• What about iTunes? Doesn’t that show people will...

What about iTunes? Doesn’t that show people will pay for content? Well, not really. iTunes is more of a tollbooth than a store. They offer a convenient list of songs, and whenever you choose one they ding your credit card for a small amount, just below the threshold of attention. Basically, iTunes makes money by taxing people, not selling them stuff. You can only do that if you own the channel, and even then you don’t make much from it, because a toll has to be ignorable to work.

- Paul Graham - Post-Medium Publishing

From the perspective of Paul Graham’s description, wouldn’t all virtual goods transactions be “a tax?”

They seem to follow the pattern PG sets up with the iPod. Create an audience that is highly engaged in your product (such as Apple’s iPod, or a social game or MMO) and then offer a convenient set of additional content (music in iTunes, new items in Pet Society, new music and clothing in Loudcrowd). In that case, I’m not sure how you would argue that “even then you don’t make much from it” because there is a preponderance of evidence showing the opposite.

The lifetime value of a paying customer in these models is anywhere between $100-$200. Indeed, well performing social games are charging a “tax” that results in $.50-$1 per average daily active user a month. PG has investments in the space so I’m sure he’s aware of these numbers.

The lesson is not that digital content won’t sell, but that there are different types of digital content — and some won’t survive. There are particular characteristics of the $1b+ in music sales revenue in iTunes. Instead of dismissing iTunes as an abberation, we should study those characteristics, because they are replicable. Hardware is not even a mandatory trait, just a highly dedicated and engaged audience, along with some of the other conditions I’ve discussed in the past.

Source: bijan