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Marissa at Union Station, Los Angeles

The Bite-Sized Economy

Virtual Goods, Real Dollars

Last week, while throwing Microsoft another $10 to play some new maps on an Xbox game, I realized that there's a major shift going on in how we thinking about purchasing and owning products and content. It has real implications for anyone trying to sell goods going forward - we're on our way from the big ticket economy to the bite-sized economy.

If you're not a console gamer, you may not be familiar with the concept of "DLC", or downloadable content. For folks using Microsoft's Xbox Live (or, until its recent struggles, the equivalent PSN from Sony), DLC allows them to buy additional content for games they already own via the network for about $10 a purchase. Generally, it's extra levels, or new storylines, or new in-game items for a game they already own.

In my case, I purchased the game "Call of Duty: Black Ops", back in when it was released in November of last year. In the old days, that $60 purchase would have been my last outlay on the game, and the game itself would have stayed essentially the same until I tired of playing it and purchased another title.

With DLC, the fundamental game may not change, but if I'm enjoying the core gameplay experience but getting bored of running through the same environments over and over again, it expands the "world" of the game so I can get some extra replay value from it.

This was in fact my second DLC purchase for that game, an incremental $20 in sales for Activision (it's publisher) without having to sell me another box of software. Notably, I'm still playing it six months after it came out, so I'm fine with that expense - it's cheaper than buying another $60 game that might or might not turn out to be as enjoyable.

Beyond Games

What's happening, at a larger macro scale, is that the friction associated with these transactions is declining (because it's easier to buy and deliver online, and because customers are more willing to.) For Activision, that means that it's worth the investment to make a $10 add-on product, even if it's only saleable to your existing customers. For me, it means I can essentially "subscribe" to a game and reduce my risk of wasting $60 on a clunker (and most games, to be honest, are clunkers - there's really only a half dozen or so 'exceptional' titles in any given year.)

If you're a vendor that's great at creating products that consumers enjoy, this is great news: now a great game not only sells more copies at the retail shelf, but it has a high-margin "afterlife" where you can sell an incremental $10-$30 per user at far higher margins than your boxed product.

But if you're better at marketing your product than building it, you may be in for a rough ride. As a consumer, I'm spending fewer dollars overall, and they're going towards fewer products total. And fewer of those dollars are "speculative" - I'm spending my money where I've already found an experience I value.

What About GDP?

It's worth noting here that this has negative implications for GDP. As Tyler Cowen pointed out in The Great Stagnation, Facebook is great, but when you're on Facebook, you're not out spending money. When you're spending less, someone is selling less, and it's potentially negative for GDP. Efficiency on the product side is one thing, but this is efficiency on the consumption side, and at least to some degree it will drive lower overall consumption.

Down the Road

I expect we'll see this playing out in a lot of other domains: obviously, television is going this way as people push back on the cable "basket" for the a-la carte options offered by services like Amazon Video on Demand and iTunes.

But it's happening in much less obvious places, too - if you consider Zipcar's hourly rentals, they're basically what happens when you reduce the overhead of a rental transaction to almost zero, allowing the minimum increment to go from a day to an hour. This is not just about digital goods - it's about any sale. Amazon will happily sell an Amazon Prime customer a cable for $3 and ship it to them for free, because they've become so efficient on a per-transaction basis. Companies that don't adjust will be left behind.

The bite-sized economy is a great trend for both consumers, and quality manufacturers / service providers. But in the short term, it's going to be a tremendously disruptive transition, as savvy buyers increasingly switch from the "bulk purchase" / Costco mentality of the past to a much more just-in-time buying model.

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