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Atoms vs. Bits: The Complete Guide to Physical vs. Digital Businesses

Business has changed more rapidly in the past few decades than in the past two centuries. With the introduction of digital technology to general industry operations, the vast majority of businesses have wholly altered how they operate, thus changing how our economy works.

For investors and business people considering physical and digital businesses, there is often a question about which one is better. Between atoms and bits, which one will bring in more profit and prove to be more successful?

What are Atoms and Bits

Atoms and bits are both terms referring to the smallest parts of a business. As we all learned in our middle school science class, atoms are the tiny particles that make up every physical thing. Bits are essentially digital atoms.

When talking about business, atoms refer to physical products, services, and companies, while bits refer to digital information. While atoms are a physical product, ​the value of bits comes from providing new forms of knowledge, entertainment, ways to conduct interactions, or ways to buy products. A​ fter the start of the Digital Age, the shift towards a low-capital economy brought the discussion of atoms and bits to the forefront of business considerations.

Until the introduction of bits, every business was based on atoms. They provided physical products and services to consumers. However, after bits became a legitimate basis for business operations, the entire way that companies operate effectively, successfully, and profitably has changed.

The History The Second Machine Age, or the Digital Age, started in the late 1950s as technology shifted from mechanical to digital. The first Machine Age​, in which industrialization accelerated, and new inventions appeared, had energized business and paved the way for the Digital Age to expand technology exponentially. Atoms were the basis of the first Machine Age, while bits founded the Second Machine Age.

As a result of the Digital Age, our economy and standard business operations have changed drastically. Growth is now exponential rather than linear. A new piece of technology can evolve hundreds of ways to become thousands

of new technologies. The exponential growth of bits has driven the digital industry to reach new heights.

Anytime a new technology sees growth at that level, companies will start to use it to maximize their profits. With so many businesses shifting from atoms to bits, we have become a capital-light economy, with much of our value in digital goods.

Technology has begun to substitute labor and physical assets, which points to a higher ROE and a rise in profit margins, asset utilization, and leverage. The digital age has disrupted the business world at an unprecedented speed and scale.

Platforms especially have proven to be great business models with a low marginal cost, distinctive asset-light nature, and robust network effects.

Additionally, a bit-focused economy results in winner-takes-all dynamics, meaning that many companies have practically become monopolies. As the pace of digital technology continues to accelerate, companies must increasingly adapt to the Digital Age to succeed.

Atoms The ​strengths and weaknesses​ of atoms come from their physical characteristics. Unlike bits, atoms require more cost as they are physical products and services. Additionally, businesses have to maintain physical locations and stores​.

Strengths The most significant benefit of atom-based businesses is that consumers feel more connected to physical products. Emotionally, they receive instant

gratification from buying a physical product in person rather than a non-physical product or a product ordered online.

Many people enjoy the experience of shopping. The term ‘retail therapy’ is well-known to us all, and encapsulates the excitement of in-person shopping. The same effect does not happen when shopping online or utilizing digital platforms.

Physical stores also have less competition to worry about, as they only need to focus on other businesses in their area and do not have nearly the same scope of competition as digital companies. Consumers must be able to physically visit their location to patronize the business.

Finally, it is much easier to build your brand and connect with customers in-person. A positive environment and helpful employees that customers can physically interact with will do more for your brand than any online service. Face-to-face transactions leave a stronger impression than digital ones.

Weaknesses The majority of atom-based businesses’ weaknesses lie in the cost of maintaining, producing, and distributing physical products at a physical location. Maintaining a physical location requires adding the expenses of rent, maintenance, and utilities. A​ ll physical products and services have higher overhead costs compared to digital goods.

You will need more employees for a physical store compared to a digital enterprise. There needs to be workers to create, package, ship, and distribute the product. If you provide a physical service, you will require more employees for that as well.

It is also much harder to scale up without a significantly high profit margin, as businesses than have to invest in another location and additional items. Additionally, it is more difficult to track and contact customers.

Without AI or data management to analyze a consumer’s buying habits and viewing history, businesses cannot accurately gain information about customers’ purchasing patterns. Unless a customer provides their phone number or email address, companies cannot contact them and encourage them to return.

While they do have less competition, physical stores are also limited to local customers.They cannot reach nearly the same audience level as a digital store, as consumers have to physically visit the business’s location.

Bits The benefits and weaknesses of bits mostly revolve around their digital features.

Strengths The biggest benefits of bits are that they can be copied freely, perfectly, and instantaneously and that they are infinitely usable. This means that businesses only have to produce one copy of their product. They can use it an infinite number of times, practically eliminating the need for mass production and distribution. In this aspect, bits have a considerable advantage over atoms.

Bits are weightless, virtual, and they can move anywhere on the globe almost instantly. You can sell someone across the world an item, and they would receive a digital product practically instantaneously.

Every feature of bits makes them able to be bought and consumed conveniently. Consumers can easily interact with digital environments and procure digital goods. Some businesses have even started to incorporate digital information into physical products with items like The Internet of Things, AR, VR, AI, robots, smart cars, blockchain, and 3D printing.

Additionally, digital businesses can reach a much broader audience compared to physical products and services as they are not limited to consumers in their physical location. Anyone with access to the internet can patronize a digital business.

Companies can also easily change and rebrand if they need to or add a new product or service. It is incredibly simple for businesses to expand digitally, as they only need to create a new digital product and a page or website for it.

Businesses can track customers and visitors to their websites. Most websites require visitors to submit their email address to make a purchase or to receive a special discount, meaning the company can contact them in the future to encourage them to return. Additionally, businesses can automatically analyze customers’ previous purchases and viewing history to personalize their experience with AI and data management.

Weaknesses While digital businesses can succeed very easily, they can also fail very easily. Though many startups encourage as part of the learning process in the digital industry, a business failure is still squandering resources, time, and money.

Additionally, American consumers are more worried about privacy violations and widespread data-gathering than ever before. According to a study from the​ Pew Research Center,​ 81 percent of Americans say that the potential risks of data collection by companies outweigh any potential benefits. They also say that they feel they have little to no control over how the entities gathering their data use their personal information.

Another 79 percent said they are “not too or not at all confident that companies would admit to their mistakes and take responsibility for misusing or compromising personal information,” and 69 percent feel that companies are likely using their data in ways they are not comfortable with.

All of this makes it extremely difficult to connect with your audience and build your brand. Consumers no longer trust companies in a digital environment the way that they do in a physical environment. They do not have that face-to-face interaction to create a genuine emotional connection and personalize the brand as they are only interacting with a digital interface. It is one that they usually do not trust.

It is also very easy for companies to become monopolies​ in the digital market. While monopolies might sound good for an individual business, their overall effect on the consumer and the digital economy is negative. Monopolies can:

  • Restrict market output, reducing consumer choice and innovation.

  • Take advantage of consumers by charging high prices.

  • Reduce surplus and economic welfare.

  • Make the economy less competitive.

  • Reduce overall economic efficiency.

  • Make the economy less productive.

  • Lower employment rates.

While the monopolizing corporation may be making more money, overall, they are causing a wide range of problems for the entire economy and digital industry.

On the flip side, there could be an extremely high level of competition. Smaller retailers with more generalized services offered by a wide range of companies have to compete with every similar company on the internet. Physical stores only have to worry about other stores in their area, while digital businesses have to compete with every digital company.

Additionally, online businesses have much more complex taxes and regulations than physical companies. The law has always been behind the digital industry, regulating digital businesses well after the digital market began to thrive. Lawmakers are still trying to figure out exactly how to tax and regulate digital enterprises properly. It may also be challenging to interact with consumers in another country or, if you are American, consumers in another state. The distance and possibly conflicting regulations add another layer of complexity.

Overall, the same features of bits that allow digital businesses to succeed easily also make it easy for them to fail.

The Future of Business In the future, we can expect to see bits take on an even more prominent role in business as a whole, especially considering the impact of the COVID-19 pandemic. It accelerated the growth of e-commerce and online platforms in a world where it is not safe to conduct physical business or interactions.

We will see more and more digital businesses. However, we will not see the end of physical companies. There will always be a place for physical enterprises as we exist in both a physical and digital world simultaneously.

The biggest trend we can expect to see in the coming years is the inclusion of digital aspects into physical businesses. We've already seen more and more physical stores add digital platforms for consumers to shop and purchase products or services remotely. We've also seen more and more technology that combines atoms and bits, as mentioned above.

It has practically become a requirement for businesses to have a digital presence of some kind, if not a digital platform for consumers to interact with and conduct remote transactions. If your company has not already begun to invest in its digital presence, you are falling behind and losing your competitive edge.

Final Thoughts Atoms and bits each have their advantages and disadvantages. Whether you should utilize one or both depends upon your business. While it is wise for companies to have a digital presence alongside a physical location, it is up to you and your organization to decide how to structure your business.

The Digital Age has already significantly disrupted standard business operations and changed our economy profoundly. As technology continues to evolve and digital goods take on a larger role in our lives, we can expect the line between atoms and bits to blur more than ever before.

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