This week the New York Times ran a think piece on how companies, mostly publishing companies, are thinking about changing from a free model with advertising revenues, to a paid model, where subscribers have to pay for either all or part of the published content.
The debate initially transfixed the internet back in the mid 1990s, and many businesses (one we ran was one of them) which had been built around customers paying for information, became awash with rivals that professed to do just as good a job, but gave away the content for free.
Today the free model is the ‘de facto’ standard way to put information on the internet, but at a time when advertising revenues are contracting, many people will be questioning this.
iTunes charges for music, but then music has always been charged for; many online video stores charge for films, but then again advertising based alternatives are emerging, and once they are established, perhaps this will undermine paid for video stores. The most successful is perhaps the Netflix store, which expects you to pay for a Netflix subscription and then adds online content for free. The new initiative from the US cable operators is expected to go this same hybrid subsidized route, which is that anyone who has a certain level of cable subscription will be able to view cable TV content on the web for free.
We’re not sure that hybrids are any better than pure business models, either pure paid or pure free. What we are sure if is that it takes a long time on the internet to change anyone’s perception, and that you cannot jump from business model to business model based on the state or perceived state of the global economy. You have to stick with what works.
If the advertising model was working in the good times, then guess what, it will work when the times are good again. If it fails to work during the bad times of a recession, then you have to make moves for survival, but rarely is a complete change of business model the right move. If people won’t buy banners, then you must sell interstitials. If they won’t buy interstitials, then put on some video and sell pre-roll video ads. If they won’t buy those, then join or build an affiliate network. If you take the New York Times article at face value and change models, you might try to sell content, and then you can turn 2 million readers into a paying audience of 50,000 overnight. That might bring in the same revenue, depending upon how much you are charging for subscriptions or per article, but first off it will take time, so there will be a revenue lag. And secondly there goes your lovely brand where 2 million people recognized you.
It’s very different if your advertising business model has never really worked, then you might want to change it, but why would you wait for a recession to have the bravery to do that? People cancel subscriptions during a recession just as much as canceling their advertising. It depends on what you want as a culture within your business, and what power your brand already carries.
If you want to have 50,000 ‘customers’ paying maybe $70 a year, you need a process that is automated. You cannot speak to each of them, and have to hold all dialogs through your web subscription pages. If you have a product worth $1,000, there is room to speak to each of them, but then the nature of customer acquisition is far harder. Do you augment your web processes with telesales, and how do you motivate a sales team who’s job is to call 100 people a day, and have one conversation with each prospect each year? It’s a very different process from having 4 or 5 sales guys who speak to all of your 200 advertising clients, every week or month, and build a relationship of trust that can get you both through the good and bad times.
The fact that you’re reading this in Faultline means that you, or your company have realized what professional analysts and journalists have known all along, that paid content is essentially different from free. IN paid content you view your reader as the customer, and you never write for the advertiser.
For many of the big publishing brands out there like say The Economist, or the Wall Street Journal, there is a history of paying for a paper subscription, and that history harks back to before there was an internet. But for some of these, the paid online model will mean that the average age of their paying subscribers has gone up each year, as their admiring fans get older. If they are not attracting younger subscribers, this is a subscription time bomb waiting to happen, so you have to keep track of demographics in subscriptions just as if they were an advertising audience.
But if you are a smaller publisher, or a local one or one that works in the business to business arena, your brand will not pull you through and no-one can remember if you were once paid or not.
One business model that was tried in the early times of the internet was the idea the cable operators want to try now, the same one as Netflix. Existing paying subscribers to magazines and newspapers, could use their subscription number and surname as log in details. Only most of them back then were happy with a paper product and they threw away the wrapping that had the subscription number on it and never went online. That doesn’t mean that such a model might not work now, but it would need to be tried out now when more people are on line more of the time.
There are plenty of hybrids to try, and we can try to copy from the cellular operators and adopt pre-pay, post pay and advertising driven models. So subscribers, those who pay for articles as they go, or those who accept advertising. This route is overly complicated and takes a huge leap of faith. What is more likely is a model like the New York Times uses, which is that it keeps that large subscriber base by offering MOST of what it does for free, and then restricts access to some part of its service to either existing paper subscribers or online subscribers.
The danger here is that you have to give away some of your best stuff, or else your audience will think you have just gone off the boil, and you also have to hold back some of your best stuff to tempt people to pay that little bit extra. A model where you keep all of your 2 million loving fans AND get 50,000 paying subscribers is the best of both worlds.
Rupert Murdoch had a great formula for newspapers before the internet, he said get ALL of your costs from subscription and bookstand revenues and then get ALL of your costs again from advertising.
We’d be interested in his formula today. Is it get all of your costs from the internet and all of your costs again from the paper edition? He’d be hard pressed to achieve that in today’s markets. Perhaps his dalliance with the Kindle approach (see elsewhere in this issue) would make that possible.
The whole issue here is about brand and consistency. If you have brand then you have an appearance of being better than all the rest of the market.
So you can either a) retain your advertising clients during a recession OR b) would have no trouble selling your content.
But in order to BUILD a brand you have to spend money or be massively original, so if you don’t already have a sufficiently robust brand, you won’t build it in a recession where your revenues are falling unless you spend a lot of money and that defeats the object.
A publishing brand which charges money must have content that is significantly and noticeably better than any free stuff out there. And to transform INTO one of those after competing for so long with free content, you have to fight the overall market erosion on content quality. You have to compete with free content by having a similar cost structure and that usually means less people or worse still, embracing citizen journalism, or some such, where content is cheap. Other ways are to have computers look at announcements, strip out headers and print press releases. Or you can pay people to do that intelligently, but it is not journalism or analysis.
Go through ANY story on the internet, and you will see whole paragraphs repeated from the original press release, apart from one or two sources, and those sources are usually brands and they have a cost structure which reflects that. Cut costs and you move towards that great morass of unthinking printed content. It’s the same for images and video.
During the last two recessions McGraw Hill, one of America’s biggest publishers, which relies entirely on advertising for its revenues, did two studies into whether or not it was a good idea to advertise throughout a recession.
One study of over 600 Businesses in a recession during the 1980s found that business which maintained or increased their ad spend had higher sales growth both during the recession and for the following 3 years.
On average they grew 256% MORE than those who had cut back on advertising. McGraw Hill achieved the same result in 2001 when it ran the survey once again. The secret is clear. If your advertising share of the total a spend is higher (because everyone else cuts their spending) your brand grows towards that same market share.
This is now well known. And yet businesses still slash their costs during a recession, and the first things to go are subscriptions and advertising. Subscriptions aimed at consumers are a little more resilient.
This week KPMG published its own survey. This one was about accepting content with advertising. It said that 60% of consumers would prefer to watch advertising on the internet in return for free content. Just 16% said they would rather pay for content to avoid receiving adverts.
Interestingly the world seems about to turn on its head and ignore that advice. The reason is clear. It is NOT the reader or viewer that matters when deciding to dump an advertising model, it is the advertiser. If they stop spending, despite such surveys, there will be no advertising to sustain the consumer in this preference.
The survey reveals that 40% of mobile phone users also they are prepared to watch advertising in return for free music and 28% said that they would watch advertising in return for access to free instant messaging.
The worry about such surveys is that this is what people say. What they mean is that if their current supplier was to offer these as options (i.e. a hybrid with choice) they might take that choice. What they are NOT saying is that they would MOVE to a new supplier, and even more so to a supplier they had never heard of, to actively pursue such a business model. So will you get more customers by following such a survey? No.
The truth is that publishers which have retained their paper versions of products are victims of the Faultline effect ‘ paper is analog and the internet is digital – and new business models will be required. The braver publishers have already thrown away their paper models, but anyone that still operates half in the analog world and half out, will find that it is carrying the costs of operating in both, but it only has one set of readers and one set of revenues, whether these are paid subscriptions, advertising or both. And that simply can’t last.