What makes a business a “digital business”? In order to justify a new category of businesses, such a category needs to be substantially different from the existing ones (otherwise what value would a new category have?). And in fact, I claim that digital businesses have two economic characteristics which make them profoundly different from “traditional” businesses:
- All digital businesses work with near-zero marginal costs in an important part of their business.
- Very often digital businesses are exposed to network effects, indirect and/or direct network effects.
Digital businesses deal with goods or services that are completely or partially digital. Even an online shop wich sells physical products operates on a digital platform. And the main feature of digital goods is that they have near-zero marginal costs. Zero marginal costs have a very profound and far-reaching impact on many business decisions.
Digital goods or services are offered in digital markets. Very often such markets show network effects, wich often play a crucial role for the business. More and more digital markets are not only built by two parties (buyer and seller), but by multiple parties. These multi-sided platforms require a significantly different management and represent definitvely a new type of business.