This morning's entry by Jeff Atwood concerning the Sad State of Digital Software Distribution missed the mark for me for a couple of reasons. Jeff states:

I can understand the desire not to undercut their own distribution channel. I'm sure Best Buy wouldn't be too happy with Microsoft or EA selling software directly to consumers for less than they can on their store shelves. But do vendors assume we are completely ingnorant [sic] of basic retail economics? Digital software distribution should cost less:

1. When vendors sell direct, it's insanely profitable (90% profit)
2. When selling through a third-party portal, it's still extremely profitable, far more than retail sales. (50% profit)
3. It's more efficient. There are no trucks full of boxes, manuals, jewelcases, and other atoms to be distributed across the world. Distribution costs effectively drop to zero.
4. It's more work for consumers. There are a bunch of additional hoops you don't have with physical media, such as DRM wrappers, helper software to install, and a long download period. It shouldn't be like this. Standard Vista style online activation from an ISO image should be all that's required. But you typically get hogtied into vendor-specific downloaders and wrappers that have to be installed on your machine, such as Steam, and the EA downloader.
   
   

While I agree with Jeff's overall statement, his profit number appear to be arbitrary (at least, I was unable to come up with a named source in the rest of his post).

1. Where does the "90% profit" number come from? Direct vending is certainly much more profitable than traditional retail, but it does not automatically translate to almost 100% profit. There are still costs associated with storage of product (think disk space now as your warehouse), bandwidth costs, security related costs, uptime maintenance. These still are going to get shaved off of the suggested retail price. These also have their traditional retail store complements - physical warehouse space, transport and distribution costs, loss management.

Besides, as far as I know, software is not exempt from keystone pricing methods. That profit percentage will grow and shrink according to the selected distribution method. And you can bet that the method includes pricing for convenience.

2. See #1. Selling through a third party will eat at your gross profits even more, because now you are probably paying a percentage on commissions. But where is your math describing 50% profit?

3. It is more efficient, but in no way do distribution costs drop to zero. See #1 again. Profits will increase, but the costs to distribute the software per unit will remain the same. You could theoretically drop distribution costs by streamlining your distribution channel, but the idea of free, zero-cost distribution on the Internet is theoretically impossible. The culprit in this case is bandwidth and storage costs. It may not cost you anything to keep software on disk (in the same way that physical inventory ages in a warehouse), but making sure it is always available will certainly cost you.

4. Now here, I am in 100% agreement. Being a Steam user, along with FilePlanet and other services, the idea of added hoops to jump through for purchasing my software makes me cringe.

A while back I bought a digital copy of The Matrix Online through IGN's Direct2Drive service, and used it again to grab a trial version of World of Warcraft. I had to install their "download manager", and diddle around with a few other things before I finally got to downloading the actual file. For someone like me this isn't really a big deal, but when the aim is to facilitate distribution, the average person HATES the extra steps. Why can't I just download an ISO, like Jeff suggests?

I absolutely agree with Jeff's overall assessment of the digital download situation (especially the mainstream marketplace's refusal to adopt BitTorrent as a de-facto distribution standard, but I think there are other issues to address in that, more later), but I think he is missing the mark in his assessment of basic retail ecomonics.

Your thoughts, Jeff?