Some observers are likely shocked that Google pays Apple 36 percent of ad revenues earned by Google search on Apple phones.
Some of us might be nonplussed. Distribution costs for lots of products routinely amount to 25 percent or more of the total cost of getting a product from factory or source to end user customer.
Distribution costs for intangible products such as advice, consulting, many software products arguably are lower, but there's a difference between price (value) and cost. Actual “distribution” costs are hard to separate from the actual “performance” or “delivery” of the product.
In some sense, for intangible services, “production” is the same as “delivery” or “distribution.”
Unlike tangible goods, intangible services are produced, consumed and distributed simultaneously. So “distribution” as a percentage of total cost is a bit of a misnomer. Production cost is hard to separate from “distribution.”
Advertising placements, like airline seats, are intangible and perishable products in the sense that they cannot be stored or saved for later use. Once an advertising availability is sold--or not sold--it is gone forever.
Unlike tangible products, such as cars or books, ad avails cannot be stored in a warehouse and sold at a later date.
Additionally, both advertising inventory and airline seats are subject to demand and supply. If there is high demand for advertising placements, the price will go up.
Also, supply can create demand. In one sense, having Apple smartphone search inventory is a form of demand creation, not simply supply expansion, as default use of Google is believed to create more demand (use of the product) by Apple customers and users.
As a result of these similarities, advertising inventory and airline seats are often treated similarly in the marketplace. For example, both products are often sold through auctions, where the highest bidder wins the right to use the product. Additionally, both products are often subject to dynamic pricing, where the price of the product fluctuates based on demand.
The point is that “distribution cost” for an intangible product can be quite a bit higher than what we might traditionally believe, since “production cost” is bound up with “sales” and “delivery” cost.
For a software product, “distribution can represent as much as 50 percent to 70 percent of total cost, in that sense. So a fee of 36 percent to handle “distribution” might not seem worrisome or out of line.
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