Making your online operations pay is all down to the top-spin

Many media businesses started 2010 with the same, simple New Year’s resolution: make money from online operations.

Newspaper publishers (led by NewsCorp) are determined to start charging for online content. Their line of argument runs that newspapers produce proprietary copy which readers value in the real world, so it follows that they will pay for it online. Paywalls will facilitate subscriber-only access to key content, and the free-wheeling search engines, like Google, will be locked out from “stealing” paid-for content. It’s worth a try, they argue, as the alternative is to just give away their newspapers online.

The chances of this working broadscale are zero. In the real world, readers pay for a newspaper because distribution is controlled and supply is scarce. Consumers can only buy papers at two or three places on their journey to work, and the local newsagent may stock just seven or eight national papers and just 20 or 30 copies of each – an inventory of less than 300 copies. Immediate demand and scarcity of supply is the oldest rule in economics for securing a premium price.

But online, there is an abundance of supply – you can access immediately almost every article of any newspaper worldwide published today for free. The potential print-run is billions of copies. As long as distribution is uncontrolled and content is abundant, why would you pay? Readers will just keep changing their news provider. And there will always be free supply. Partly because there will always be competitors looking to add readers, and partly because – rightly – politicians will enforce free access to impartial news as a basic democratic freedom.

So, what might be achievable? It seems to me, there are only two options.

Either, you charge a modest premium for very specific content (it might be articles by a certain sports journalist for some, or a fiendish sudoku for others) but accept a very niche audience (because most readers – though we would love to believe differently – will not pay to read one sports report over another). Or, you could charge a minimal entry price – let’s say 10p per day – and try to take a little money from everyone. This is the so-called long tail that has worked well for Google, with thousands of small transactions.

Neither model inspires me with confidence. For the former, only a few readers will subscribe for specific columnists; most will go elsewhere. And, worse, once your star columnist realises people will pay for his particular articles alone, why would he not charge direct rather than via a newspaper paying him a salary? The internet puts all content creators directly in touch with fans, so they can by-pass record labels, TV channels and newspaper companies alike.

For the latter, readers will still probably only pay for one cheap base subscription, so there’s a first-mover advantage and not much else (just like Google in search). Worse, the comparison with the cover price of the paper in the real world, means that, for everyone, a cheap subscription will just erode the value of the core product very quickly.

So, traditional media should not expect much more than a colourful niche from online revenues – the odd podcast, the odd key columnist or data feed, for instance.

But it’s worse for pure-play internet companies. The vast majority of online activity is email (no revenue), search (monopolised by Google) and social networking. But no one has yet found a model to monetise social networking.

Take Facebook, which now has the ludicrous total of close to 400 million users. If it were a country it would be seven times the size of the UK but with only about £300m in revenues (less than £1 per head per year – the sort of subsistence levels that inspire international aid).

The argument runs that there must be a way to sell to 400 million people. After all, in 1970 Coca-Cola gathered the world together on a hilltop, taught the world to sing and sold everyone a Coke. So, 40 years on, surely we can flog everyone not just a subscription but a music download, some deodorant and a dodgy T-shirt as well? Yet, we now know that doesn’t work in the virtual world: users may like Facebook but they don’t want to pay for a service just to post pictures of themselves falling down in the street after a night of excess (and they certainly don’t want an ad for household cleaners popping up next to that picture). Meanwhile, social networks gobble up investment funds on server capacity and bandwidth.

Out of all of this, one or two networks will succeed (like Google has done in search) because the sheer scale ought to bring sufficient aggregation to monetise the audience. But most will fail because they will run out of cash, which is the second core law of economics.

So, how do media companies make sense of this? It seems to me that we have to secure the bedrock of old media reach and revenue streams (there’s life there still) while adding some online top-spin. Don’t be mistaken that one will supplant the other. Use digital to promote and enhance the real-world offering, not the other way round.

As for marketers, they should do the same: focus their investment on the long-term media choices that will be here to support their brands for the next two or three decades but have some fun with what’s current and contemporary. Just don’t confuse a one-night stand with a long-term relationship.

Andrew Harrison is chief executive of the RadioCentre. You can contact him at andrew@radiocentre.org