Will AI Disrupt Non-Tangible Products and Industries as Much as the Internet Did?

Most digital and non-tangible product markets were disrupted by the internet, and might be further disrupted by artificial intelligence as well. Non-tangible products are goods or services that cannot be physically touched or held.  

These products  provide value through experiences, expertise, or access, rather than a physical object. Services including legal advice, consulting, haircuts, car washes, travel experiences provide examples. 

So do content products such as e-books, software, online courses, music downloads and video games.

Intellectual property such as patents, trademarks, copyrights, as well as financial Instruments such as stocks, bonds or insurance policies, are examples of intangible products. 

For many of us, internet access and data processing, though supported by very-real tangible platforms, might also be considered intangible products. One uses internet access, but the service is intangible. One uses platforms to process data, but those physical platforms are not the product. Rather, insights, perspectives, discussions, communications and documentation are common outputs and the “products” of the platforms. 

Business models for intangible products have been reshaped by the internet, and stand to be disrupted by AI as well, though the mechanisms might differ. 

In part, the internet disrupted value chains by attacking distribution costs and methods. AI is more likely to disrupt non-tangible product value by altering content production costs and methods. 

But digital technology--and AI--reshape the ways non-tangible products are produced, distributed and consumed.

When analog products are transformed into digital products, they can be replicated and distributed at minimal cost. So scalability grows dramatically, explaining why Netflix can operate globally in a way that legacy media content companies have found difficult. 

New distribution platforms also are possible, as online marketplaces connect creators with customers directly and globally, with fulfillment often possible on-demand. 

Marketing also shifts to online and targeted vehicles, though true for tangible and intangible services, with greater importance on customer experience issues.  

The overall impact of internet mechanisms has been to put pressure on non-tangible product business models, as competition is easier. AI should have many of the same effects.  

Of course, many intangible products have both minimal marginal costs (the cost of producing one additional unit) but also high sunk costs. Connectivity networks, water and electrical networks provide examples. Other networks--such as transportation networks--might also have similar characteristics: high sunk costs to produce the first unit, but low to relatively-low marginal costs for supplying additional units. 

That might suggest the ability to use marginal cost or forward pricing, both of which account for volume or network effects.

Marginal cost pricing sets the price equal to the marginal cost. For most digital goods, this translates to near-zero pricing, as replicating and distributing the product incurs minimal extra expense. But recovery of the sunk costs means that, in practice, marginal cost pricing is rare, even for non-tangible products. 

Forward pricing uses the concept of setting current prices with a view to future expected production costs, as when scale effects occur. 

Traditional pricing models often focus primarily on current production costs (materials, labor) to determine the initial price. Forward pricing takes a longer-term view, factoring in the expectation that production costs will likely decrease as the technology scales up (more units are produced).

Another possible related concept is near-zero pricing, where digital products can take advantage of Moore’s Law impact on the cost of digital infrastructure (computation, memory, bandwidth), and therefore the cost of producing and distributing digital products. 

Near-Zero Pricing: This strategy sets a very low price, often free, to attract a large user base. Revenue can then be generated through advertising, in-app purchases, or freemium models (free basic version with premium features for a fee). Near-zero pricing works best for products with network effects, where value increases with more users (e.g., social media platforms).