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.

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.

How Much Should The New York Times Charge for Web Access?

Today is the breathlessly anticipated day Apple will unveil its tablet, and part of the buzz focuses on how much newspapers might charge for downloads to the device. Last week, the New York Times announced it will charge readers for unlimited access to its web site.

These two things are probably not a coincidence. Last week I argued The Times is trying to limit the loss of print readers and make itself more competitive in online ad markets.

But subscription revenue will still be welcome. The Times must figure out a reasonable price for access to its web site. The newspaper must also set prices for delivering its news via electronic readers such as the Kindle and the new tablet.

The key is to focus on channels for delivering the news and advertising. Journalists are fond of saying content is king, but that is not correct. Readers also value convenient or speedy access to the news, and both characteristics can easily be more important than content.

The web channel

There is justifiable skepticism about how many readers will pay for access on the web, but not because readers have somehow been trained to expect free news.

Many readers already pay for access to news, and other content, on the web. They just don’t pay The Times and other news producers.

Readers instead pay an Internet Service Provider, or cellular provider, for access to the web and the news sites there. These readers will sensibly view any charge the Times imposes as a disproportionate increase in the price of access.

Say you pay $30 a month for access to the entire web. Even a $5 monthly fee for the Times seems like a very large price increase.

The web also offers numerous alternative sources for many of the stories covered by the Times. A large number of substitutes always means there will be competition to provide those substitutes at the lowest possible price.

That is why The Times has said it will not cut off free access its web site, but instead will continue allowing everyone to read a limited number of articles. That is also why the Times has been careful to reassure print subscribers that they will not pay the new fee for unlimited access.

The e-reader channel

One way The Times and other newspapers might solve the problem of competition is by finding a channel with less competition. This means there has to be a way to limit the number of news sources found in the delivery channel.

Apple apparently plans to do just that by charging publishers for access to its e-reader – newspapers will set their own price and give Apple 30 percent of the revenue.

Will this work? Yes, but only if two conditions are met.

First, readers have to decide the tablet has characteristics -- such as mobility, convenience, and status – that make it preferable to the web for delivering The Times.

Second, Apple and its wireless provider have to set a price for general access to the web and other digital content that is low enough to avoid the problem of readers thinking the Times is again charging a disproportionate amount.

One analogy is broadcasting and cable. When cable first came along, there was skepticism that anyone would pay for access to easily available broadcasts from their local stations.

But cable offered a much larger range of programs, and people were willing to pay for the local broadcast as part of this larger bundle of information.

Apps and games on Apple’s e-reader might play a similar role luring readers away from the web.

However, news from the Times in this analogy becomes a premium product, like HBO. But news is far less entertaining so prices will still be limited.

The other problem is that Apple, not the Times, owns the channel and will therefore charge the Times as much as possible for access. This is likely to become a real point of contention if the tablet takes off. The Times and other publishers are therefore likely to also maintain relationships with Amazon's Kindle and other e-readers.

The print channel

So, the only delivery channel controlled by the Times is print. That is another reason I believe plans to charge for access are partly an effort to stem the loss of print readers.

But the reliance on advertising revenue in the channel where newspapers have always had the most control over reader pricing is also a reminder that advertising will continue to be the most important revenue source.

NBC Breaks the IPod's Chains

NBC is ending sales of its popular programs on Apple's popular Itunes, making digital versions of "The Office" and its kin available for free from the network. Viewers will watch the programs for 7 days before the file self destructs, but they won't be allowed to avoid the commercials. The network will also sell commercial-free versions that don't vanish from the customer's hard drive.

There are good reasons to question the move, which comes as Apple is reintroducing its ubiquitous Ipods with attractive new features, colors and advertising. But there is a chance NBC will succeed at bending the economics of the Web away from Apple and toward the network's own interests. If NBC succeeds other producers and distributors are also likely to abandon Itunes.

Problems the Network Must Overcome

NBC will lose serendipitous sales to the horde of Ipod customers who --they have no other choice --repeatedly visit the site searching for particular videos or music, and then pick up a couple of NBC programs along the way. The customers who arrived at Itunes actually looking for NBC programs will now have to find and navigate a separate website before they can watch their favorite shows.

NBC may raise the price for commercial-free downloads of its programs, charging as much as $3 more than Apple's current price of $1.99. Viewers who don't want to pay more will be left with nothing 7 days after downloading the version that won't let them avoid commercials.

All of these changes mean NBC must expect a decrease in paying customers. The potential rewards, however, could more than make up for any short-term losses.

Fighting the Power of Steve Jobs

Apple still enjoys its image as a benevolent revolutionary created by the famous commercial comparing Microsoft to Big Brother. But to NBC, Apple is using its power to produce profits by limiting its suppliers' choices.

This is because Apple is a hardware company, and Ipods provide a major part of its revenue. Ipods are useless without videos or music, so Apple created Itunes to offer downloads at uniform, relatively low, prices. This encourages consumers to buy more videos and music than they might otherwise be willing to buy.

However, Itunes only works with Ipods. The more downloads that a customer buys, the more expensive it becomes to switch from Apple's Ipod to a rival's video and music player, even if the rival is cheaper.

This leaves producers and distributors like NBC almost no leverage to negotiate with Apple. An estimated 40 percent of downloads on Itunes come from NBC. But NBC must accept whatever wholesale price Apple offers, even if that price is below NBC's costs, or below what NBC thinks it could earn if it wasn't forced to sell programs through Itunes.

How NBC Hopes to Earn a Profit

So the network will instead turn itself into a rival to Itunes. At first, it will only offer the free version of its videos. A service that allows customers to buy programs for PCs and portable players, including Ipods, should be available by the middle of 2008.

By offering free videos, NBC is using a classic strategy for entering markets by selling a product below cost. NBC expects to build demand for its new service this way, then begin offering the versions that viewers must pay for. (This strategy is frequently used with new software products).

But I expect NBC will not stop offering the free, self-destructing versions of its programs. These versions will be downloaded by viewers who are not willing to pay, or are not interested in repeatedly watching the same episode over long periods. NBC will earn revenue from the commercials.

Viewers who place a higher value on repeatedly watching programs over long periods will pay for the commercial-free versions. Even if the new price is higher than Itunes, NBC can increase its total revenues if the Itunes price was below the range where most viewers are sensitive to price increases.

Formally, changing different consumers different prices for versions of the same product is called price discrimination. Economist Hal Varian argues the low cost of digital reproduction makes what he calls "versioning" to allow price discrimination increasingly important to the Web.

Other scholars criticized media companies in an article in the International Journal on Media Management ¹ for not taking advantage of digitization to adopt price-discrimination strategies that can increase the profitable distribution of their products.

NBC has now decided to try just that. The network's experiment will test the theoretical arguments in demanding market conditions. If NBC succeeds, the dynamics of Internet competition will once again change in dramatic and interesting ways.
¹ Chang, B.H., Lee, S.E., & Lee, Y.H. (2004). Devising video distribution strategies via the Internet: Focusing on the economic properties of video products. The International Journal on Media Management, 6(1 & 2), 36-45.