First published on: Thu Mar 26 2009 11:51:43 GMT+0800
This week’s entry is inspired by a cartoon character.
Content is king, but sourcing and distributing that content to the audience cost money. Revenue is needed to cover the costs, make a decent enough profit and reward all the content producers for the work taken to create that content in the first place.
This model works brilliantly during the early years where content acquisitions are limited to a few large content producers who have the economic capacity to do so. Examples such as sending a reporter deep into a war zone, junkets in major entertainment events,etc. are indications on where the investment are needed to acquire content which the editors feel is relevant to their readers. But the upside is that money was flowing in, allowing content producers to make, at times, good money.
Next came the communication path which used to be vertically integrated into the editorial enterprise. They own the media platform, and till today, the traditional print media is still active and have a audience size that is sufficiently enough to keep the lights on (for now). When the Internet appeared and became a mass medium, the content producers decided that it’s time to monetize this new communication path, complementing the huge profits off their traditional products. After all, content is king, and people will be willing to purchase content for its editorial value.
What happened following their push into the Internet communication path is a now a case study on how the digital economy is FUNDAMENTALLY different from the bricks and mortar world. Content producers started by offering content at subscription rates in the early years. However, there is no credible payment mode such as a Paypal, WorldPay or PayMo to give the early Internet users confidence to disclose sensitive payment information over a new medium such as the Internet. Subscription rates plummeted, and content producers start to worry about the revenue model needed to make money off the Internet. Costs started escalating as content acquisition costs remain unchanged, and needs a revenue stream to justisfy the investment in that area.
Their next step is to move into advertising. Banners started appearing on the websites, and sales teams are compensated by how much inventory they can sell off the site. Content is now offered free, and the hope is that every Internet user will be motivated to visit these content sites and drive up the pageviews needed to fill up the CPM inventory. It’s sounds like a simple enough model, and content producers then felt that it is probably a better way to make money than the subscription model.
Fast forward to 2009, and we now see the number of content producers shutting down or struggling to make money in a “free content in exchange for advertising” model. Here are some examples of venerable content producers who struggle to keep the lights on, and those who didn’t (i.e. shutting down):
1. The New York Times
2. The Rockey Mountain News
3. The Los Angels Times
This problem is not restricted to venerable content producers. Newer upstarts also faced the same problem of monetizing their online assets. A recent article from The Economist highlights some of these new companies who face problems, though some of them managed to find new parents who are now struggling with these problems as part of their acquisition:
1. Youtube – Sold to Google (just in time)
2. MySpace – Sold to Fox and recently restructured
3. Facebook – Minority stake by Microsoft at US$15 Billion valuation
4. Twitter – I have a plan….but I won’t tell you
5. SpiralFrog – Jumps no more
The 4 companies above are just a snapshot of what today’s supposedly post-Google IPO, Web 2.0 poster cholds are trying to do to make money off their users. There’s still Flickr (sold to Yahoo) and Bebo (sold to AOL) who are still trying to monetize their users accessing their sites. The interesting thing is that there is minimal, if not no content acquisition cost. Content is uploaded by the users, shared in many innovatve channels, and distributed across multiple platforms (online, mobile, OOH digital screens, Kindles, iPhones, Blackberrys, etc.). It does sound like a great economic model.
But the cost of distribution remains unchanged. We still need servers to host the software to manage the content. We need terabytes of hard disk space to store the content. We need the bandwidth to distribute the content to global distribution points. Even if the content acquisition cost is minimal (e.g. SpiralFrog), the fact remains that licensing fees need to be paid to other parties in the music ecosystem (e.g. music publishers, writers, authors, etc.).
What I have described above sounds bleak. Does that mean that Content is NO LONGER King? Can we make money off the Internet at all?
I thought so too for some time till I attended a Web Wednesday event at the Geek Terminal in downtown Singapore on 25th March 2009. It was a speaker from Sulake, a company that originated from Finland and creator of the Habbo social networking site . It is profitable, and made a profit of 50M Euros in their last financial year. Average session time is around 40 minutes and they have close to 100M users as of last year. How did they make money then? 3 important points stand out:
1. There is a revenue model from Day 1
Access is free, but upgrades are only available if you make payment.
2. Pricing model
Focus on micropayments. Small payment anounts limits resistance to payments.
3. ENter a market where payment modes are readily available
Payment modes are not restricted to credit cards. It includes SMS payment, pre-paid gaming cards sold off 7-11s, and other micro-payment methods which charges low processing fee for payments as low as US$0.30.
Now all this sound like common sense, and it’s being practiced by at least this company who is still privately owned and profitable. The fact remains that this is a company that has relied on basic common sense and financial discipline to ensure that the company grows organically at a stready rate. While Sulake may not have the billion dollar valuation as Facebook, it does have a sustainable revenue stream that allows valuation to be based on actual cash flow.
The Internet does make money for some. The question is whether one is willing to rely on their common sense to do so.
Cheers,
Darren
Digital Media Journal 