Thinking Outside the Box

[allardjd 1,853]

Thinking Outside the Box

 

By John Allard

 

If you’ve bought any FS add-on software lately, you know that there’s usually one more decision to make after you’ve decided what to buy. If buying on-line, you’re probably forced to decide whether you want the download or the boxed version. Of course if you’re buying in a brick and mortar store you’ll only get boxed products; conversely, almost invariably for freeware, downloading is the only option. For on-line payware, however, there is most often the choice. Why is that?

 

I’ve been doing some thinking about that kind of thing lately and doing some reading on it. One of the things that I’ve noticed is that the price spread between boxed and downloaded packages is either nil or at least is very modest; 10% or less. Where there’s a difference, it’s the boxed software that costs a little more and that seems natural enough.

 

That being the case, up to now I’ve been personally inclined to go with the boxed versions, even though that means waiting for the mail (or FedEx or UPS) to get it to me and, sometimes, paying a little bit more. If there’s an option I’ve always wanted something physical to hold in my hand when I spend my hard-earned dollars.

 

Analyzing the alternatives rationally, I’m forced to conclude that there’s probably no good reason for doing that. Downloaded zip files can be saved to a disk and labeled properly. Text files or pdfs with all the purchasing information, unlock codes, etc, can be copied to the disk too, for safekeeping, so everything can be put into one package and put on the shelf, just like the boxed version. The expense of doing that is pennies and it only takes a few minutes. The only thing missing may be the printed manual and a plastic box with a pretty label. If you care to, printing the manual from the obligatory pdf file is always possible too, I suppose, though with the price of ink cartridges that’s going to drive up the price a little. More and more though, even the boxed versions don’t have a printed manual, so there’s another potential advantage of the box going down the drain. Still, I’m old school, and still feel inclined to opt for the box when it’s available.

 

What really sets me to wondering, however is this business of the price spread. Intuitively (though not necessarily correctly) it seems to me as if the boxed version should cost quite a lot more than the download. If so, I can’t help but feel I’m getting a bargain if I get it at the same, or very nearly the same price as the e-delivery, though, of course, that neglects the previous analysis that there’s really no advantage. I guess the other way to look at that is that I may be getting shafted by paying the same or nearly the same for the download if it costs so much less to produce. I don’t usually dwell on that, however; I have only two options and they really are close to the same price. Perhaps some basic economics might illuminate this a little. Let’s look conceptually at what it might cost to produce what we’re paying for.

 

The cost of putting one unit of a product in the hands of a customer can be thought of as consisting of two components. One is that unit’s share of the fixed or setup cost. That total cost is more or less unrelated to how many units will be produced, so each unit’s share of it decreases with volume sold. The other cost component is the incremental cost of producing one more unit of product. Those two pieces, fixed and incremental added together, constitute the cost of the produced unit.

 

With software, the development costs, marketing costs, legal costs, artwork design and text composition for ads, manuals, etc, business overhead and things of that nature are borne equally by the downloaded and boxed units. Neither costs any more in that respect than the other, so it can be assumed that those costs are the same for each unit, regardless of how it is dispensed to the customer. Given that, we can neglect those common elements of the fixed costs in our search for understanding cost or price differential.

 

There are, however, elements of fixed cost that do differ between various production methods and those must be analyzed separately and assigned to each method in order to determine the cost of production for each. That is the case for software if both boxed and download methods are employed. These second components of the fixed or setup cost consist of those things that are unique to each of the methods of production/distribution. Since we’re mainly concerned with what’s different between download and boxed, we don’t need to worry too much about what is fixed and what is incremental from this point forward, only what’s different between the two products. Let’s consider each method separately, trying to think where the expenses come from.

 

For the boxed versions, the expenses must include the physical production and handling of real-world objects, i.e., buying, burning and labeling the disk, buying and labeling the box, physically printing and stuffing the inserts, shrink wrapping, etc. Warehousing and shipping are not inconsiderable expenses either. The facilities have to be built, bought or rented, heated, cooled, insured, maintained, staffed, secured, etc. A boxed CD package isn’t a voluminous, heavy object, but certainly some expense accrues from having to produce it, handle it and house it. Add to that the cost of shipping the physical product to the customer, whether that be five hundred to a wholesaler, thirty to a retailer or one to an individual. That’s not small potatoes either and it behooves us to remember that this is a product sold on a world-wide market. Moving physical product costs money. Moving it further costs more.

 

Switching over, is there any expense associated with producing and delivering downloaded software that is not part of the boxed set costs? It seems as if in that case it comes down to the need for a web connected secure server system of adequate bandwidth, leased or owned, to dispense the files. Also needed is some kind of secure unlock scheme or system to assure that only those who pay can use the product. Certainly there are costs associated with those things but they are less incremental than the boxed costs. In simple terms, once the distribution version is safely ensconced on the server with the appropriate protections and access, available for downloading, the incremental cost of dispensing one more unit must go to nearly zero.

 

Considering those two situations and neglecting volume and economies of scale, I am intuitively led to believe that a unit of boxed software must be considerably more expensive for the publisher to put in the hands of a customer than a single downloaded unit. I don’t have any numbers to back it up, but considering what’s involved in each case, that seems plausible, even probable.

 

Now to the price spreads. On the surface of it, I would expect the difference in price of the two product formats to reflect only the difference in the costs of production. But what of profit? Does the more expensive production technique justify a higher level of profit? If one production technique is much more expensive than the other, requiring the investment of significantly more capital to produce the product in that format, then is it not fair to have the margin of profit be commensurate with what it takes to produce in that way? It’s a manifestation of the economics concept of ROI – Return On Investment. If a publisher spends ten times as much to get a box of software on the street as he does to push one out over he internet, isn’t he justified to not only recoup the extra cost in the price of the box, but also to reap ten times the profit from the box?

 

Well, maybe not. At some point of price spread, market forces intervene and the customer balks, refusing to buy the more expensive software because the value difference to him of the two options is less than the price difference when that difference is determined solely by production cost. Confused yet? This begs the question of why boxed products are available at all any more. Download is practical, safe and universal these days and arguably is much cheaper to do.

 

There is more to consider. One possible aspect is bandwidth at the customer end. Software is getting ever larger. DVDs are replacing CDs because often the latter aren’t capacious enough to hold the files. There no doubt still exist many potential customers who may have the hard-drive and memory and CPU to load and run what is being sold, but have too small a bit-pipe to their home (or none at all) by which to download it. Boxed software makes those sales possible.

 

Another factor may be that wholesale sales of boxed product to storefront retailers is considered more or less mandatory or at least salutary, even at little or no profit; that could be the case because of the visibility and implicit advertising that results from potential customers seeing the product on a shelf somewhere. That may well be a factor driving the vendors to persist in producing the boxed products, even if they are sold close to, at, or even below cost. If they are producing them for the stores in what is largely a marketing effort, why not offer them for retail sale from their web-sites as well, at whatever price differential from the downloaded stuff that the market will bear?

 

If the foregoing analysis of the relative costs of production and distribution between the two options holds true, it is likely that the publishers would just as soon dispense entirely with production of boxed software. It may be that they cannot because of the marketing effects of it. The on-line sales of a few units of boxed product to those like me going out the door one at a time are likely not much of a factor one way or the other in their decision to continue to make boxes. It’s probably to service the mass-market retail stores that they stamp them out, to claim those shelf-feet in the electronics departments for that hot new title’s box cover and their company logo to be prominently displayed. If they can make a small profit besides, all the better, but my instincts tell me that the profit is in the downloads.

 

Shifting gears here, I sat at the feet of Duncan Murray, the developer of AirHauler, in the preparation of this article. Not literally, of course, he’s in Scotland, but he made some good points which may are not apparent in the above analysis. His point of view, of course is that of independent developer who creates a software product, then enters into a contract with a software house to produce, market and distribute it for him. For which, he gets a cut of the take. That seems simple enough. It’s also quite common in FS circles. Much of what we see on the FS add-on market comes to us in that way. Many of the FS software houses are marketers and publishers, not so much developers in their own rite. Guys like Duncan do much of the development heavy lifting these days.

 

The case he makes, again bearing in mind his particular perspective in this case, is that boxed software works to our detriment – his and ours - in ways we might not have thought of. Of prime importance is the fact that FS software is a niche market. In relative terms, there aren’t that many of us out here buying flight simming software. A modestly successful FS add-on title sells a few thousand copies world wide. Ten thousand is quite successful.

 

Boxed software is produced primarily to be sold through the mass-marketers who buy in relatively large quantities (bearing in mind the relatively low overall sales numbers) but who expect deep discounts in pricing. They in turn sell it for less than the software houses, even less than the download prices. That cuts deeply into the return to the developer, who gets a percentage of the wholesale price from the publisher to the distributer, e.g, Best Buy, Wal-Mart, etc. and who may also get a lower percentage on boxed sales than on downloads.

 

What happens is that the developer has spent some considerable time and effort producing a niche product for a niche market but gets relatively little return for it to the extent that it goes to the mass-marketers. The picture Duncan paints is that the flow of good add-ons may well dry up one of these days because the developers are not getting much return on their investment.

 

You may think that the only investment the developer has is his time, however that’s not strictly true. Quite aside from the fact that he has a right to expect compensation for his time, there are also significant out-of-pocket expenses required for distribution licenses for other software products. For example, if an FS add-on uses FSUIPC, a special distribution license must be purchased by the developer to use FSUIPC for his application. The users get the freeware version – the developer pays the freight for everyone.

 

This is kind of a dilemma for everyone concerned. Do we users pay more to buy the download version from the publisher to keep the software coming? Does the publisher forego the production of boxed product to keep the mass marketers from contracting the overall revenue, but accepting lower sales? Does the developer spend the time to make the next killer application if he gets relatively little return on his effort? There’s more here than meets the eye and I don’t feel as if I have the entire picture before me. The next few years are going to be mighty interesting.

[hurricanemk1c 195]

Nice one John!

[Sputnik421 0]

I normal go for the download option but with AirHauler I had no option but to have the boxed as download was not available at the time. So when I found out about it I looked for the best price I could find and settled on play.com. They were offing it at a much lower price than Just Flight, and had given me good service in the past. Had I known how good Duncan's after sales service is, and how little he gets from boxed sales at the time. I may have made a different choice on who to buy it from, but with no knowledge of Duncan and wanting the best price I made my choice. I like the shareware option for getting new software, as you get to know the product and maybe the developer. Prior to having to commit your hard earned cash, if Just Flight had had the demo version ready when AH went live. I would have tried before purchase, and would have had the chance to make a more informed decision on who to give my money to.

[SlimNasty 0]

Hi John,

Very good article, there is a couple of things I would love to add if I may which will hopefully add more value...

I have to say well done to Duncan because this is without a doubt a fantastic product. There are other expenses he has which are also unseen by the end user, like the PC hardware and software he has used, not to mention the time he spent learning to code software and any packages he may have used in conjuntion with this. I am also sure that this must have taken a massive amount of time to produce so you can't ignore the electicity bill that comes in each month. (unless he has a windmill)...

I tend to go for Boxed versions myself and there is a good reason for this. Most publishers will outsource the production of the discs and in most cases these discs will be pressed and not burnt. Therefore these have a longer life expectancy. I have found that old CD's with data burnt on my old 2x CDR on my Amiga are not of much use now as the discs just wont read, press discs do not have this issue at all, so for me downloading, burning to disc and keeping would present a risk, although probably minimal.

Also coming from the print trade you would be surprised how cheap you can produce a disc, box, printed insert and manual even for low quantities. With the invention of digital presses over the last ten years these now print as good as litho and you are talking pennies to produce something on these now as running costs are always coming down. I would imagine production cost of the DVD with box and manual could be lower than a pound, but don't quote me.

I hope this all helps?

[allardjd 1,853]

Phil and Sputnik,

Thanks for the comments, guys. That's good insight from both on a topic I certainly am not an expert on. Like you, I like the box, disk and (less and less these days) the printed material, but there are two edges to the sword.

I'm in the midst of recovering from a lost hard drive. The boxed payware titles I have are not a source of worry. The downloaded payware, if I was prudent, is going back in OK, but if I didn't save the e-mails, purchase order numbers, unlock codes, etc, in a place that was unaffected by the casualty, will be a little less certain. I have tons of both and and the jury is still out on how much will be lost.

I couldn't possibly agree with you more that Duncan has provided us with something truly special and I can only hope that he's reaped a benefic commensurate with the costs and the effort and the risks. I don't know the details and they're none of my business anyway. I do know that the boxed sales, which includes virtually anything that goes to a brick-and-mortar retailer and almost all of what goes to the mail order houses benefits him relatively little. It seems that has less to do with the cost of producing the physical packages than it has to do with the deep discounts the high-volume marketers expect and demand. His percentage is from whatever their cost is from JF, not what the retail customer pays, so if the mass marketer gets a deep discount, he takes a big hit too.

John

[SlimNasty 0]

Just to add SlimAir Logistics which is my Air Freight Company within AH has delivered 63,075,642 IBS of AirHauler CD's if that helps work out how many were sold :-)

[rob16584 42]

I cannot speak for Just Flight's own position, but, working in a company that deals a lot with high street retailers I do have an insight into how they operate; they more or less make you dance to their tune. If Just Flight are wanting to get the boxed product into the shops to promote it then they are more or less going to have to give it to the retailer at the lowest price otherwise the retailers won't take on the product and people won't be able to buy it in the shops. Personally I hate working with high street retailers as they think that they can do what they want because they are so big in comparison. With FS being such a niche industry I am guessing that the developers are happy just to get their products into the public eye so allow themselves to be pushed around a little more than say someone like EA Games would do.