Digital Distribution - A Revised Perspective

     A few years ago the idea of purchasing digital version of goods seemed completely outlandish because the physical version was just as good, if not better, and to my befuddlement, could usually be purchased for a lower price. In my mind, a good example of this was and still is, to a conditional extent, movies. Buying a movie from iTunes versus buying the physical copy provides a stark contrast in cost and features. For example, the movie "Inception" can be purchased from a retailer for $9.96 while on iTunes it costs $14.99 and while Amazon has the digital copy for $9.99 it doesn't come with any of the behind the scenes features or film commentary. In my mind, this reinforces my previous perspective that buying movies digitally is generally a poor idea economically. However, I have had two experiences since my last writing on this topic that has changed my mind on buying digital goods to a certain degree. First, thanks to the prompting of my wiser, technological savvy friend Stuart I signed up for Netflix. Since signing up I have been impressed by Netflix which enables customers to receive DVDs through the mail and watch an unlimited amount of movies over the Internet for a low monthly rate starting under $10 a month. While not all movies are available for streaming over the Internet more and more are becoming available each month. The interesting part of this service is that there is no viable difference in my mind between owning a movie and being able to stream it through Netflix. I say this because watching either a movie I own or on Netflix has little to no noticeable differences. Essentially, with my subscription to Netflix I "own" every single movie Netflix offers for streaming because I can watch any movie whenever. Another way to look at the cost of Netflix is to suppose that I am amortizing Netflix's database of films on a monthly basis for under $10 which, in my opinion, offers incredible value for the cost. To drill into this still deeper, let's say I subscribe to Netflix for the next 50 years, which would come out to a total cost of $6,000 ($10 a month * 600 months). Then that cost divided by the price of an iTunes movie would allow, for the same price, someone to purchase 400 movies ($6,000 / $15 iTunes movie cost). So, what is a better deal, subscribing to Netflix or buying movies from iTunes? At the rate of one movie a week, which seems to be a conservative, reasonable rate, you can watch 2,400 movies on Netflix (600 months * 4 weeks a month) for the same cost as owning 400 movies bought at $15 through iTunes. The difference is a staggering 2,000 movies! The difference only becomes more incredible at higher viewing rates. An informal survey of my contacts reveals that a rate of 3 movies a week is equally realistic. This reveals that you could watch 9,600 movies for the same price of owning 400 movies bought through iTunes. However, at low watching rates when combined with only renting movies digitally the math evens out. For example, renting a relatively new movie on iTunes costs $3.99 for standard definition. This means that iTunes is a better deal than Netflix at a viewing rate of two movies or less a month which seems to be an outlier when it comes to viewing rates. This leaves us with the obvious conclusion that while Netflix is a superior decision for watching movies it also points to the gaps between differing digital goods and thereby comprehensively convinces me that subscribing to Netflix is an excellent economical method of watching movies (note: Netflix subscriptions includes many TV shows as well). Netflix served as a wake up call that my previous perspective may have been more limited that I realized. This prepared me for my second experience.

     For many years Valve's Steam store has offered games for sale and demos to download and try. The service is purely digital as it offers only downloads and no physical product for sale (besides shirts, etc for the pedantic among us). The issue of note with the service, however, is that the prices are typically higher than one can get in brick and mortar stores. For illustration, "Call of Duty: Black Ops" can be purchased on Steam for $59.99 or you can get physical copy for $44.99. This seems like a weakness on the part of Steam's pricing scheme but their service offers several advantages that may not be immediately visible. First, installation is made simple, just click install. Secondly, patches and updates are managed automatically and make it easy to stay up-to-date. Last, but not least, the Steam software can be installed on multiple computers and, in association with your credentials, the same software can be installed on multiple machines. I remember spending much time when I was younger trying to install the right patches on my PC at home to be able to play a network game with my brother. If we weren't on the same version of software then the game wouldn't work. This problem is solved by Steam by managing the entire process from purchase, to installation, to patch management on your behalf and the result is indisputably brilliant in its execution. However, it may still be hard to stomach the generally higher prices Steam demands especially for budget conscious buyers. When the games are competitively priced, however, that, I believe, is when the decision between virtual and physical purchases becomes nearly immaterial. Physical purchases of games sometimes come with nice instructional manuals or miscellaneous items that improve the purchase. For example, special editions of games usually come with extras that cannot be fully replicated by their digital counterparts such as art books, branded apparel and USB drives. On the other hand, digital goods and extras are now being offered by certain games that grant certain benefits to the player or special items that improve the experience. Dragon Age 2, for example offers a special sword and shield for those that pre-order the game on Steam. This cannot be purchased by any other means and is a tangible benefit for fans of the game. I believe that this furthers the blurring of the line between physical and digital copies. By extension, this means that if the sole difference between Call of Duty: Black Ops (standard version, not the special edition) from a store versus from Steam is merely price then it is logical that if they were the same price the digital copy would be preferred because of the positive externalities associated with the Steam experience. Therefore, should Steam equalize on price the digital copy would be given consumers preference.
    
     As a whole then, digital content has caught up to its physical counterpart. This conclusion is absolutely massive in its implication because we have then transitioned into a society where the technological means and preferences of "place" in the marketing mix is decisively geared toward digital distribution. Music, for instance, has seen this revolution already where the biggest retailer is Apple's iTunes store with second place belonging to the massive conglomerate known as Walmart. This monumental shift in consumer preference is incredible because we are experiencing the transition of a society that now values digital purchases as equal to, and in some cases superior to physical goods. This then revises my opinion that buying digital content is a bad idea. Previously I was just focused on the iTunes digital product selection and price characteristics but with healthy competition from firms like Netflix the game is changing which will benefits customers, I believe, in price, selection and convenience. Given this conclusion, I would be remiss to note that all of these benefits are enabled by the advancement of the Internet and as such it will even be more critical to carefully evaluate the implications of network neutrality now and in the future.