Be careful assigning a zero or negligible value to digital goods.

There is still a scarcity at play due to the fact that digital goods require physical resources for hosting and transport, albeit in much smaller unit quantities than physical goods. For a case in point, look at the financial statements of Level 3 (an internet bandwidth provider) and Akamai (a hosting service). Those two randomly selectd firms, which represent a sliver of the industry, had combined revenue close to $4 Billion last year, and have experienced double and triple digit annual revenue growth.

This demonstrates that society does place value on digital goods. To the extent that consumers can substitute physical goods with less costly digital goods, in the long run this supply/demand dynamic will tend to drive the price up as the digital economy continues to move along its marginal cost curve. In the long run, Internet technology is no more immune from “diminishing returns” than any other.

As another case in point, the combined average household expense for for bandwidth (cell phone, broadband, cable/sat TV, sat radio, phone, etc.) has been steadily increasing each year. If digital goods are getting cheaper, why is it that we are spending more money on them?

Peer-to-peer architecture and ad-supported business models do not make these costs go away, they just shift them to different places in the value chain (i.e. ultimately the consumer still pays).