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The Web's free lunch is over (or is it?)

By Arthur Goldstuck

As the World Wide Web avalanche of content sites moving from free to paid models continues, it is obvious that the eternal free lunch that was content on the Web is over.

Obvious, that is, to anyone who has been charged with the task of turning content provision into a profit centre.

Obvious, in other words, to the managers of online news services provided by the likes of the Financial Mail in South Africa and The Times in the United Kingdom. Obvious to the webmaster at the South China Morning Post in Hong Kong and the manager of streaming video content at CNN.com in Atlanta.

Why is it so obvious? Well, because it’s become clear to all these managers that banner advertising is no way to make money from a content-driven web site. Clearly, then, the solution must lie in selling the content itself.

Or does it? Is it really so obvious? Has online advertising really failed? Is paid-for content the real alternative?

In fact, there is one little problem facing most content managers rushing for the paid-content model. Selling content online, in and of itself, is even more unproven a model than selling advertising online.

A few have succeeded. This week’s Jupiter Media Forum in New York had almost every single one of these presenting their case studies on stage in the space of a few hours. There was the Wall Street Journal, with its 625 000 online subscribers to its financial news; Playboy.com with 114 000 users of its “educational” journalistic and pictorial content; Sony Online with 424 000 paid subscribers to the EverQuest online role-playing game; RealNetworks, with 500 000 people paying $10 a month for the RealOne Super Pass service.

Aside from these exceptions, provision of content online has proven almost universally to be a cost centre.

For one very good reason: most managers and owners of content sites do not understand the business they are in. Invariably, they operate as direct spin-offs from content businesses like publishing or news services. They expect economies of scale and existing infrastructure to allow for cost-effective services that merely need a small revenue stream to produce profit. And that revenue stream, they assume, will be generated by converting their physical revenue models directly into online models. Little thought is given to the overall business strategy.

In most cases, they do not realise that they are in fact in the business of extending existing business strategies onto the Web, rather than trying to create new businesses on the Web.

For example, by embracing the Web, a small newspaper like the Mail & Guardian was able to leverage its quality journalism into a global brand, winning awards not only for its courageous reporting, but also winning recognition for its brand-building power. When its online edition was sold off to an Internet Service Provider in 1997, it moved from being a leading brand-builder and the pride and joy of its staff into a cost centre that became a millstone around M-Web’s collective neck.

Yes, in tough times every business investment needs to be justified in terms of the profit it helps produce. But an online presence is not only part of a daily transaction with the visitor, it is also an effective part of building a long-term relationship with an audience.

Closing sites to all but paid subscribers turns that relationship into a purely financial one. And, by extension, a highly demanding and disloyal one. Once people are paying for a service, they will expect a far more extensive and reliable service. Which, in turn, means a far more expensive infrastructure. Just ask the Wall Street Journal, which has had to jump through innumerable hoops to bring profitability to its supposedly highly successful online service. If more than 600 000 paying subscribers can’t guarantee profit, what can?

Part of the answer lies in the comments made by Martin Nisenholtz, CEO of New York Times Digital, at the Jupiter Media Forum:

“If we have learned anything over the past decade, it is that there are no silver bullets, no major formulas for achieving online economic success. People are trying a lot of different things to get to profitability … for us, pursuing a diversity of revenue streams has proven to be the best strategy. I don’t know anyone who is foolish enough to think that a single revenue stream is desirable.”

I could think of any number of those, but that is not the real issue. The bottom line, says Nisenholtz, is that the New York Times Digital is “not an online newsletter aimed at a few hundred thousand subscribers. We are a major online publishing brand with a big global aspiration.”

Its revenue model sees a third of its turnover coming from display advertising, another third from syndication and related packaging of content, and the rest from a mix of classifieds and direct e-mail services.

Note the conspicuous absence of subscription revenue. The New York Times, says Nisenholtz, understood that the next content web site is a click away. If that is true for a global brand, how much more true isn’t it for regional brands and spin-off web sites?

It’s not only a matter of revenue strategy; it’s also a matter of understanding your overall business strategy. The media is not only about selling subscriptions or advertising; it is also about turning brands into household names that are an essential part of the audiences’ lifestyles. And that can THEN be leveraged into additional revenue streams.

When content managers come to see the only performance metric in their business as the amount of ad sales or subscription sales, they have lost sight of the power of the Internet and the vast audience it is able to deliver to content sites.

I leave the last word to Nisenholtz: “We shouldn’t be talking about paid versus free anymore. It’s all over. It’s the wrong debate. The right one is about focusing on profitable businesses that can actually scale in the marketplace as more consumers turn to digital in a variety of forms.”

Arthur Goldstuck is editor of The Big Change and author of more than a dozen books on the Internet and urban legends. He runs the independent research and strategy consultancy, World Wide Worx.

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The Big Change is a business strategy blog and newsletter published by Arthur Goldstuck, managing director of World Wide Worx, a leading technology research organisation based in Johannesburg, South Africa.

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