THE GREAT UNBUNDLING

From https://stratechery.com by

BY BEN THOMPSON

To say that the Internet has changed the media business is so obvious it barely bears writing; the media business, though, is massive in scope, ranging from this site to The Walt Disney Company, with a multitude of formats, categories, and business models in between. And, it turns out that the impact of the Internet — and the outlook for the future — differs considerably depending on what part of the media industry you look at.

THE OLD MEDIA MODEL

Nearly all media in the pre-Internet era functioned under the same general model:

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Note that there are two parts in this model when it comes to making money — distribution and then integration — and the order matters. Distribution required massive up-front investment, whether that be printing presses, radio airplay and physical media, or broadcast licenses and cable wires; the payoff was that those that owned distribution could create money-making integrations:

Print: Newspapers and magazines primarily made money by integrating editorial and advertisements into a single publication:

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Music: Record labels primarily made money by integrating back catalogs with new acts (which over time became part of the back catalog in their own right):

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TV: Broadcast TV functioned similarly to print; control of distribution (via broadcast licenses) made it possible to integrate programming and advertising:

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Cable TV combined the broadcast TV model with bundling, a particular form of integration:

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THE ECONOMICS OF BUNDLING

It is important to understand the economics of bundling; Chris Dixon has written the definitive piece on the topic:

Under assumptions that apply to most information-based businesses, bundling benefits buyers and sellers. Consider the following simple model for the willingness-to-pay of two cable buyers, the “sports lover” and the “history lover”:

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What price should the cable companies charge to maximize revenues? Note that optimal prices are always somewhere below the buyers’ willingness-to-pay. Otherwise the buyer wouldn’t benefit from the purchase. For simplicity, assume prices are set 10% lower than willingness-to-pay. If ESPN and the History Channel were sold individually, the revenue maximizing price would be $9 ($10 with a 10% discount). Sports lovers would buy ESPN and history lovers would buy the History Channel. The cable company would get $18 in revenue.

By bundling channels, the cable company can charge each customer $11.70 ($13 discounted 10%) for the bundle, yielding combined revenue of $23.40. The consumer surplus would be $2 in the non-bundle and $2.60 in the bundle. Thus both buyers and sellers benefit from bundling.

Dixon’s article is worth reading in full; what is critical to understand, though, is that while control of distribution created the conditions for the creation of the cable bundle, there is an underlying economic logic that is independent of distribution: if customers like more than one thing, then both distributors and customers gain from a bundle.

WHEN DISTRIBUTION GOES TO ZERO

A consistent theme on Stratechery is that perhaps the most important consequence of the Internet, at least from a business perspective, was the reduction of the cost of distribution to effectively zero.

The most obvious casualty has been text-based publications, and the reason should be clear: once newspapers and magazines lost their distribution-based monopoly on customer attention the integration of editorial and advertising fell apart. Advertisers could go directly to end users, first via ad networks and increasingly via Google and Facebook exclusively, while end users could avail themselves of any publication on the planet.

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For Google and Facebook, the new integration is users and advertisers, and the new lock-in is attention; it is editorial that has nowhere else to go.

The music industry, meanwhile, has, at least relative to newspapers, come out of the shift to the Internet in relatively good shape; while piracy drove the music labels into the arms of Apple, which unbundled the album into the song, streaming has rewarded the integration of back catalogs and new music with bundle economics: more and more users are willing to pay $10/month for access to everything, significantly increasing the average revenue per customer. The result is an industry that looks remarkably similar to the pre-Internet era:

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Notice how little power Spotify and Apple Music have; neither has a sufficient user base to attract suppliers (artists) based on pure economics, in part because they don’t have access to back catalogs. Unlike newspapers, music labels built an integration that transcends distribution.

That leaves the ever-fascinating TV industry, which has resisted the effects of the Internet for a few different reasons:

  • First, and most obviously, until the past few years the Internet did not mean zero cost distribution: streaming video takes considerable bandwidth that most people lacked. And, on the flipside, producing compelling content is difficult and expensive, in stark contrast to text in particular but also music. This meant less competition.
  • Second, advertisers — and brand advertisers, in particular — choose TV not because it is the only option (like newspapers were), but because it delivers a superior return-on-investment. A television commercial is not only more compelling than a print advertisement, but it can reach a massive number of potential customers for a relatively low price and relatively low investment of resources (more on this in a moment).
  • Third, as noted above, the cable bundle, like streaming, has its own economic rationale for not just programmers and cable providers but also customers.

This first factor, particularly the lack of sufficient bandwidth, has certainly decreased in importance the last few years; what is interesting about TV, though, is that it is no more a unitary industry than is media: figuring out what will happen next requires unpacking TV into its different components.

read more here…

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What does Medium.com’s profit model pivot say about the future of online advertising?

One of the most prominent startups in the online publishing space pivoted from its current ad model, saying publishing is ‘a broken system.’ Is this a genius move? Or is it misplaced hope? Contributor Megan Hannay takes a look at what it means for marketers and online publications.

medium-com-logo2-1920Online advertising, and especially its bulky older brother, “programmatic,” are darlings of the digital marketing world. Even folks who typically focus on the content and SEO side are dipping into the implications of bot-driven ads.

The ability to deliver highly targeted display ads and sponsored content to key consumer segments, with (literally) super-human speed and precision sounds like the data-driven answer businesses have been waiting for since the dawn of “personas.”

But what if there’s something wrong? Not with programmatic, but with the system itself: the vehicle on which ads arrive on consumers’ desktops and phone screens?

For many niche and local publications, plans for profitability already feel tenuous; if a startup with $132 million in the bank and a network of incredible talent can’t foresee sustainability in digital ads, what do the next few years look like for the little guys?

The Medium move

Earlier this month, Ev Williams, the founder and CEO of Medium.com, announced the platform’s pivot from ads and sponsored posts to an as-of-yet-undisclosed (perhaps even undetermined) revenue generation model. Williams titled the post “Renewing Medium’s Focus,” and after announcing a layoff of about a third of Medium’s staff, he went on to explain his company’s shift:

 Upon further reflection, it’s clear that the broken system is ad-driven media on the internet. It simply doesn’t serve people. In fact, it’s not designed to. The vast majority of articles, videos, and other “content” we all consume on a daily basis is paid for — directly or indirectly — by corporations who are funding it in order to advance their goals. And it is measured, amplified, and rewarded based on its ability to do that. Period. As a result, we get… well, what we get. And it’s getting worse.

By “what we get,” it’s not clear whether Williams meant clickbait, fake news or thinly written content with shameless product plugs, but it’s likely he was referring to all of the above.

So what happened? How did the internet, which has the power to reach a few billion more people than any individual print publication can, result in an unsustainable profit model for content publishers?

How digital ads ‘broke’ publishing

Advertising is always a little gimmicky. We know the hamburger in the ad isn’t the same hamburger you’ll get via the drive-thru window. But banner ads and, specifically, the page view numbers that determine their rates have brought the gimmicks to the content these ads share screen space with.

As academic journalist Frederic Filloux commented in his “Monday Note” column written after the Medium announcement, “In reality, there is absolutely no correlation between editorial quality and the revenue it brings…” Filloux explained that a 500-word local news piece is given the same rate as a many-thousand-word in-depth investigation into a foreign war.

This shift has encouraged outlets to embrace clickbait, meaning visitors to traditional media sites are confronted with the types of sensationalistic headlines that were once left for entertainment news publications: fear-provoking video clips, alligators, an irresponsible truck driver, weight loss tips and CEO “freakouts.”

Screenshot of weather.com, taken January 16, 2017

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Display ads have cornered publishers into appealing to readers’ most base interests, at best, to generate more clicks. At worst, it’s also contributed to the rise of fake news.

What’s next for online publications?

1. We’ll all wait for programmatic to get better

Maybe the problem is that the technology isn’t quite there yet. We’re only just starting to get systems that can follow anonymized users from desktop to mobile device. A few years down the road, or more, we could potentially get to the point of complete synchronicity between consumer and advertiser.

Imagine ads that predicted your wants and needs to the point that they were mostly useful, instead of pretty much always annoying. While browsing a news article: “Oh yeah, I did mean to order more toothpaste, and this brand’s offering a BOGO deal.” Click. Toothpaste order sent. While streaming a video: “I do still need to book a hotel for my summer trip, and that Airbnb looks amazing.” Click. Home added to Airbnb wishlist. 

If we can eliminate ads users don’t want and streamline programmatic to the point that almost every ad is seen as an assistant, rather than as an intruder, then, at the very least, ad blocking could potentially decrease, and the friction between a publication in need of funds and its readers would be relaxed, potentially encouraging more outlets to increase their ad services.

2. Some publications will resort to clickbait for the greater good

Consider the Jekyll and Hyde that is BuzzFeed. Celebrity gossip mag? President-elect challenger? Or investigative news outlet? While primarily funded by more viral fare, the site uses some of its revenue to fund investigative hard news pieces.

BuzzFeed has also branded itself as a viral native advertising outlet for its customers. You can’t go programmatic with BuzzFeed (at least until native orders go automated), but you can pay their team to develop a branded listicle and place it on their site.

This model is still being tested, but if BuzzFeed continues to dominate in terms of traffic and popularity, it’s likely that more publications will continue to mimic its style.

3. Publishers will find other ways to make money

Via data

In a recent digital media exec “confession” piece, a Digiday interviewee complained, “Every publisher is trying to be an ad agency and every ad agency is trying to be a data company.” The executive’s point was that agencies are not highly profitable, and they shouldn’t be business goals for failing publications. But the advice also can be seen as encouragement for publications to skip the middle step and head straight to data.

 

read the rest of the column here…

 

Some opinions expressed in this article may be those of a guest author and not necessarily Marketing Land. Staff authors are listed here.