There are many similarities between software and content. Why are there differences in profitability?

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Editor’s note: There are many similarities between software and content. For example, they are easy to distribute without restrictions; they require a lot of fixed costs to create, but they have almost no cost for repeated use; their feedback cycles are very short, and iterations are fast. But why is the software business more profitable than content in most cases? Adam Keesling analyzed this and the original text was published on the substack with the title: Why Software is More Profitable Than Content

A few weeks ago, there was a post on Twitter that listed what the promoter wanted to know when he was young. Here are some suggestions:

  • Read every day. It doesn’t matter what you see. It doesn’t matter whether you “finished this book” or not. Just read it.

  • Abide by the golden rules. You will meet people again and again in your life. Make sure they have a high opinion of you.

  • Investing in relationships. Your community is very important, higher than you think.

His series of discussions is very good. I suggest you take a few minutes to check it out.

However, the content is not the most interesting. In fact, several Twitter threads pop up every week. On the contrary, comments are interesting. To be more specific, those will be saved by Readwise or ThreadreaderCome to the comments of tread.

I don’t know why they kept it. However, I have visited similar places before, so I can guess. They may be paying tribute to that tread. Or maybe they feel the same. They hope that they will accept some of these suggestions, or plan to accept them in the future. So, they saved the tread in case they would take a trick out of it one day.

In fact, I have done this countless times. I assume that a certain word or idea can take up a place in my brain as easily as a plug in a socket. But we humans do not work this way.

We need to be reminded to remember; we need to receive information in the correct context. Before seeing that thread, I may have heard many suggestions, but seeing it is still very valuable, because it uses different wording. Reorganizing information into the right context is the whole purpose of the media.

All of this is the beginning of an answer to a question that I have been thinking about for months: what is the difference between doing content and doing software?

Similarity between content and software

At first glance, there are several similarities between software and content services.

Distribution. Regardless of software or content, there are no distribution restrictions. Both products are delivered via the Internet without physical or digital gatekeepers. This is helpful: First, the expansion does not take a long time, but the incremental cost of pushing the product to more people is basically zero.

Again, let’s consider physical goods. Even if the physical product is sold online (perhaps a DTC food company), there is no way to get viral transmission like content or software. Even if the DTC brand can get viral, the product itself will not work. The cost and time required to deliver the physical product is too high.

The story of the service industry is similar. The service industry produces intangible products (often with the help of people, which results in non-scalability), and limits distribution due to coordination.

Investment. The investment attributes of software and content are the same: it takes a lot of fixed costs to create, but there is almost no cost to use repeatedly. You can write a program, no matter how many times it is executed, the program will perform the same function in exactly the same way. Similarly, you can write an article, no matter how many times the article is read, the reading method is exactly the same.

Content, software and several other products(Real estate, durable consumer goods) have the same quality, but in stark contrast to the service industry, which repeats the entire cost structure for each transaction.

Iteration. Both software and content benefit from a short feedback loop. Both can be adjusted immediately; both can be quickly tested and iterative of ideas. It’s easy to tell everyone about your service. Then, it’s easy for everyone to try it out. Creators or developers can quickly learn whether customers like their products. For software, customers will use it more. For content, customers are happy to share more.

In contrast, let’s look at the hardware company again. Although there are many ways to get feedback, but the frequency of feedback is not so high, because they can not quickly change the product. Even if we assume that it takes the same engineering time, for the hardware, there are still many steps (prototype development, manufacturing, assembly, packaging, delivery) before it is sold. But software and content will bypass all these steps.

Why the profit margin of the software will be higher

So, of course, the content and the software feel very similar. However, one thing is not the same: software companies tend to have higher profit margins and lower customer churn rates. Why is this so?

To answer this question, I want to distinguish between products and businesses. The content and software products are in line with the characteristics I listed in the previous section: the feedback period is short, there are no distribution restrictions, and the investment properties are attractive. These are exactly the same.

However, the situation at the business level is different. Compared with the media business, software companies tend to have higher profit margins and lower customer churn rates. If both products have similar characteristics, shouldn’t their business also have similar characteristics? Why is the software business more attractive than the media business?

One answer came from a blog written by venture capitalist Fred Wilson in 2012. He believes that the core of the difference between the two is the difference between practicality and entertainment. The practicality provided by technology companies may continue, but social apps or video games are short-lived:

In the past week, I had lunch with senior people in the entertainment and video game industry. This is an interesting chat, everyone has a wide range of topics. One of the things we discussed left a deep impression on me, that is, web and mobile apps may behave more like TV than traditional software applications.

Over the past seven years, I have witnessed my child move from myspace to Facebook and then to Instagram. Five years later, which companyWill the application become their “must-have”? no one knows. This is always the case with video games. From Farmville (Happy Farm) to Cityville (City Farm), from Words With Friends to Draw Something, users are always empathizing.

Although I like practical and entertaining narratives, I don’t think this can fully cover the differences between them. Even if it is content that most people think is practical, such as assisting in making industry decision-making information, or letting everyone know about the latest developments in the world, there is often no profit space for the software business. The profit of practical content seems to be no different from that of entertainment content.

So, I summarize the difference between people and content as follows: Content products have declined, but software products have not declined.

Yes, you use the same search engine every time, but you don’t ask the same questions every time.

The CRM you use every time is no different, but the customers you want to promote each time can be different.

You use the same streaming service every time, but you won’t watch the same movie every time.

This brings us back to the introduction of this article: The content exists to help you understand the current state of the world in which you are, to remind us of some important truths, or to make us feel something.

The first point is very short, because the world is always changing. The last two points are also short-lived, because once we consume a little content, we will ignore it. We are born with the urge to pursue freshness. We are tired of predictability. Therefore, we need someone to remind what should be done and why. We need context.

This kind of contextualization still cannot be done by computer, so the content business must find someone to create scenarios for its customers. If this can be done with a computer, then we call it a software company, not a content company.

Content products talk to people, and software products talk to computers. This is why the value of content declines faster than the value of software. This is why software is a better business.

Translator: boxi.