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The Digital Goods Age
Why Digital Products Will Disrupt Commerce
The digital goods commerce is growing twice as fast as physical goods commerce, and accelerating. Soon it will dominate global commerce, driven by exponential technologies and seismic shifts in consumer behaviour. It’s already a gigantic USD 950 billion market, and even bigger opportunities are arising. Get ready for the next commerce revolution.
It was in the final days of 2018 when the US Supreme Court started to hear oral arguments in a lawsuit against Apple. The suit, known as Apple Inc vs Pepper, had been filed by a class that included a group of iPhone users led by a man named Robert Pepper and their claim was straightforward: Apple App Store is a monopoly and is not only breaking antitrust laws but, more importantly, making it harder and more expensive for consumers to buy digital goods. The litigation was really unusual and the Court didn’t have a jurisprudence to judge the case, so this case is still pending. But this surprising event is special, not because of its uniqueness, but because it’s a symbol of a dramatic change of times: digital goods are becoming more and more important and consumers, more than ever, want to have access, convenience and freedom of choice when purchasing them, and are willing to fight for it.
Digital goods are products and services that are completely delivered using information technology. In other words, they don’t involve an exchange of physical things. Some illustrative examples of digital goods include: media such as movies, music and publications delivered as digital files or streaming services; games delivered without a physical media; virtual goods such as avatars and tools sold in a game; art, photographs and graphic designs sold in digital format; software such as mobile apps; education services that occur in a digital environment; communications, computing, consulting, infrastructure or data services provided digitally. The list is long and growing everyday as technology digitizes the world around us. This thesis is intended to investigate the impacts of the tremendous evolution of this industry, the possible consequences in consumer habits and in businesses, and to point out astounding opportunities that are arising.
Analyzing and cross-referencing information from a wide variety of sources, such as trend reports, market forecasts, business news, corporate announcements, industry researches, books and conferences, it becomes clear that the effects of the digital goods economy is already huge and will become even more so. Digital goods commerce is growing dramatically – twice as fast as physical goods commerce – and accelerating, boosted by seismic shifts that are happening worldwide in the way we buy things. As technology becomes more accessible and pervasive, its importance will only be greater. It will not only increase the sales of virtual items inside games or subscriptions of mobile apps services, it will disrupt the entire commerce ecosystem. We may be seeing the beginning of a new era, an age in which the commerce of digital products surpasses the commerce of physical products in value and importance: the Digital Goods Age.
In order to go deeper into this argument, the following chapters will present facts and figures on the digital goods commerce, explore the trends that are shaping the commerce ecosystem showing why digital products may disrupt it, demonstrate some of the most successful cases so far in digital goods commerce in the world and their extraordinary numbers, and enlighten great opportunities to push this industry even further while solving the biggest challenges to fulfill the vision of such a digital goods world.
The digital disruption of commerce has already started. Chapter One of this document will explore three major trends that are shaping the commerce landscape, deeply changing consumer behaviour and forcing a profound reorganization of the industry. These trends overlap and strengthen each other, and, together, outline one overarching key message: digital is dominating commerce piece by piece. Right up front, we will show that digital has already conquered commerce sales channels, with e-commerce now representing 50% of the year-over-year growth of retail sales in the US and expanding. After that, we will show how digital is transforming not only the point of sales and the marketing techniques to promote sales, but the entire purchase process, moving all of us as consumers from a digital centric to a digital only commerce experience. Finally, we will show that digital’s next disruption might occur in the last bastion of traditional commerce: the digitalization of goods themselves. The more we penetrate and immerse in a digital world, the more digital goods are becoming the next commerce battlefield!
Considering only the value of consumer apps, enterprise apps, and app-driven IoT technologies, the Digital Goods Economy is already a gigantic USD 950 billion market. In a year that retail defaults showed an all-time high in the US, it’s noteworthy to see that some of the most valuable companies in the world are already creating billionaire businesses around digital products and services with great growth potential, way more than their physical goods counterparts. Chapter Two, in turn, will illustrate some business cases from top companies that are exploring the digital goods commerce with staggering success. It will focus on one of the most prominent areas of this burgeoning industry, where are concentrated the major players and the biggest numbers: digital goods distribution.
After that, Chapter Three will spotlight new opportunities to take the Digital Goods Age even further, pinpointing some possible paths to overcome the biggest challenges to the evolution of the digital goods industry. As the history of Apple Inc. vs Pepper lawsuit shows, the market is today heavily concentrated in just a few players, especially regarding distribution. Besides that, there is a consistent trend of business model convergence in the industry, each of the big tech companies trying to create their own end-to-end platform for producing, distributing and retailing digital content and services, so the more their dominance expands, the more the market is concentrated. This situation may prevent us from having more access to digital products and services. If we can find ways to increase the accessibility, discovery and convenience of purchasing of digital goods, we will deeply meet the wishes of consumers and possibly unleash great business opportunities. A new economic system to trade digital products and services, decentralized and fully integrated, could be the way for the digital goods industry to reach its full potential.
Finally, the last chapter will try to wrap up all the arguments presented in the previous ones and highlight the most important takeaways of this thesis. The Digital Goods Age is coming, rapidly. Here’s why digital products will disrupt commerce.
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This article was originally published in the book “The Digital Goods Age – Why Digital Products Will Disrupt Commerce“.
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The Digital Disruption of Commerce Has Already Started
Three major trends are shaping the commerce ecosystem, profoundly changing the way we buy things and forcing a profound reorganization of the industry. Together, they outline one overarching key message: digital is dominating commerce, piece by piece.
The profusion of screens, the explosion in the number of smartphones and wearables, the expansion of broadband internet and the payments revolution create unprecedented opportunities for the growth and democratization of digital products. App Annie predicts that the total amount spent in app stores alone will reach USD 157 billion by 2022, a 92% increase compared with 2017 numbers.
But there are evidences that support that the importance of digital products will be even greater, far greater than the success we’ve seen in consumer mobile apps. Advances in technology are profoundly changing how we buy things and it will impact all the commerce ecosystem. These changes will be the result of three major trends:
- The e-Commerce proeminence – digital sales have been exploding for two decades, and will probably maintain this trend for the foreseeable future. It will represent the vast majority of the retail revenues, with huge influence both in businesses and consumer habits.
- Digitalization of the commerce experience – technology advances are completely changing the retail business as we are moving from a digital centric to a digital only shopping experience.
- Dematerialization of goods – disruptive new technologies such as The Internet of Things (IoT), Artificial Intelligence (AI), Augmented and Virtual Reality (AR/VR), autonomous systems, voice assistants integrated to lots of devices and the Spatial Web will soon become massive and pervasive, digitalizing the world around us. A digital world will be a digital goods world.
Let’s deep dive into each of these trends.
E-Commerce is booming and this trend will not stop soon.
Online sales have been flourishing all around the world. In the US, it has practically doubled in 5 years (from USD 230 billion in 2012 to USD 450 billion in 2017). In Brazil, for example, it went from BRL 22 billion in 2012 to BRL 48 billion in 2017.
Besides this massive growth, e-commerce only accounted for 10% of total retail sales in 2017 and engaged just a small part of the consumer population. Imagine, then, what will happen when e-commerce’s growing share of sales are combined with the explosion of people getting online. By 2024, thanks to 5G and disrupting innovations in connectivity technologies, there will be 4.2 billion more people ready to consume online, reaching a total 8 billion people online, each with high-speed connections. Digital commerce will skyrocket, with unimaginable opportunities for the companies in its ecosystem!
“In 2016, global online sales totaled $1.8 trillion. Remarkably, this $1.8 trillion was spent by only 1.5 billion people – a mere 20 percent of Earth’s global population that year. There’s plenty of room for disruption.”
Peter Diamandis, Executive Founder of Singularity University.
From a Digital Centric to a Digital Only Commerce Experience
Digital commerce is evolving in numbers and also in shape. The evolution of the retail environment, driven by advances in technology, has taken us from single channel or siloed channels to omnichannel retailing. Customers expect to easily find the products and services they need everywhere, to create a seamless relationship with the sellers and the producers in each and every platform, and to always have a fluid shopping experience.
Now, consider that we are living just the early days of a complete transformation of the retail industry. Combine the evolution so far with, in the near future, powerful AI recommendations and product personalizations, IoT products enabled to buy other products unmonitored, local short-distance productions powered by 3D printing and innovative materials, tremendous cost reductions in manufacturing and logistics leveraged by the evolution in robotics and autonomous systems, and disruptive new means of payment, such as cryptocurrencies, cashierless stores and real-time payment systems that will reduce friction and transaction costs, and we will evolve from a digital centric to a digital only commerce experience. That is, the purchase of physical or digital products will be more and more similar events, both in the expectations that we will have before, during and after the purchases, as well as in the value that we attribute to the products and services. The physical goods commerce is a trillion dollar industry, so imagine the potential impact to digital goods commerce if just a small part of this revenue moves for it as the differences between the two industries become blurred.
And the Digitalization of the Commerce Experience is just the beginning. How we interact with the digital world is changing. The next wave is the dematerialization of the goods themselves!
The Next Disruption of Commerce
The digital goods market will go way beyond mobile apps or virtual items inside games. Actually, they are already far more than this. Take Netflix as an example: it’s not just an Android application or a website, but an ubiquitous service available in any device, everywhere, anytime. Now, imagine that digital services will become even more pervasive. Today the primary interface to access digital services is the displays. They are everywhere, from our smartphone, computer and watch to our living room TV. This is about to change, deeply. The Screenless Software Movement has already begun and embraces many new digital experiences where human interactions with the computers happen through human speech (tech like Amazon Alexa) or our body language (tech like Magic Leap).
Imagine when digital products do not rely only on screens. This future will happen sooner than you think. Canalys appoints that worldwide smart speaker shipments grew 137% year-on-year in Q3 2018 to reach 19.7 million units, up from 8.3 million in Q3 2017. Amazon, the top spot in this market, shipped 6.3 million Echo smart speakers alone in Q3 2018. Canalys estimates that more than 56 million smart speakers will have been shipped globally in 2018. And, although these numbers are pretty remarkable by themselves, the revolution will happen when voice assistants become integrated with a proliferation of other devices, such as fridges, ovens, dishwashers and many others. This is going to tremendously impact commerce, not only because it will create a powerful new sales channel (by the way, voice shopping in US and UK combined is expected to jump to USD 40 billion in 2022, up from USD 2 billion today), but because it will create a new digital goods industry on its own. The possibilities are endless, from screenless media and entertainment services, to education, productivity tools, home automation and much more.
Consider then the impact of Augmented Reality (AR), the mixing of the real world with the computer generated world through disruptive new devices such as Magic Leap or smart contact lenses. It’s revolutionary. It will digitize the world. Or, in the words of the Magic Leap team, it will add layers and layers of a Magicverse to the reality.
Rony Abovitz, CEO & President of Magic Leap
Realize that Augmented Reality could entirely replace the screens, as everything becomes a “screen”, be it your car, your living room wall or even your body. The new capabilities they will unlock are astounding. You may expect enormous repercussions, not only in gaming, media, and entertainment industries, but also in education, training, corporate workplaces, healthcare, defense, tourism and many many others. VR/AR is expected to exceed the USD 94.4 billion market by 2023, AR alone growing 73.8% each year during this forecasted period. What will happen with the sales of the biggest categories of the physical products trade (such as clothing, shoes, electronics and cosmetics) when more and more humans penetrate and immerse in this deviceless mixed reality?
Advancements in technology will push this scenario even further, opening up even more opportunities to the digital goods commerce. Gartner predicts that the future will be characterized by smart devices delivering increasingly insightful digital services everywhere. We will shift from thinking about individual devices and fragmented user-interface (UI) technologies to a multichannel and multimodal experience. The environment is the computer! And E-Commerce will become Everywhere Commerce! We will be living in a digital world, almost literally, so we will consume primarily digital goods.
Next, get to know the stories of the companies that are leading the race for this boundless and revolutionary market.
Big wave chargers
Some of the most valuable companies in the world are already creating billionaire businesses around digital goods. Their numbers are impressive and suggest that the companies that do not embrace this market will lose the next commerce revolution.
In 2018, we are seeing jarring news appearing in the commerce arena: retail defaults are at an all-time high in the US, according to Moody’s Investor’s Service. Sadly, it’s the downfall of those companies that didn’t embrace the first wave of the digitalization of the commerce experience. On the other hand, we are also seeing that some of the most innovative and valuable companies in the world are aggressively charging the next wave of the commerce revolution and exploring the gigantic opportunity of the digital goods market. Their numbers are already astonishing and suggest that even niche businesses in this industry can become unbelievably big. They also show that the companies that do not explore this trend will fall behind and lose market share, if not go out of market completely.
Below are some of the most successful cases so far in digital goods commerce in the world and also a Brazilian example that demonstrates that these opportunities are both happening globally and locally. The companies listed here belong to the most prominent area of this burgeoning industry, where are concentrated the major players and the biggest numbers: the digital goods distribution.
Apple App Store and Google Play Store
It’s estimated that the Apple App Store alone has made profit of more than USD 40 billion since it was created 10 years ago. It reached USD 22.6 billion in worldwide gross revenues in the first half of 2018, up 27% year-over-year. Google Play Store, in turn, is a behemoth digital store with more than 3.5 million apps available and more than USD 20 billion in revenues a year.
Amazon
Subscription Service Sales is already a more than USD 13.3 billion per year business for Amazon. It’s growing almost twice as fast as sales of physical goods and already represents almost 7% of Amazon’s total net sales (AWS’s colossal revenues, a digital service per se, not included).
Third-Party App Stores
Driven by the open nature of the Android platform (which allows third party app distribution), the growth of the Chinese app market (where Google Play isn’t officially available) and the developers’ need to open new distribution channels, Third-Party App Stores have arisen. Today, they already represent 25% of the annual mobile apps gross consumer spend worldwide and a breathtaking 33% of the market’s downloads. Amazon App Store, GetJar and Aptoide are just a few examples of the players exploring this prospering market and growing exponentially.
Tencent
Leveraging the powerful ecosystem around WeChat/WePay and other juggernaut Chinese media properties, revenues from Tencent’s value-added services business (including payment services, digital content and online games) increased by 14% to USD 6.3 billion for the second quarter of 2018 on a year-on-year basis. Tencent’s total fee-based VAS subscriptions were up by 30% year-on-year to 154 million subscriptions, primarily driven by strong uptake of video subscription services. Digital content revenues grew substantially year-on- year, benefiting from take-up of Tencent’s market leading video and music subscription services, as well as from Tencent’s live broadcasting and online literature products.
VIVO (Brazil)
With a consumer base of almost 70 million clients, VIVO, the Brazilian branch of Telefónica, registered BRL 1.7 billion in revenues from digital services and value added services in Q3 2018, up 75% year-over-year. It already represents 25% of all revenues from the Telco’s mobile business in Brazil.
(Source: Telefónica Brazil Q3 2018 Announcement)
What’s the common thread? All of these businesses are distributing digital goods at scale, and leveraging the network effect created around their other assets, be it hardware, software or services.
The more we build moats, the more we will need bridges
Digital goods are the next commerce battlefield, but the path to reach its full potential will not come without great challenges. The biggest of them all is the heavy concentration of the distribution market. Finding a solution to that would be a tremendous business opportunity.
Although the digital goods market is booming, it doesn’t mean that there are a lack of opportunities to enhance it. Tackling the problems the industry presents today may take the digital goods industry to a higher level. These solutions may also be the biggest business opportunities to the companies that want to thrive in this blossoming market.
Today, it’s very difficult for a digital goods producer to make its products and services available everywhere. The first obstacle relies on creating a great multi channel user experience in the almost infinite myriad of OSs, devices, screen sizes, browsers, versions, APIs, SDKs… and all of them constantly changing.
Another big problem, just as or even more important, is the restrictions that producers find in distribution. In the physical goods trade ecosystem there are millions and millions of stores, hundreds of thousands of distributors, specialized services to connect producers with multiple marketplaces, a variety of online and brick-and-mortar sales channels and broad and complex supply chains. But, in digital goods commerce, there are just half a dozen big distribution companies that monopolize the market, define their restrictive set of rules to allow producers to trade in their playground and take the lion’s share of the revenues.
Alternative distribution deals are also difficult, requiring one-on-one negotiations, hard integrations efforts and not always good conversion rates as a result of the adapted user experience. As a consequence, the producers of digital goods end up concentrating their efforts on a single channel (their websites) or on a few multichannel (essentially, Apple App Store and Google Play Store or dedicated sales teams) strategies. In practice, there is no omnichannel retail in the digital goods market.
And there is a big risk that this condition won’t change in the near future. There is a consistent trend of business model convergence in the industry, each of the big tech companies trying to create their own end-to-end platform for producing, distributing and retailing digital content and services. As theirs dominance expands, more and more this walled-gardens strategy consolidates.
But the more the companies create their moats, the more we will need bridges. This lack of an extensive, networked and free market of digital goods harms the most important stakeholder of this equation: us all, as consumers. It’s funny that you can buy your new 60-inch flat screen connected TV in an infinite number of e-commerce websites and conventional stores all over the world, but you have very very few options from where to buy the apps you are going to use in your TV. You probably don’t even know what are the best apps for that, since it’s so difficult to find them on app stores. We normally don’t stop to think about it, but this shortage of curation and availability of digital goods is preventing us having better, healthier and more fulfilling lives. If the current organization of the digital goods commerce impacts consumers with such a frugal service, such as TV entertainment, imagine it with life changing services such as education, health, safety and entrepreneurship. It comes as no surprise that American consumers have filed a lawsuit against Apple and its digital goods commerce monopoly… they are eager to change this! So, if we can find ways to increase the accessibility, discovery and convenience of purchasing of such services, we will meet the wishes of consumers, change people’s lives and possibly unleash great business opportunities.
In order to achieve the promised land of the Digital Goods Age, it is important, therefore, that a new commerce and economic system to trade digital goods is created. One that facilitates consumers to find and engage with digital products, that simplifies how producers can make their products integrated and available everywhere, and that leverages the already built immense infrastructure to trade physical products, allowing hundreds of thousands of players to participate in and benefit from the digital goods commerce revolution. A solution like this would unlock the potential of the digital goods market and allow it to reach its greatness. It would be as much an enormous business opportunity for those who create it as a remarkable opportunity to leave behind a fulfilling legacy and to change the world.
A Digital World is a Digital Goods World
Soon we will be living in a digital world, almost literally. Digital goods importance will massively increase. It will not only boost the sales of virtual items inside games or subscriptions of mobile apps services, it will disrupt the entire commerce ecosystem.
The world is being digitized. Exponential technologies are creating new ways to interact with each other and with the world around us, profoundly changing our habits and expectations about what to buy, how to buy and where to buy goods, and new business opportunities in the digital economy are being created at an overwhelming velocity. The digital goods market will deeply transform the commerce landscape.
The evolution and the trends of the digital goods market are overwhelming. It’s already a gigantic USD 950 billion market considering only consumer apps, enterprise apps, and app-driven IoT technologies, but soon it will be even bigger and dominate the commerce ecosystem. In a year when retail defaults are at an all-time high in the US, we are reminded of a relentless truth: disruption in just around the corner. The companies that didn’t embrace the first wave of the digitalization of the commerce experience are doomed. On the other hand, some of the most innovative and valuable companies in the world are aggressively charging the next wave of the commerce revolution and exploring the gigantic opportunity of the digital goods market. Their numbers are impressive. What will happen to the companies that stay behind?
The potential of digital goods commerce is immense and it can go even further. Today, the market is heavily concentrated in just a few players, especially regarding distribution, and this may be preventing us having more access to digital products and services. If a new commerce and economic system to trade digital goods, more democratic and integrated, is created, it could unleash a great power to push the industry to new limits.
The digital goods economy has the true potential to massively democratize the access to the best products and services worldwide in areas as important as education, health, safety and many others, helping millions of people to raise, significantly and permanently, their standards of living. The creation of a digital goods world is one of the most powerful initiatives to drive prosperity globally, while generating unbelievably big business opportunities.
Embrace the next commerce revolution. May the Digital Goods Age begin.
![The Digital Goods Age - Book Cover](https://i0.wp.com/www.nex.business/wp-content/uploads/2019/03/The-Digital-Goods-Age_English_BookCover.jpg?resize=199%2C300&ssl=1)
This article was originally published in the book “The Digital Goods Age – Why Digital Products Will Disrupt Commerce“.
Confirm your details below and download the eBook for free.
Author: Renato Cagno
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