One reason why paid content may be the only way forward

A few days ago I wrote a post about the economics of online advertising. To summarize, the argument went like this:

• Increasingly, publishers' ability to differentiate themselves in the advertising market is being undermined by the web
• This is mainly because of (i) audiences' promiscuity thanks to the hyperlink, and (ii) ad networks
• This drives advertising costs down towards publishers' marginal costs of inventory

Granted, this picture may not be the full story; among other things it doesn't apply to all advertising categories. But to the extent that it does describe the future, it has an interesting strategic implication, at least for general news:

If editorially targeting a niche audience (local, ideological, etc) no longer leads to a price premium on the advertising side, then profits can only come from (i) a cost advantage or (ii) capturing some of the surplus that audiences get from differentiation. As legacy businesses either die or reconfigure for the new reality, cost disparities will not be as gross as today (e.g. NY Times vs Huffington Post) and (i) will be less of an option. If this happens, and to the extent that it does, then profits could only come from getting audiences to pay for unique stuff.

Sorry for the abbreviated nature of this post. If there are reactions I might write a more expanded version.

Comments

[Stephen Hill]

We have run a niche media service for ambient music since 2001. With our numbers, any thought of advertising (much less premium priced advertising) was a fantasy. So we went with a 'freemium' subscription model from the start.

Nine years later, we're not rich, but we have been consistently profitable and we're still alive and growing slowly and steadily. We just released our first iPhone app and are seeing a nice boost in subscriptions and usage from it.

Paid content is a road for long-term players with either a first mover, unique, or high-value service. Understanding user psychology is key: converting free users to paid can take years. It's a delicate dance of providing incentives, reducing transaction cost and friction, and running a consistent, reliable, satisfying service.

Stephen Hill
HEARTS of SPACE
www.hos.com