Why Software is More Profitable Than Content

Written by... a content company

Image Source: NeONBRAND / UnSplash

There was a Twitter thread a few weeks ago that listed the things that the person wished he knew when he was younger. A few examples of his advice:

  • Read every day. It doesn't matter what. It doesn't matter if you "finish the book". Just read.
  • Follow the Golden rule. You will run into people again and again throughout your life. Make sure they speak highly of you.
  • Invest in relationships. Your community matters more than you think.

It’s a nice thread and I’d encourage you to take a few minutes to scroll through it. 

However, the contents of the thread isn’t the most interesting part. In fact, several of these threads pop up every week. Instead, the interesting part is the comments. Specifically, the comments that call upon Readwise or Threadreader to save the thread for later. 

Now, I don’t know their intentions. However, I’ve been in a similar spot before, so I can guess. They probably nodded along to the thread. They related it back to their experience. Some of the advice they wish they would’ve taken, other advice they plan on using in the future. So they saved the thread so that one day, when the time comes, they can pull this information out of their back pocket and use it when appropriate. 

I too have done this countless times. I’ve assumed that a single utterance or idea would neatly occupy a spot in my brain like a plug fills a socket. But that’s not how we humans work. 

We need to be reminded of things; we need to receive information in the right context. I probably had heard a lot of the advice before I read that thread, but it still was valuable because it was phrased differently. Reframing information to the right context is what the media is all about. 

And all of this is the beginning to the answer of a question I’ve been pondering for months: what is the difference between content and software businesses?

Similarities Between Content and Software

At first glance, there are several similarities between software and content businesses. 

Distribution. For both software and content businesses, there are no distribution constraints. Both products are delivered over the internet and there are no physical or digital gatekeepers. This helps for two reasons: it doesn’t take very long to scale, and there are basically zero incremental costs for spreading the product to more people. 

Again, consider a physical good as the opposite. Even if physical products are sold online (perhaps they are a DTC food company), they can’t go viral in the same way a piece of content or software could. Even though a DTC brand could go viral, a product itself cannot. The costs and time to deliver a physical good are too high. 

Similar story with a service business. Service businesses produce intangible products (often with the help of humans, which are not scalable) and due to coordination have limited distribution. 

Investment. A piece of software and a piece of content have the same investment profile: lots of fixed costs to create something, then almost no costs to use it over and over. You can write a program one time and it will perform the same function the exact same way, no matter how many times it’s been executed. Similarly, you can write one article and it will read the exact same way, no matter how many times it’s read.

Content and software share this quality with several other products (real estate, consumer durables), but contrast service industries that repeat their entire cost structure with each transaction. 

Iteration. Both software and content benefit from short feedback loops. Both can be adjusted on the fly; both can rapidly test and iterate ideas. It’s easy to tell people about your service. Then, it’s easy for people to try it. Quickly, creators or developers can learn if their customers like the product or not. With software, customers will use it more. With content, customers will share it more. 

In contrast, think about a hardware company. There are ways to get feedback, but the feedback doesn’t come as often because they can’t change their product very quickly. Even if we assume that it takes the same amount of engineering time, with hardware there are many more steps before it can be sold (prototype, manufacture, assemble, package, deliver). But software and content bypass all of those steps. 

Why Software Has Higher Margins

So it certainly feels like content and software are very similar. However, there’s one thing that isn’t very similar: software companies typically have higher margins and lower customer churn. Why is this the case? 

To answer the question, I want to differentiate between products and businesses. Both content and software products match the characteristics I listed in the previous section: short feedback loops, no distribution constraints, and an attractive investment profile. Everything lines up. 

However, things are different at the business layer. Software companies tend to have higher margins and lower customer churn than media businesses. If their products have such similar characteristics, shouldn’t their businesses have similar characteristics as well? Why is a software business more attractive than a media business? 

One answer comes from a blog post that venture capitalist Fred Wilson wrote in 2012. He argued that the difference centers around utility vs entertainment. Technology companies provide a utility that is likely to last, while social apps or video games were ephemeral:

I was having lunch with a veteran of the entertainment and the video game business this past week. It was an interesting and wide ranging chat. One of the things we discussed that stuck in my mind was the thought that web and mobile apps might behave more like TV shows than traditional software applications.

I've watched my kids go from myspace to facebook to instagram over the past seven years. And who knows what social app will be their "go to app" in five years. This has always been the case in videogames. Farmville to Cityville to something else. Words With Friends to Draw Something to something else.

And while I like the framing of utility vs entertainment, I don’t think it fully encompasses the differences. Even content that most people would consider to be a utility — such as information to make business decisions, or information to keep people up to date on the world’s happenings — don’t typically have the margin profile of a software business. It seems that utility content still has the same margins as entertainment content. 

Instead, I frame the difference like this: content products decay while software products don’t.

You use the same search engine, but you don’t ask the same questions. 

You use the same CRM, but you don’t pitch the same customers. 

You use the same streaming service, but you don’t watch the same movies. 

Which brings me back to the introduction of this article: content exists to help people make sense of the current state of their world, to remind us of important truths, or to make us feel something. 

The first one is ephemeral because the world changes. The latter two are ephemeral because once we’ve consumed a piece of content, we move on. We have an innate impulse to seek novelty. We get bored of predictability. And so humans need to be reminded of what to do and why we should do it. We need context

This contextualization still can’t be done with computers, so content businesses must employ people to create that context for their customers. If it could be done by computers, we’d call it a software company rather than a content company. 

Content products talk to humans, while software products talk to computers. That’s why the value of content decays faster than the value of software. And it’s also why software is the better business. 

Editor's note: the premise of this post rests on an assumption that, in general, software businesses are more profitable than content businesses. But of course, there are exceptions and nuances to that claim. We’re going to hold it as true for this article and I might dive into that question in a future post (if that sounds interesting let me know!).

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