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 1st 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.
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