News in the Era of Free October 30, 2009
Posted by gjchatalas in Reflections.add a comment
Tuesdays discussions were very interesting. I thoroughly enjoyed hearing the gritty details of the West Seattle Blog, some of which I’ll surely reflect upon in a later post. But the theme of the evening was free as a business model, so I’m going to tie that into a few of my observations as they apply to online content.
Amid all the hue and cry about the demise of newspapers, the fact remains that they are still profitable for the most part. The problem was that they grew accustomed to large profit margins. When those margins got smaller the newspapers panicked because they’d made business decisions based on the inflated return, including purchasing other papers and real estate, two areas industries hit hard in the recession. And, of course, they had to answer to their investors on Wall Street. One of their answers, cutting staff and coverage, may have saved money but led to a worse product. If only they had learned to live with margins in the 5 to 10 percent range, which they are very capable of achieving, then they wouldn’t be pleading poverty. Barron’s online on Monday ran analysis saying that in reality, newspapers are doing just fine. And if newspaper management had been even a little bit agile in regard to digital media, they would have figured out ways to stem the losses to Craigslist and others.
The New Yorker doesn’t skimp on its content; it’s well-respected and award-winning. Online, though, it doesn’t offer access to every article. It lists all the content in the current issue, but some of the best articles don’t open when you click on them. The magazine can get away with this because of its sterling reputation; people can either buy a subscription to read the article, or wait until it becomes live online later. Many publications use this method, including Columbia Journalism Review, and it underscores the point that having compelling content needs to be central to any media approach.
Book Review – Free, by Chris Anderson October 26, 2009
Posted by gjchatalas in Reviews.1 comment so far
It’s been said that the best things in life are free. Chris Anderson sings this tune in his book “Free: The Future of a Radical Price,” saying that not only is “free” great for consumers, but a necessity for business in the digital era.
As the editor of Wired magazine, Anderson has had a front-row seat for the technological revolution of the last couple decades. His 2006 book, “The Long Tail,” surmised that digital technology was toppling standard business convention. Specifically, because of high costs of marketing and distribution, brick and mortar companies have relied on selling massive quantities of a few hot products. But thanks to digital tools, these marginal costs are significantly lowered, allowing companies to sell smaller amounts of many different items and still make money.
“Free” is a continuation of Anderson’s general themes of “Long Tail”: the positive economic effects of digital technology on society and business. Here he argues that offering stuff for free is a savvy and inevitable move.
Anderson understands that his thesis runs counter to traditional economic theories. “It doesn’t take a PhD to understand why Free works so well online,” he writes. “You just have to ignore the first ten chapters or so of your economics textbook.” He seems to relish his role as a rabble-rouser, and heaps praise on successful practitioners of “free,” from Gillette to Google.
The economics of production have indeed been turned upside down by digital media. At the heart of this transformation is the sharply decreasing price of technology: processing power, storage and bandwidth. As a result, the marginal costs of copying, sharing and distributing are next to nothing.
Thus, he reasons, these low marginal costs, combined with the psychological appeal of a zero price point, make “free” a winning proposition. In turn, Anderson argues, businesses that learn to accept and maximize “free” are going to find success. The book goes on to lay out the ways this is being practiced, and cites cases where companies are using “free” as part of their business models.
So far advertising is the most prominent method of monetization. There’s a lot of free information on the Internet these days, content that attracts viewers with specific interests and needs. And advertisers are paying to reach these coveted audiences. Besides the standard display ads to which we’re accustomed, many creative approaches to online advertising have taken hold: pay-per-click text ads, affiliate ads, site sponsorships, paid listings in search results, and more. Google is the leader in translating its page views to cash; its services and products are offered gratis, and the money comes from advertising.
“Freemium” is another popular model, in which some content is free, but there are charges to access enhanced information and services. Several online publications, including The Wall Street Journal, Congressional Quarterly and Consumer Reports, and niche sports sites such as Rivals.com, are successful with this hybrid approach; free content generates interest, but if you want the really good stuff you’ll need to pay. Flickr and Craigslist give away services, but charge fees for what they deem premium services.
Anderson doesn’t limit himself to information products in explaining why Free is so dynamic. He points out that Zappo’s and Amazon use the power of free shipping to encourage purchases, and studies have shown it works.
What becomes obvious while reading the book, though, is that these common approaches to monetization aren’t really all that unique. Advertising revenue subsidizing free content has long been the strategy of publications, radio and network television; bring in as many people as possible, and charge high ad rates. Freemium, too, is merely a derivative of subscription publications and cable television. And using “free” as an enticement to buy a product is a time-worn strategy.
And while the book celebrates “free,” others curse it. In particular established media companies have struggled in the online era. They’ve offered their content for free, but the ad dollars haven’t proven to be particularly lucrative. Classified advertising, a cash cow for newspapers for decades, has become a skinny source of revenue as those dollars have fled to free online classifieds sites. Meanwhile, the one product you would think the media should be able to convert to cash, content, instead is being poached and monetized by Google and other aggregators. Media companies are actually failing, in part, because of their embrace of “free,” and the book doesn’t reconcile that conflict.
So as the book claims that there’s a lot of money to be made by charging nothing, this isn’t necessarily proving to be the case. And “Free,” while making its points, doesn’t really address where the money is going to come from over the long haul either. When it comes down to it, Facebook, YouTube and others mentioned in the book aren’t yet making a whole lot of money on their free offerings. Anderson concedes as much in the pages of “Free,” noting that while anybody can incorporate it, “typically only the number one company can get really rich with it.” Google is proving to be that exception, a company that is raking in big bucks in the era of free. But Google’s CEO Eric Schmidt is also quoted in the book, expressing concerns about the free model on the larger marketplace; free does work fine for his company, “and not well enough for everyone else.” That said, considering Google’s remarkable innovation and products, one might even question whether free is the reason Google is succeeding.
The book is at its best in providing historical context to “free,” and tying it gracefully to the present. And it does an excellent job explaining the basics of “free,” and demonstrating how prevalent it truly is today. However, unlike its cover claims, it doesn’t really examine the future of “free.” Free offerings may still be an interwoven element of our digital economy going forward; but without insight into its future I’m not convinced “free” will be the backbone Anderson believes.
Anderson, Chris. Free: The Future Price of a Radical Price. New York: Hyperion, 2009.
The Clash Over Free Online Content October 19, 2009
Posted by gjchatalas in Uncategorized.1 comment so far
The economist Milton Friedman insisted that “there’s no such thing as a free lunch.” His feeling is that no matter the label, something “free” always costs the recipient in some manner. However, Chris Anderson, in his new book Free, says the theory has lost its resonance in the digital era; free is the new price model. At the same time the establishment media is at wit’s end over free distribution of their content.
The July/August issue of Columbia Journalism Review featured a series of essays titled “No Free Lunch” discussing the challenges facing news organizations, and how they might be able to recoup some money for the content they produce.
“Open for Business,” by Michael Shapiro, suggests a free/paid hybrid, whereby some subscribers subsidize the free content. While society is indeed accustomed to free content, the fact remains that people do pay for in-depth and exclusive information they deem valuable. Sports sites provide “insider information” for a fee. And online versions of established publications have successfully utilized the “freemium” approach described in “Free,” in which some content is free, but there are costs to access enhanced information and services. Among those in this category are Consumer Reports, The Wall Street Journal and Congressional Quarterly.
The catch, of course, is that there has to be something that people are willing to pay for, and this requires an investment in reporting and creating content of value. This is where the paying customers also come in handy; they help underwrite the cost of producing more quality content that brings in both paying and free eyeballs. This fits into freemium’s 5 percent rule: the small percentage that pays for a premium version end up covering the costs for the many who access the content for free.
Clearly the establishment media created many of its own problems. They opted for the network television model: free access, mass audiences and high ad rates. Perhaps news organizations should have taken the cable television model instead: subscription fees and ad revenues driven by quality content. Ironically this approach is what newspapers and magazines operated under for decades, before the internet led to some rash, and arguably faulty, business decisions.
And now many media giants such as Murdoch and the Associated Press are circling the wagons, adamant about putting a price on the content. They believe that what they produce is valuable and merits a fee.
But just because media companies facing a crisis want to change the game, it doesn’t mean the people will necessarily go along. At least that’s what is indicated by a study by Hsiang Iris Chyi of the University of Arizona, “Willingness to Pay for Online News: An Empirical Study on the Viability of the Subscription Model.” The 2005 study randomly surveyed 853 Hong Kong residents, and found that very few would be interested in paying for information they’ve become accustomed to having for free. And those that were willing to cough up the cash tended to be both older and newspaper subscribers, demonstrates a generation gap rather than an income disparity. The takeaway from Chyi’s report, though, is that it will be difficult for media companies to rely on a subscription model for economic viability.
Rather than prying open the wallets of a generation used to free online content, Free suggests news organizations need to find ways to generate revenue within this new economic reality.
Slides:
Resources:
Chyi, H.I. (2009). Willingness to Pay for Online News: An Empirical Study on the Viability of the Subscription Model. Journal of Media Economics, 18(2), 131-142.
Osnos, P. (2009). What’s a Fair Share In the Age of Google?. Columbia Journalism Review, 48(2), 25-28.
Shapiro, M. (2009). Open for Business. Columbia Journalism Review, 48(2), 29-35.
Adam Smith and I October 15, 2009
Posted by gjchatalas in Reflections.1 comment so far
Week 2 of class provided a nice overview of the economics basics, explained in a fairly easy-to-understand manner. This baseline should be helpful as we delve further into the subject matter. However, as I become re-acquainted with Adam Smith, I’m not overly impressed with how some of his theories have played out.
It’s clear that the economics of information varies greatly from the time-worn economic approaches applied to industry. And my reading of the first few chapters of Free support this. Scarcity doesn’t apply to information, and distribution costs are minimal. Information is, indeed, the epitome of high fixed costs, low marginal costs.
From our discussion, Adam Smith isn’t getting too many plaudits from me. His definition of “perfect competition” is elusive in reality; it’s far too narrow a definition to give the competitive markets credibility in this context. There is just too much product differentiation for this type of competition to apply.
Going further, society and economy these days are far too diverse to be governed any more by the standard economic dogma and theories. I’m guessing that all the books we read this term are likely to reinforce this. In particular, “externalities” are challenging the premise that all market decisions are based on money. Instead, we are seeing externalities such as reputation playing a much larger role in the economics of information. We regularly see people creating and sharing for free to enhance their standing, rather than working within a typical market relationship. And as we review more of Adam Smith’s theories, I’m willing to bet that he has some corollaries that do apply to the present.
Lastly… we spoke about it briefly, but the topic of whether online content will find a paying audience is very interesting to me, too. I’ll be focusing on this subject in my discussion/presentation for class next week. See you then.
The Economics and I October 8, 2009
Posted by gjchatalas in Reflections.1 comment so far
As I wade into this new class, defining what I want to gain from it is worthwhile both to my learning and how the class may be structured to accommodate my interests.
I don’t have a particularly strong understanding of economics. Sure, I can make cursury comments, which typically are based on something I’ve read online or in the paper. But a primary objective of mine is to be able to speak knowledgeably about economics, and be able to assess sides of an argument in a more cognitive manner. So a background in the basics and how they apply to communications and media. This needn’t be too technical; I want to focus on learning, rather than grapple with comprehending the arcane.
More specifically, I work in the media world, so examining current trends in the business models will be of significant interest. There are an abundance of questions these days about an uncertain media future, and hopefully this class will enable me to answer them with an inkling of expertise.
Among questions of interest that I’d like to better understand: Where is the money going to come from, and where will it go? Is the advertising business dying? Will anybody pay for content? What business models will replace newspapers? Will monopolies give way to smaller companies? What will be the successful businesses and opportunies in the digital media world?
Further, I want to be able to articulate why I think a certain business model has merit, or not. I would like to present ideas as to how my business (and others) can move forward in a manner that makes sound business and economic sense.
It’s a long list, and surely more questions and objectives will arise. But it’s a good starting point.
