignificant in a large scale operation. That’s why I can stream an average of 2,000 MB of data from the expensive and complicated Netflix IT infrastructure for $8 per month. That works out to $0.004 per MB with 1 MB being the average size of an ebook.

  9. Scholarly publishers will probably be among the first to be dis-intermediated for they are the greatest abusers of the “broken market” that includes academic textbooks and journals. Lame arguments such as this are the last throes in the death scene. A broken market is where price is removed from consideration. With textbooks, that is where professors “adopt” textbooks and students have to pay for them. The markets for academic journals and prescription drugs are similarly broken or bent.

  10. Bob W, well said.
    I have run a nudie web site for nigh 15 years (DOMAI.com). It has *tens of thousands* of visitors daily, downloading lots of free pictures, and less than one percent ever paying anything. But it still makes a profit. And by the way, the hosting cost with the same traffic has dropped about 80% in the past few years.

    The cost can be significant, if there’s not a sound business model attached (how does Twitter survive?), but if there is, then it’s not, not compared to printing, shipping, and trying to sell to bookstores.

    By the way, my web host does have staff 24/7, I believe all bigger web hosts do.

  11. Warehousing and distribution is increasing pretty fast these days as the online buying of product increases, small businesses even your local flower shop is going online where you can just select what you want and it will be delivered to you with 24 to 48 hours, you dont have to go to dozens of shops to get the best price either, but warehousing and distribution company should be Chosen pretty care fully if you choose the right storage and distribution company your delivery will be fast and you’ll get a tremendous feedback, your chosen warehousing and storage company should have Batch code/expiry date recording it helps alot both sides since they will contact you if they find any item close to expiry date even if you send it by mistake they’ll get you know :) also they should have inventory softwares to manage goods, dispatches, storage information, delivery dates, addresses. IT good’s require more care than other products since they are more fragile like Laptops, Server’s, Storage Drive’s etc so you should double check before hiring any warehousing distribution service.

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