Why Software, Pharmaceuticals, and Content are Bellweathers of Growth

Tuesday, January 5, 2010 , Posted by Johnny Fuery at 4:19 PM

Originally Published 2007-11-12 14:37:18

In classical terms, the concept of production includes the concept of "widgets" and the costs required, both in aggregate and per piece, to manufacture said widget.

Whether you're building missiles or metronomes, this holds true. In the short term, there are limits to production, and therefore the costs of production rise as the factors of production approach their maximums. For example, employ more workers (labor) in a factory, and at some point additional workers cannot help the factory produce more widgets -- they just get in the way and cost more money. So the "marginal cost" of producing more widgets as the factory capacity is exhausted increases to the point where it is simply not profitable to sell more widgets.

There are a few precious industries where this concept does not exist. I've heard software executives call this the "infinite margins of software", which, in purely technical terms, is completely incorrect, but does succeed in capturing the concept in a sound bite.

The research and development costs that went into building Windows Vista, for instance, is in the hundreds of millions of dollars. However, now that the work is done, every single additional unit that Microsoft sells drops almost directly to their bottom line (i.e., save for support and maintenance costs, which is included in the price, it's almost pure profit).

The same is true about pharmaceuticals. The first pill costs $400 million dollars to produce. The second pill is less than a penny.

Content is, perhaps, the easiest for the layperson to understand. If you use your creativity to write a book, paint a masterpiece, or otherwise produce something that consumers want in droves, the cost of each copy is merely the cost of producing the media upon which it lives (that is, the DVD the video is encoded on, the paper the novel is printed on, etc). So when you hear "You Can't Always Get What You Want" in a Coca-Cola commercial, no work (production costs) came out of the royalty paid to the Rolling Stones.

So, if you're contemplating a new career, trying to explain to your grandma why she should invest in tech stocks, or simply want a little background info to back up the "content is king" mantra, now you have it. Go work for a biotech, tell Grandma that Microsoft invests $5 billion in engineering and makes 50 with it (try that with traditional widgets!), and realize that digitally-based content has zero reproduction costs outside of bandwidth.

No incremental costs of production mean that every extra unit you sell (or every new page view your blog gets) is, essentially, free. This increases your margin, your profitability, and ultimately, your wealth.

Comments

On 2007-11-12 16:48:44 University Update - Windows Vista - Why Software, Pharmaceuticals, and Content are Bellweathers of Growth said:
[...] Why Software, Pharmaceuticals, and Content are Bellweathers of Growth » This Summary is from an article posted at Really Smart Guy » GeekSpeak, Real Estate, [...]

On 2007-11-13 09:20:02 alexey said:
what happened to your previous wordpress theme?

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