Thursday, September 15, 2011

The economics of transitioning to digital media markets

The transition from traditional media markets to digital markets was one of the dominant threads of discussion during last week’s conference.

Executives from traditional media firms who are trying to manage this transition disagreed on the best approach. This was not surprising given the complexity of the problems they face.

Here are three pictures that illustrate some of the challenges for firms that operate in multiple media markets.

This first picture shows traditional markets on the left, channels might be print, or radio and television, either broadcasting or cable.  Firms earn revenue from advertising, subscriptions, or a combination of the two.
Firms face a downward sloping demand curve because an increase in price reduces the amount of advertising or subscriptions they sell, and vice versa.  The shaded rectangle is the amount of revenue the firm generates (price x quantity  = total revenue).

On the right is a digital market where the channel might be a website on the Internet. The firm faces a downward sloping demand curve, but prevailing prices are much lower. The firm is forced to charge a fraction of its price in the traditional market.  The online audience is much larger but the total amount of revenue, shown by the shaded box, is much smaller.
Prices are lower in the digital market because of the volume of identical or close to identical media content – audiences easily can switch to a substitute if the firm raises prices.  In addition, most online advertising revenue is generated on about 50 websites, according to the Interactive Advertising Bureau.  Everyone else competes for small shares of the remaining revenue.

This next picture shows what happens as audiences continue to shift from traditional channels to digital channels. The shift is illustrated by the new demand curve in the traditional channel, which now generates considerably less revenue than before.  Even if the audience increases in the digital channel, competition keeps prices low.  The shaded box on the right shows there is not enough revenue to make up for losses in the traditional channel.

This last picture shows what can happen if a firm starts to raise digital prices because audiences find its content especially appealing.  Intense competition in the digital market might create a price ceiling, illustrated by the kinked demand curve.  When prices reach the flat portion of the demand curve, additional increases mean the firm will lose all of its customers.

The risk of this happening drives the debate about charging for access to websites.  That debate was present at the conference, and will be discussed in future postings.

But the larger point is that operating in different channels requires different strategies.  Three strategies were discussed at the conference.

One was a classic differentiation strategy - provide content tailored to the interests of different market segments – or niche audiences.

Another was a cost-reduction strategy.  Reduce costs by creating economies of scale, republish the same or similar content in different channels.  This is often referred to as convergence.
The third strategy is based on moving away from intensely competitive digital channels. Firms are trying to find less competitive channels where audiences and advertisers are more likely to pay for differentiated content.

Tuesday, September 13, 2011

Does economics overlook the logic of communication?

Eric Rothenbuhler of Ohio University wonders if economic logic falls a bit short when it comes to understanding what drives success for media companies.  Rothenbuhler, whose research focuses on the nature of communication, writes in response to yesterday’s post:

Steve Wildman is right, of course, about the economic logic of servers versus channels and storage versus programming.  But media companies that forget they are communicators, that try to operate by economic logic alone, are doomed.
The shift from programming channels to storing stuff on servers is analogous to the shift from being in the communication business to being in retail, or wholesale, or just warehousing. The relationship with the audience member goes away and the media business becomes just a supplier of things people choose—it might as well be Sears.
The penny press was programming, not story storage.  Top 40 radio was programming, not juke boxes.  Even silly stuff like NBC's "must see TV" Thursday night line up some years ago, worked because it was programming that pulled audiences in and held them, it gave them something to anticipate before they watched it and something to talk about after—it created an event in the everyday flow of their life.
The greatest successes in media businesses are always based on communication innovations, on programming that attracts and holds audience members because it draws them into a communicative relationship.
That's what media managers ought to be thinking about today - the logic of communication. Be successful at that, and the money will follow.
Eric co-authored a seminal article in the field of media economics when he was a master’s student at Ohio State.  There was a very nice moment at the conference when he and lead author John Dimmick were together again.

Dimmick (r) & Rothenbuhler (l) at the conference.  In 1984 they published "The Theory of the Niche: Quantifying Competition Among Media Industries," Journal of Communication, 34(1), 103-119.

    Monday, September 12, 2011

    Abundance and scarcity in new and old media

    Speakers at last week’s conference clarified what the exponential increase in production of digital media content means for different kinds of media firms.

    Steve Wildman of Michigan State University explained the negligible cost of storing content on a digital server removes an important constraint on the production of media content. This very low cost allows companies to open up their servers to anyone who wants to upload a video, photo, text or other content.  If someone does want to access a particular file, the company that owns the server doesn’t pay the cost of producing a copy – the person who accesses the content pays that cost.
    The result is sites like YouTube, where millions of videos are stored and most are never viewed.

    Wildman said digital servers act as if there is an almost unlimited number of channels for delivering media content.  Each channel is created when someone actually requests a copy of the content stored on a server.

    This has been a boon for all of us because it dramatically reduces the cost of exercising our apparently limitless desire to create and distribute messages, photos, videos and other content.
    But traditional media companies own and must pay for a limited number of channels, they could never afford to act this way. Traditional companies must earn enough revenue from publishing each piece of media content to pay for the channel where the content appears (Wildman has detailed this analysis here).

    Non-media companies benefit from unlimited media channels

    When server based content is combined with modern search tools – such as Google or Bing or twitter – it becomes cheap for companies to find and communicate with customers.
    This makes possible new marketing strategies such as Open Branding, discussed by Nita Rollins of Resource Interactive.  Open Branding calls for companies to engage in a dialog, building online communities where customers have a voice in the creation of the company brand.
    Of course, companies will only do this if the cost is less than or equal to the return in the form of increased sales or revenues.  But digital tools have dramatically lowered those costs, so companies that sell non-media products can take advantage of Open Branding.

    But media companies face increased competition

    But what about companies that are actually in the business of creating and distributing media content? 
    Media companies must compete for attention with the huge amounts of content generated by individuals and organizations using free server space.  For example, the time of a city council meeting, or a call for volunteers to help a civic organization can now be published directly by the council or the civic organization.  Media companies are no longer neccessary to get the word out.
    Stephen Lacy of Michigan State said the central problem facing media companies is how to create content that is both scarce and valuable to potential audiences.  One way to do that is by offering content that has special quality to set it apart. 
    But for now I want to focus on the channel part of the scarcity issue.  Another way to make your content scarce is by controlling channels people use to access the content.  That can mean controlling the hardware – computers, smart phones, tablets- used to access all of those servers.
    Competition to control access to unlimited content
    In this competition, companies that can limit consumers to a single device or related set of devices can win.  Apple is the highest-profile example of how this works.

    I’ve written before about how Apple limits access to music and video downloads by requiring that customers use Itunes.  The company's recent effort to seamlessly link Apple devices with one another and with Apple’s servers is another step in this direction.
    Meanwhile, the company knows it can increase the range of content and functions available to customers by allowing more apps on its devices.

    Of course, this also means anyone who wants to provide content to Apple customers – such as a media company struggling to compete in a server-based market – must design an app that allows Apple to keep a substantial share of revenue the app generates from Apple customers.

    For now, companies like Apple appear to be ahead of the game when it comes to creating scarcity in the digital media world.

    Friday, August 19, 2011

    Creating the Future: Managing Media in the Digital Age

    Readers of this blog are invited to a Sept. 7 conference at The Scripps College of Communication  to discuss the challenges and opportunities for firms operating in fast-moving media markets.

    Richard A. Boehne, president and chief executive officer of The E.W. Scripps Company, will be the keynote speaker for Creating the Future: Managing Media in the Digital Age.  He will be joined by top executives from media firms in Ohio and West Virginia and leading scholars from four universities.
    For registration and other information, visit our conference website:
    Partial list of speakers:

    Richard A. Boehne, president and chief executive officer, The E.W. Scripps Company.
    Margaret Buchanan, president and publisher, Cincinnati Enquirer
    Bray Cary, president and chief executive officer, West Virginia Media
    Richard Dix, publisher, Kent-Ravenna Record Courier
    Lynn Gellermann, executive director, TechGROWTH Ohio, managing partner, Adena Ventures
    Anne Hoag, associate professor in the Department of Telecommunications, College of Communications, Penn State University
    C. Ann Hollifield, Telecommunications Department head, Grady College of Journalism and Mass Communication, The University of Georgia
    Stephen Lacy, associate dean for graduate studies, College of Communication Arts and Sciences, Michigan State University
    Phil Pikelny, vice president Dispatch Digital and chief marketing officer The Dispatch Printing Co., Columbus
    Nita Rollins, Ph.D., Futurist, Resource Interactive.
    Scott Titsworth, Interim Dean, Scripps College of Communication, Ohio University.
    Steve Wildman, James H. Quello professor of telecommunication studies, College of Communication Arts and Sciences, Michigan State University
    Joseph Zerbey, president and general manager, The Toledo Blade
    Contact me if you have any questions by e-mailing:

    Thursday, May 6, 2010

    The Future of Journalism (It's in good hands)

    Members of My Online Journalism Seminar
    Back (L to R), Kristin Nehls, Tricia Flickinger, Alyse Kordenbrock, Jeremy Bookmyer, Ryan Lytle.
    Front, Jordan Valinsky, Erica Nunez.

    Wednesday, May 5, 2010

    Thoughts on the proposed sale of Newsweek and what it means

    The Washington Post Co., a bastion of journalistic excellence, wants to sell Newsweek because the magazine keeps losing money.

    This development illustrates why some proposals for preserving first-class newspapers and magazines are unlikely to succeed.

    The company has owned Newsweek since 1961. The company's record of journalistic excellence rests on reporting in both the Washington Post newspaper and in Newsweek.  Despite this fact, the Post Co. has for years not relied on either publication to ensure its economic survival.

    The majority of revenue at the Post Co. comes from the educational testing giant Kaplan. The long-term decline in print advertising revenues has forced the company to use Kaplan's earnings to offset losses from the continued operation of Newsweek and the Post newspaper. This could not be sustained, so the Post is now forced to try and sell Newsweek.

    What does this mean for other journalistic organizations?

    First, Newsweek has tried to adapt to the digital world where a week's delay publishing news or commentary is far too long to satisfy audiences. This report says Newsweek's "digital side" generated just $8 million last year, too little to pay for the magazine's production.

    The cost of producing print newspapers and magazines is relatively high.  But advertising revenue per reader in print is also relatively high.  The cost of producing digital news is much lower, but ad revenue per reader is much, much smaller than print revenue. Print journalism organizations face the problem of transitioning from high-cost high-revenue markets where audiences are still sizable, but stagnant, to low-revenue markets where audiences are growing.

    Newsweek probably had unusual support for making this transition because the Post Co. is controlled by the Graham family, which has a commitment to journalism.  The family was probably more willing than other Post Co. stockholders to subsidize losses at Newsweek while trying to make the transition work.

    But in the end, no company can afford to keep losing money in one division and subsidize the losses with profits from another division. At some point, the company's ability sustain itself will be questioned.

    So the second lesson is that suggestions for subsidizing journalism -- with profit-making parts of a company, with donors or endowments, or with government funds -- ignore a fundamental economic reality. Journalism that cannot sustain itself economically will always be at risk of economic failure.

    Monday, April 12, 2010

    Why you might want to wait to buy an iPad

    As the first wave of iPad hype begins to recede, let's consider the possibility that Apple will repeat the pricing tactics used to launch the iPhone.

    Apple lowered the price of the iPhone by $200 just two months after its launch on an earlier wave of carefully-crafted publicity. Widespread outrage prompted Apple CEO Steve Jobs to offer early buyers a $100 store credit.

    This still looks like a textbook example of price discrimination.  Price discrimination occurs when the same product is sold to different consumers for different prices.  This requires first that consumers will pay different amounts for the product, and second that consumers can be divided into groups based on their willingness to pay.

    A classic way to divide consumers into groups uses time.  Release a product, let's call it an iPhone, for $599.  Wait until all of the people who want to be among the first to own the product have bought one. Then lower the price to, oh, $399.

    Offer complaining customers a consolation prize.  The store credits probably cost Apple much less than $100 a person.  Store credits are often used to buy products that cost more than the credit.  Or else the customer never uses the entire credit.

    Now Apple has another "magical and revolutionary product." The starting price is $499 for the most basic iPad.  That's $100 less than the iPhone's original cost, but the iPad doesn't make phone calls.

    Is Apple's pricing history about to repeat itself?  It can't hurt to wait and see.