Apple iTunes Falls to Online Marginal Cost Improvement – Owning Digital Products will Fade

Apple iTunes Falls to Online Marginal Cost Improvement – Owning Digital Products will Fade

In a perfect internet market, marginal cost is zero for digital products. In other words, the cost of producing to serve an additional user will be zero. This is possible because distribution cost and transaction cost – two components of marginal cost – will disappear. This has a huge implication on the trajectory of digital firms: because distribution within internet is unbounded and unconstrained [limited gatekeepers], the friction for distribution tends towards zero, opening huge opportunities for new business models.

Under this circumstance, two things happen:

  1. There is limited value in owning digital products if you can stream the same content. The low marginal cost makes streaming more cost-effective over time, especially when you consider more product choices stream triggers for you. Yes, you can stream more contents over just buying and owning rights.
  2. There is limited value in outright purchase of digital products when you can do subscription for the same reason as noted in #1 above.

These factors are the reasons why owning music is no more a smart choice: streaming pays better. Apple iTunes had to go for its era is fading for Apple streaming business to take over. The future belongs to streaming as that cost will keep dropping per value compared with buying and owning music. Simply, if marginal cost drops, users win, and asking them to own the digital product is offering a non-optimal choice to them.

So is owning music becoming a thing of the past?

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