BIHUB PATH

February 23, 2021

Marketing, Communication and Management
Analysis and Sports Technology

Why do digital products create so much equity value?

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The greatest innovations over the last twenty years have been created by digital products. The internet has created completely new businesses with market values of billions of dollars. Google, Facebook, Twitter, Amazon, Alibaba, Tencent, Booking.com are just the tip of the iceberg of value created by digital products. Esports is the most innovative digital product in the sports market with investments worth over $2.5 billion in venture capital funding in 2018.

Digital products have no cost to manufacture. The product could be a video service, playing a game or buying a financial product. The gross margins are very high because there are no costs of physical goods sold.

The internet is accessible to nearly everyone in the world. Digital products can be distributed rapidly to anyone and are not manufactured or distributed physically. Products relevant to large audiences are launched and generate revenue rapidly. Internet businesses can quickly become very large. For example, a fantasy league relevant to football fans can be sold to everyone almost at once.

The internet also provides access to markets of smaller groups of people distributed across the world.  Golf has fans all over the world but they are a niche audience compared to football fans.  The internet makes golf fans accessible wherever they are to create a global market with greater value.

Lightweight businesses

Investors call business models based on digital products “lightweight”.  Startups can take off very quickly. They don’t require huge amounts of capital to build a factory and stock.

The unique features of digital products – low cost of goods sold, ease of distribution and low transaction costs – make new business models possible. Fantasy sports took off when the internet became available to most consumers in the late 1990s. By 2002, fantasy football alone was worth $1.5 billion and played by over 15 million people.

Disaggregation

The internet enables different business activities take place in different locations.  They can still be closely connected by telecoms. Digital products are not physical. Traditional logistic requirements have no influence of business location. The main business activities can be sited wherever the most qualified people live. This makes it possible for businesses to specialize in online sales, digital product development or management of support functions. The entrepreneur can buy the additional services required for a complete business from third parties. This “disaggregation” of business activities creates opportunities for startups to be able to operate at large scale with low costs by becoming specialists.

Long Tail

Traditional businesses try to minimize the number of products and to maximize the quantity of each product sold. This lowers complexity and stock holding costs.  Digital products don’t follow the same rules. Digital businesses can offer a wide range of products to meet the requirements of small audiences. The revenue from any one product is small but it can become significant across a wide range of products .

DAZN announced in March 2020 that it will distribute its coverage of boxing matches to over 200 countries worldwide. Boxers are highly paid and it makes sense to create a market including the countries where boxing is not yet well known. The audience for boxing matches is a long tail market.

Marketplace

Internet make it easy not only to distribute but also to find suppliers. This makes it possible to create marketplaces where buyers and sellers come together. Marketplaces charge either a flat fee per transaction or a small percentage of the value of the transaction. Marketplaces need very large volumes of transactions to make interesting businesses.

Freemium

Consumers can try digital products before they buy with very low cost to the seller. Consumers can use the products for extended periods before upgrading to a paid version of the product. The entrepreneur’s skill is to decide the product features which make the product useful to the consumer; but not so attractive that the consumer will never upgrade.

Cricket is the most popular sport in India. The launch of the Indian Premier League in 2008 inspired Harsh Jain and Bhavit Sheth to develop Dream11. Dream11 became India’s largest fantasy sports platform. In the beginning it took some time to find the freemium model for Indian consumers. Harsh Jain put it like this: “Launching fantasy sports in India for the first time in 2008 … meant that we had to hard sell the concept to potential hires, investors, and most importantly, users! It took us a few years of experimenting with the format and a lot of perseverance before we finally found a product that would resonate with sports fans in India.”

Fantasy cricket was a new concept to Indian consumers in 2008. The concept of “free to try” enabled consumers to learn the game with no risk.

Investors are attracted to startups offering digital products. They like the fact that valuable businesses can be created very quickly. Sports clubs have only just begun to develop digital products which can keep their fans engaged between events. eSports, fantasy sports and distribution of video to smartphones are just some of the digital products which will attract fans to stay close to their clubs.

 

David Carratt

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