Analog Economics

A physical book requires harvesting trees to make paper, onto which a story or information is transferred via a printing press. Then many hands and lots of energy are required to move the book from manufacturing plant to retail store and, finally, to the consumer. This process is resource, labor and capital intensive.

To see how this works in financial terms, let's consider the author of our book.

In the analog world she writes her book and receives 10 percent of every sale, or $2.50 on each $25 book sale. The publisher retains the remaining $22.50 for manufacturing, distribution and selling expenses. Let's further assume that her publisher pushes hard and sells 25,000 copies in one year, a decent number in the offline publishing world. Our author would then earn $62,500 ($2.50 x 25,000 copies) for her creative efforts.

Digital Economics

The same book can be produced and packaged in a digital form known as an 'eBook', and delivered anywhere in the world in seconds, at 1/100th the cost and with almost no environmental impact.

So let's assume our author writes that same book, but decides to become an entrepreneur in the digital world by setting up a small Web business and selling her eBook online, over the Internet, to a worldwide market. And for the sake of this example, let's assume she sells the same number of books at the same price.

Looking at the costs of doing this, over the year she'll spend about $2,500 to build the Website, $4,000 a month for a half-time Webmaster, $150 per month to host the Website (that sells and collects money 24 hours a day, seven days a week), and an additional $10,000 per month to buy pay-per-click ads on Google to get traffic to her site.

At the end of one year her expenses ($2,500 for construction, $48,000 for the Webmaster, $1,800 for hosting and $120,000 for advertising) would total about $172,300. On the income side, her revenues ($25 per copy x 25,000 copies) would total $625,000. When we subtract her expenses from her revenues, she's left with $452,700. Cheap digital tools and the Internet's reach provide her with the leverage to do a little more work…but make a lot more money. She could never enjoy this sort of success in the offline world.

This simple example shows the amazing leverage of becoming an entrepreneur and selling information products in the new digital world. Whereas in the physical world our author earned 10 percent of the revenues ($62,500), in the digital world she earns more like 70 percent ($452,700), or seven times more income.

The New Capital

This new digital world shifts the advantage from those with, or having access to, financial capital, to those with intellectual capital. And that's exciting.