Content Economics - Part II - Where Is The Pot of Gold?

Where is the “Pot of Gold” at the end of the rainbow for online publishing? If online advertising cannot provide the necessary revenues to keep traditional media firms afloat, is there a magical model that can? Or will simple economics need to play out in order for normalcy to return to the market?

In my earlier post, Content Economics, I looked at the changing world of traditional media and was highly skeptical of recent comments from traditional media firms about changing course and starting to charge for online content. In this post I would like to delve more deeply into the economics of the content value chain – and very specifically around the driving concept of “scarcity versus ubiquity”.

In its simplest sense, content that is scarce can likely drive a paid content strategy while content that is ubiquitous cannot. So how do we categorize content into one of these two buckets (plus a third “wildcard” bucket that changes some of the rules of the game)?

First, let’s consider content that is ubiquitous on the web. By definition, this is content that is readily available in many places on the web, with little to no additional value provided simply because it is found on one particular site versus another. In other words, this is the content that, if Site A decides to start charging, people will simply find it elsewhere for free. The best example of ubiquitous content on the web is news – whether it is breaking news, entertainment, sports, etc. The speed of the internet makes this content available in abundance literally within seconds. For example, last week someone told me about Manny Ramirez testing positive for a banned substance. I went to Twitter Search and instantly had links to hundreds of possible articles to read – from traditional media (newspaper sites, CNN) to sports blogs to “citizen journalism” on various social networks and comments on traditional sports sites. If I (and I suspect most people) had clicked on one of these links and been presented with a pay wall, we simply would have clicked elsewhere.

So what makes content suitable for charging?

Content that is part of a “value chain”. Typically, this is business content that is provided by people or companies with specific expertise that is used by professionals to better perform their jobs. Examples include Bloomberg, The Wall Street Journal, The American Lawyer, etc. These content producers create unique content that enables others to make money in their jobs – therefore, becomes an essential link in the overall value chain. (It also helps that most of content costs in this category are business-to-business costs – not a consumer reaching into their personal wallet).

Content having a unique viewpoint, access to “inside” information, or providing compelling analysis. Just as people will pay a premium to see Bruce Springsteen in concert or Tiger Woods play golf, there are some journalists who are so well regarded within their field of expertise that their content is worth paying for. Similarly, there are journalists who, through their relationships or reputation, are able to gain access to people and information that is not generally available. Finally, there are journalists who are able to digest complex information (for example, legal briefings) and present it back in a format that is either more understandable, or saves the consumer significant time and/or money (generally a business consumer in this particular case).

Content that is used multiple times. This is a point frequently missed by traditional media companies – the fact that their content is, essentially, disposable. A consumer reads it only once, so it has no residual value. Contrast that with content such as music and movies, typically consumed many times after it has been purchased. However, the “wildcard” I mentioned above applies here – that of the illegal acquisition of copyrighted content. Or, put another way, the ability for technology to take content that should be scarce and turn it into ubiquitous content.

Content that has a place in time. Archival content from the New York Times, Time Magazine, Sports Illustrated, and other long-standing periodicals, made available digitally, is a great candidate for paid content. This is content that has great research value, provides a historical perspective, can be quite sentimental, and is scarce in that it is stuck in time. For example, a first-hand depiction in Sports Illustrated of Jackie Robinson’s first game is a highly unique piece of content that you wouldn’t find reproduced elsewhere.

Unfortunately for consumer media, no matter how many times I add the (hypothetical) numbers up in my head, I keep coming to the same conclusion: Scarce and unique content are primarily found in the business-to-business market, while the consumer markets are laden with ubiquitous content. The consumer markets may have pockets of scarce content, but in general, most of their content has little value in a paid content market place, because it has no residual value and similar content can always be found elsewhere for free.

So where is the “pot of gold” for consumer media? I’m afraid that, like the leprechaun guarding the pot, it might not truly exist – or at least not exist in the world as we know it.

As discussed in the first Content Economics article, the essence of capitalism is supply and demand – and when supply exceeds demand, winning out over your competitors requires the production of products that have the most value. It also means that in a supply-driven market, prices will reduce; therefore, companies with lower cost structures will gain an advantage.

First, demand will naturally reduce. If you don’t make money producing content, you’ll stop producing the content. This means that not only will more and more magazines shut down, but I believe we’ll also start seeing websites shuttered as well. In fact, just recently, Condé Nast shut down not only Portfolio, but its accompanying website. This is a departure from the recent trend of shutting down newspapers and magazines, but leaving their online presence in tact. But as online advertising declines and the sites fail to make money, it is inevitable that many entire titles will vanish as well.

As supply reduces, the value of the advertising will also need to increase. Clicks will no longer be a meaningful metric, unless those clicks produce some sort of value. Sites and ad campaigns that can drive actions to occur will have the highest value and begin to see the return to more desirable rates.

While the reduction in supply coupled with higher value advertising will eventually help the revenue side of the equation, profitability will also depend upon the ability to keep costs down. This is where traditional print media companies are at great disadvantage against online only companies. Time Inc. just reported an unheard-of 92% decline in EBITDA in the 1^st quarter. As print revenues continue to decline, the very high fixed and variable costs of producing print content continue to increase. Reduction in the number of titles, consolidation of operations, increased subscription and newsstand rates, and, unfortunately, even more layoffs will be necessary for these firms to stay afloat. In fact, I believe that as we start to emerge from the recession, there will be significant merger and acquisition activity among the major media firms as a way to further consolidate operational costs.

Of course, online-only firms are not immune from cost controls either. Both traditional media firms and online-only firms need to take a hard look at the content they produce, determine the value of the content, and make difficult decisions on what they will continue to produce. The days of simply putting as much content out there as possible – driving up the levels of inventory – are gone. Media companies will need to determine which online channels are profitable and which are merely eating up resources and dollars. Even online, the creation of content is not free. Therefore, the creation of any content which fails to further the profitability of the company should be halted. This, in turn, will continue to drive down supply, helping the market to start balancing out.

Profitability in the consumer media market is not going to return because someone finds a magical “pot of gold”. Simple economics will drive a return to profitability through attrition, higher value advertising, and cost containment. In this sector, paid content is not a silver bullet that will make up for the drastic reduction in advertising revenues.

Innovative Ideas – Opportunity Lost?

Are companies allowing themselves to become too “in-bred” by hiring only the candidates that fit best on paper in lieu of potential “game-changers” with new and innovative ideas?

I keep hearing from recruiters and people in job transition that companies are only hiring people that match their qualification sheet exactly, and dismissing any resumes that are not a perfect match, despite the notable skills offered by the rejected candidates. “If you haven’t worked with System X, don’t bother to apply”. But doesn’t this lead to a very homogenized pool of candidates for the position and a lack of diversity for the hiring employer? What about candidates that may not be a perfect fit on paper, but offer new perspectives and ideas that can help drive a company to the next level (and overtake their competitors)?

Let me pose a few hypothetical questions:

• If you’re hiring a CIO/CTO who “must know System X”, aren’t you likely missing out on candidates that have stronger vision, leadership, and management capabilities? A top-notch IT leader can learn a company’s systems in a matter of weeks – but you can’t teach vision and leadership.
• If you are only meeting with candidates that have worked exclusively within your business vertical, aren’t you asking for the same, recycled ideas and excluding candidates who could bring new, innovative ideas from their industry to yours?
• Are you only filling positions that you have, or are you looking at opportunities to bring great talent into your organization and create new positions that could enable your organization to leapfrog the competition – especially during a time when your competitors are probably in a bunker waiting out the recession? Blow up your org chart and find a place for people who will change your organization.

It is worth noting that poor economic conditions have historically produced surprising winners when the smoke cleared. Conversely, a recent McKinsey study on high-tech showed that about half of the companies that entered these downturns as leaders—the top 20 percent—ended up as laggards when the economy regained momentum. While the risk-averse try to cling on to what they know best, new and exciting businesses spring up by using the down period as an opportunity to gain on the market leaders – and in the past, many times have overtaken market leaders. Perhaps the best example of a company rising from the ashes of a serious downturn is Google, which flourished in the wake of the “Internet Bubble Burst” in 2000-2002. During those years, while most other companies were trying to figure out what hit them, Google released AdWords, Toolbar, Image Search and News, signed search deals with Yahoo! and AOL, and opened their first international office. Google emerged from the down market with a market capitalization of $35.7 billion in 2002, then continued to grow during the recovery – 89% in 2003 to $67.7 billion. Whatever firms emerge victorious from this downturn, it is likely they will be firms that have great agility now, are able to easily experiment with new business models, and are able to bring new ideas to the market more quickly than their more risk-averse competitors.

There is an unprecedented level of brilliant talent on the job market right now. People who have achieved remarkable accomplishments have never been so readily available. This is the perfect time to hire all-stars whose company could no longer afford them, despite their talents. And, in this depressed job market, companies will likely pay less for extraordinary talent than they are currently paying their mediocre performers.

Now is not the time to sit still and wait out the recovery. Now is the time to make bold moves and position your company to be a leader after the turnaround. And there are people with very unique talents ready to help, but unfortunately, too many companies would rather play it safe and “in-breed” ideas rather than bring in people with original thoughts.

In times of both prosperity and recession, companies that are most innovative and forward-thinking tend to come out ahead. It would serve companies well to take a hard look at the available talent pool, not limit themselves to specific job requirements, and use the down market as an opportunity to bring intelligent “game-changing” people on board who enable them to innovate and will position the company to hit the ground running during the recovery.

Content Economics

Give consumers the content they desire in the format that they want it, when they want it, and build a business model around it. That’s the right way to drive the media industry forward, not by forcing litigation, subsidies, or other handouts to simply preserve a model that has seen its time come and go.

The latest round of controversial statements coming out of traditional media this week centers around the question of how news media can survive. Some are calling for Google to subsidize them for linking to their content (FYI – if they don’t want Google to link to them, a simple robots.txt file can fix that). Others continue to suggest that consumers should pay for their content. At a cable industry conference last week, Rupert Murdoch said “People reading news for free on the Web, that’s got to change.” But how do you force people to pay for something they either don’t want or can get for free elsewhere? As I stated in a previous blog post, the Internet breeds ubiquity, minimizing the market for all but the most unique content.

The Associated Press fired a salvo at the industry by stating that they are going to police the use of their content on the Internet – but in typical old media fashion – have no idea how. "I think it would be premature to get into the mechanics of how it might work," said Sue Cross, a senior new media executive at the AP. "We simply aren't that far along."

The economic stimulus package and corporate bailouts notwithstanding, the concept of capitalism is quite simple. If you create products or services that people want, have value, and are unique, there will be a market for those products or services. Sometimes that market is a direct market (the consumer pays directly for the product or service), while other times it is an indirect market (the consumer “pays” by accepting the intrusion of advertising). But one very important point seems to keep getting lost – there is no inherent right in a capitalist society for any particular product or service to exist – the market dictates their existence.

If people are no longer buying a printed media product, if their advertising is no longer valuable, if they aren’t providing value that people are willing to pay for, then why must they exist (at least in their present form)? If the production costs for print media exceed revenue, then there is a problem with the business model in the current market.

The media market of the (near) future must understand how people consume content and then determine a way to monetize that market. What are the ways people find content in the current media market?

1. Twitter / Facebook / Other Social Networks: You get links to articles of interest based on people you have “friended” or “followed”. Often very relevant, since there is a tendency to be linked to others in your particular industry or who share similar interests.

2. Google News Alerts: You enter keywords and get news article headers sent via email. No loyalty to a single media product, but you get the information most relevant to the topics you care about.

3. Email Newsletters: You register for a daily/weekly newsletter and are sent a header on the relevant information from a particular site. Much more brand loyalty, but the consumer is limited to the perspective of the site they subscribe to.

4. Portals: You set up a page on “My Yahoo” or “iGoogle” or one of several other aggregator sites.
A great way to pull all the content you need onto a single place, but you need to make the effort to go to the page to get the links to the content.

5. Related Links: You are reading an article of interest and there are links to similar articles. Very effective if done well, unfortunately, too many media companies under-invest in the technologies to do this right.

6. Web Search: You enter keywords and are directed to relevant web sites. Not very effective for finding only relevant articles as you are also directed to marketing sites and only receive information as good as the keywords you enter.

7. RSS feeds: Frequently combined with portals, but also used with “feed readers” or similar software, utilizes the feeds from various news sources to provide you with headers and links to news items you have subscribed to. Downside is that some sites don’t offer granular enough feeds to drill down on specific topics of interest. For example, I can get an RSS feed from the NY Post for all of their columnists, but not for a specific one.

8. (Last but not least) Print: Still very effective for Sunday reading and doctor’s/dentist’s offices, but losing steam elsewhere. The print medium is still significantly more effective at delivering longer form, more analytical content than the Internet. And I imagine that only a few people grab their laptop over breakfast in bed on Sunday. The newspaper or magazine still has its place on trains, offices, bathrooms, and reading rooms. Unfortunately, however, it is no longer the predominant way to deliver content to the masses, is often already outdated, and carries a price tag that is circumvented by reading the same (or similar) content online.

So how do media companies reconcile all of the various access points to media and ensure compensation for their efforts?

The first step is to determine what they do that truly has value. For example, the New York Times may have a large number of visitors to news, sports, and key columnists but very few visits to LifeStyle and Travel online (hypothetically). At what point do they determine that it is no longer profitable to continue publishing sections online that receive little traffic? Or does it make sense for some papers to only produce a printed version on Sundays and be online only the rest of the week?

Secondly, how do we engage the consumer as the consumer wants to be engaged? This is the key question, as it helps determine where there may be potential for subscription charges, where valuable registration information may be collected, or where advertising revenue can be maximized through effective targeting that drives cost-per-click or cost-per-action dollars into a range that produces advertising profitability.

These two ideas assume a remodeling of the current business models as opposed to a radical change in the overall business models. But what if the current models were blown up and we completely re-visioned the way content is delivered? What if all major columnists were freelance “bloggers” and were either paid subscription fees for their content, or were able to attract sufficient advertising – while cutting out the middleman (the newspaper or magazine publishers) and keeping all profits to themselves? Major columnists, in effect, become brands unto themselves. For example, I always read Phil Mushnick in the NY Post. I would still follow him if he was independent (to me, the NY Post simply serves as a container for his content). This is not a radical idea – think Arianna Huffington or Michael Arrington (TechCrunch) – who compete, successfully with the Washington Post and Ziff-Davis/Cnet, respectively.

The bottom line is that people currently, and in the future, will gather their information as they see fit – not as a single publication or website dictates to them. We will continue to use news aggregators, social networks, and other methods of personalizing our informational content, not tied to a particular brand or media firm. Sure, we may have some brand loyalty, but that is more likely to be targeted to a particular writer than a specific media title. Let’s face it, as an American Idol fan, I read Michael Slezak’s column religiously, but it doesn’t matter to me whether it is part of EW.com or a blog unto itself. In fact, the EW brand really adds nothing to the user experience – its Slezak’s words, his brand, that drives me to his column. The same with Michael Kingsley from the Washington Post, Ken Rosenthal from FoxSports, and Mushnick – their affiliation is less important to me than their content – so what value is it, to them, for their columns to appear under a major masthead instead of as an independent news source – especially when RSS subscriptions, aggregation, and linking are so prevalent?

So the key question is – will we really still need traditional newspapers and magazines, or is the future of the media industry simply to personalize and aggregate the information we want to read in the format we want to receive it? If you read a newspaper today, many of the articles are likely from the Associated Press or another news source – in a way, the newspaper is just acting as an aggregator of news information printed out for consumption where the consumer doesn’t have access to the online version.

Time Inc. is already experimenting with a personalized magazine (albeit, quite limited). Hearst is experimenting with a tablet device for content distribution. Firms like Zinio and Texterity are building online readers. Interesting concepts, but isn’t this all just an exercise in giving the consumer the specific content they want in the format they want? (Quite frankly, I think all of these experiments will fail, because they are still executing them from the content provider standpoint instead of the consumer standpoint).

At the end of the day, it comes back to the initial viewpoint of what succeeds in a truly capitalist society. It’s not about finding ways to subsidize outdated business models, but about striving to invent new ones that incorporate the social mores and consumer preferences of the current time. Give consumers the content they desire in the format that they want it, when they want it, and build a business model around it. That’s the right way to drive the media industry forward, not by forcing litigation, subsidies, or other handouts to simply preserve a model that has seen its time come and go.

Recycling Old (Bad) Ideas

There has been much written over the past few weeks about newspaper and magazine publishers wanting to return to a pay-for-content model. There is widespread belief forming among these publishers that they have content so unique and so compelling that people will pay money for it.

But this approach hasn’t worked in the past, so why would it work now? Time Inc.’s traffic boomed after the curtain was removed from their content. Restricting the content isn’t the answer, it’s how to increase the value of their content (or the advertising attached to their content), how to create new, online-only content that has value, or how to leverage other assets (like customer information) to generate new revenue opportunities.

I have read several articles where media executives point to The Wall Street Journal as an example that paid content works. They are failing to realize that WSJ online subscriptions are business expenses, and most are reimbursed on expense reports. Also, people in financial services use WSJ content to make major decisions daily on their jobs. Sites like People, The New York Times, and Newsweek are read for personal enjoyment, entertainment, and information – not as decision making tools – personal expenses that would likely be low priority in a down economy.

Some magazine and newspaper companies are discussing experimenting with revenue models without doing the due diligence necessary to determine the validity of a model. They are failing to study return-on-investment or cost-benefit analyses that time after time have shown that the paid content model only works in very specific instances. They are failing to understand the implications of the current recession and a new generation of readers that are making their most basic business assumptions invalid. For example:

• Most people under 25 have grown up viewing all online digital content as free – not only will they not pay for magazine or newspaper content, they also don’t believe in paying for music, movies, or online games. They are willing to accept that advertising is what makes that content free. Even the record companies realize they are fighting a losing battle against free content
• Even in cases where some people agree with paying for content, it is generally for content that is used multiple times – like music, movies and games. Magazine and newspaper content is generally read once and discarded, which eliminates any residual value in owning the content

Revisiting the paid content model reinforces the basic problems that traditional magazine and newspaper companies need to accept and fix:

• They lack a sophisticated understanding of online publishing
• They tend to view online only in terms of how it extends their existing brands
• They lack ideas on how to make money online and recycle ideas that have failed in the past
• They fail to study the viability of ideas before they act on them

The biggest downside of experimenting with these recycled models is that it will consume significant resources that could otherwise be developing and implementing new models that may work in the current economic and social environment. Due to the large number of layoffs, resources are scarcer than ever before, and cannot be wasted on initiatives with negligible or unknown value.

For an example of how to do it right, look no further than Hulu.com. NBC and Fox formed a partnership and produced a new site built specifically for the Internet, not simply an extension of their off-line brands. Hulu is one of the top video destinations on the web and one of the keys to its success thus far has been an independent management team focused on the site as an independent destination.

Before the newspapers and magazine companies make plans public to resurrect old revenue models that have failed in the past, they should look to examples in “new media” for ideas that will generate new revenue based on what people want and are willing to pay for, and determine how that revenue will be generated. While it is fair to say that online advertising isn’t the be-all, end-all revenue model for traditional publishers, the idea that people will pay for ubiquitous content online is not the answer.

In Search of ... Vision

There is plenty of blame to go around when you examine the current financial crisis. There are the banks – anxious to collect interest revenue, giving loans to people that can’t afford it, believing, hell, if they default, we’ll just take the house and sell it to a higher bidder. There are homebuyers – needing more than they can afford, being swindled by mortgage brokers and real estate agents to get in over their heads – not having an ounce of common sense in signing the deal – and no accountability after the fact.

But there is another culprit, less obvious, but one that threatens the very fiber of American business and our ability to climb out of this recession (and avoid future ones).

I have worked for many of the world’s greatest companies during my career. Companies like AIG, Ziff Davis, and Time Inc. were once considered among the elite American corporations. So what happened?

We all fell prey to Wall Street mentality. We started thinking in terms of quarterly results instead of long-term strategy. After all, it is the quarterly and annual results that determine bonus numbers, not whether or not you position your company to succeed long-term. So – the hell with strategy, the hell with long-term thinking – make the numbers NOW or you’re out.

But America wasn’t built thinking 3 months at a time. People and companies used to have vision and a desire to fulfill that vision. But now, it’s all about quarterly results, insane bonuses based on those results, and very unfortunate short-term thinking. Even in the current recession, a recent quote from a well-respected executive at a very large company was “revenue now, future later”.

The most unfortunate thing about the current downturn is that nobody seems to have learned from past mistakes. Companies have their hands out, but still have the same people making the decisions on how the bailout dollars will be spent. Many top executives are still trying to figure out how to come out of this crisis with the most dollars in their own pockets instead of how to get American workers back to work and make our economy productive again.

We must ask ourselves – where is the creativity? Where is the American spirit? When will we stop falling prey to greediness and start making sure that every American that wants to work and contribute to the betterment of the greatest country on earth be given that opportunity?

There is more than enough to go around if we just re-assess our values and re-assess our reasons for going to work every day. Is it really about just making more and more money, or is it to provide great products, great services, and fulfilling employment to ALL Americans, not just the top .1%? We need to stop the short-term, vision-less thinking that has dominated American business for the past 20 years and get back to the quest for excellence that made this country great.

I’m not being naïve – I understand that companies need to be profitable to stay in business. But there has to be a balance. Some decisions may mean a bit less profit now to have a more successful business down the road. Knee-jerk decision making based on Wall Street demands have driven some of our greatest companies to the brink of ruin. Is anyone out there learning this lesson, or are we going to keep having more of the same and face recessions and layoffs every few years for the rest of our lives?

The Cost of Being Rich

With all the (deserved) fuss lately over executive compensation, I started thinking -- "What does it really cost to be rich in America?". I'm not talking about Bill Gates rich, but lets just say the upper .1% or so.

Without being all scientific about it, I made some assumptions about what would put a person in that class. I think you'll all agree that these numbers would make a person quite comfortable and certainly in the upper echelon of how people live in the US:

• 1 primary residence ($2.5 million) and 1 vacation residence ($1.5 million)
• 2 kids at the best colleges ($50,000 each annually) and 2 kids at home
• 2 $100,000 cars and 2 $75,000 cars
• $15,000 per month for entertainment, plus $20,000 per month for club fees
• $15,000 per month for clothes
• 4 vacations per year at $25,000 each
• We'll even assume they're good people and give $100,000 per year to charity
• Plus other living expenses like utilities, insurance, groceries, and non-catastrophic medical coverage

This quite lavish lifestyle costs about $2 million per year. Add in taxes and we'll call it $3 million. Throw in another $500,000 for savings and investments. That's $3.5 million per year.

In 2007, the average compensation for a Fortune 500 CEO was $10.5 million. $7 million more than necessary to achieve the high standard of living above. A total of $3.5 billion in excess just across this group of CEO's. Enough to pay a $100,000 salary plus benefits to 25,000 people.

So someone out there please explain to me -- why would anyone need more than the lifestyle I have described above? Do these company's Boards of Directors really think that the excess they are paying their CEO is truly worth the productivity of additional workers? Wouldn't even these CEO's agree that their company could be more productive and provide higher value to their stockholders with more people providing their products/services?

Let me cite one glaring example. According to Forbes, John Chambers, CEO of Cisco, made $55 million in 2008. Using the model above, that is $51.5 million in excess, or the equivalent of about 370 workers. Cisco just laid off 3000 people.

The balance is way off.

Wasted Talent

One of the things that puzzles me these days is -- How the Hell are we ever going to get out of this recession?

Every day it seems, I get an email or a phone call or a Facebook/LinkedIn message from some incredibly smart, talented person from my past who has experienced the gut-wrenching sound of being told "We're sorry, but your job has been eliminated". It seemed like in the past, economic downturns were used by companies to rid themselves of the deadwood. This time around, it feels like they're cutting their best and brightest, while keeping around the people who won't complain about no raises, no bonuses, and no interesting work, while the company goes into a bunker and waits for the smoke to clear.

But that's the paradox -- how can we have an economic recovery when many of our country's most intelligent minds are not being productive, are unable to spend money and are actually taking money out of the system in the form of unemployment compensation?

In past economic downturns, some companies didn't bury their heads in the sand and wait for Wall Street to tell them everything was ok. They took advantage of the opportunity to attract great talent, build competitive advantage and leap frog their competitors as the economy improved. Look no further than Google for the best example of this -- they flourished when the Internet bubble burst.

So who is going to be the "Google" of this economic downturn? What company has the guts to forge forward while everyone else is running scared? These are the companies that will help us turn this around -- and they'll be the new leaders in the new economy that rises from the ashes of this monumental recession.