The Problem of Media Economics: Value Equations Have Radically Changed

Entering 2009, the future of media is undoubtedly a quandary, with no end of head-scratching across the industry. As with everything these days, it seems that it all comes down to radically changing economics. There are way too many conversations about the future of media, news, journalism, etc. going on out there that don’t reference economics, so I’m going to kick off the year with two personal anecdotes that illustrate the problem of media economics.

Last weekend, my wife and I wanted to watch Becoming Jane, because we’ve been on a Jane Austin kick. We watched Pride & Prejudice the night before (highly recommended). We subscribe to Netflix (NFLX) DVDs, but we hadn’t ordered the movie, and we didn’t feel like waiting. I went to Apple (AAPL) iTunes, and it was available for purchase for $15, but not for renting (for $3 or $4). Amazon (AMZN), same deal, not on their video on demand service, just the DVD for $15.

I checked out Neflix’s Video on Demand offering and found that we don’t have the right hardware (nor do we have the required “unlimited” subscription). Hulu, well, they’re making progress on movies, but it’s mostly old stuff. Video store — the Hollywood video near us is an empty shell — and I can’t remember the last time we got into a car to rent a movie.

So here we were, ready to spend $4 even $5 dollars on content, and nobody would take our money. Seriously.

So that $5 stayed in my wallet. No sale. No revenue. Nothing. We didn’t end up watching a movie.

Here’s another story.

Over the holiday, we helped some relatives post a listing for basement apartment on Craisglist. They had already listed the apartment in the newspaper, but they responses had been entirely from older people — 70s and even 80s. They had been looking for a young professional (it’s a steep staircase down to the apartment). And the responses had been coming in slowly. The apartment remained unrented.

We posted the apartment listing on Craigslist, and over the next few days they were flooded by phone calls, mostly people in their 20s. In less than a week they had rented the apartment to a public school teacher who had been living at home and was looking for her first place.

So they were able to achieve for free on Craigslist what they couldn’t achieve by spending money in the newspaper.

To me, these two incidents represent media value equations that have radically changed. It seems that most media companies still haven’t figured out how to adapt to or even understand the changes to the fundamental exchange of value in media.

Some of that stems from a failure to understand legacy media economics.

People ask why no one wants to pay for news anymore, referencing the decline in newspaper circulation, when in fact that misrepresents the value equation. People were paying for newsPAPERS, which contained a lot more than news, and they were also paying for newspaper delivery, which is a service.

For all those people searching for apartments on Craigslist, the value equation for their local newspaper has fundamentally changed. They may still value local news, but some of the highly valuable information that used to ride along with the news has been removed, which changes the equation.

It’s not that no one wants to pay for music or movies, it’s that increasingly we want to pay for content when, where, and however we want. We’re willing to pay for the convenience of video on demand, but the service isn’t always being offered. Digital technology has put content producers in the services business, but they don’t yet fully understand that value exchange.

New business models for media require entirely new exchanges of value — it’s not about finding new ways to balance the old equation.

Comments

[J.P. Hannan:]

Two great examples of how media has changed. It all comes down to relevance and actionability.

Younger people no longer think to look at newspaper classified ads for their primary source of help wanted, apartments, and for sale by owner simply because print classifieds are not actionable in a point and click world. Hence, the audience there has atrophied to a much older demographic, and subsequently, the content is no longer relevant to that younger demographic. It doesn't mean there isn't a business model there to cater to classified needs of older readers, but the one size fits all wide audience model is gone.

The Netflix story just shows how media has gone from being a sit down meal to Vegas buffet. We pick and choose as we desire, again seeking relevance but we also want it all within reach when we choose to load the plate- we want it actionable. This is a tough order to fill, but media companies now have to be ready, fully stocked and open 24/7, 365 days to keep them coming back.

Jan 07 05:19 AM

[The Good Ne...:]

Scott,

Great examples. This re-arranging of the value chain in media represents a huge opportunity for those entrepreneurs willing to invest the time to understand and business sense to monetize their understanding.

For those new businesses and business folk that get it right, it will be nothing good news.

GNE

Jan 07 01:29 PM

[Jason Rines...:]

Bingo. Here's a more personal story in this regard: Businesses want sales leads. That NEVER changes. But the market of 2001-2005 gave contact records that could have been yanked out of the phone book to pass as 'qualified leads'. It was tantamount to fraud. The market prices for this quantitative model was around $20 a lead.

I went the other direction as CEO of a marketing business. I demonstrated a spreadsheet in 2005 to Higher Ed sector how sales conversions with 100% true purchase intent would yield 2 1/2 times the profit of the quantitative model, even with the lead cost being triple, $60.

I proved the model but had to be patient for the market pyschology to change and a catalyst. I prepared in 2007 for the same quality model in Healthcare market. Q4 2008 market accepted the value proposition but the turmoil had middle marketing management running for personal hedges.

Now we are VERY busy already as there is no competion of marketers willing to share the risk. We get paid when our clients make profit. Imagine that, a value proposition.

Last point: If your an entrepenuar attempting to raise money you had best learn how to give a presentation in 10 minutes of how to make money for your investors. Focus on market problem, market solution, management team and competition. Know numbers of how to make profitability and presenting that rather then how your airplane flies and putting potential investors asleep.


On Jan 07 01:29 PM Good News Economist wrote:

> Scott,
>
> Great examples. This re-arranging of the value chain in media represents
> a huge opportunity for those entrepreneurs willing to invest the
> time to understand and business sense to monetize their understanding.
>
>
> For those new businesses and business folk that get it right, it
> will be nothing good news.
>
> GNE

Jan 07 04:25 PM

[Robert H. H...:]

* "To me, these two incidents represent media value equations
* that have radically changed. It seems that most media companies
* still haven’t figured out how to adapt to or even understand the
* changes to the fundamental exchange of value in media."

* "Some of that stems from a failure to understand legacy media
* economics."

I think media companies understand very well the "changes to the fundamental exchange of value in media." And they almost certainly understand their legacy economics. What is widely misunderstood (outside the large media companies) is that the legacy value of a particular unit of "content" -- "Becoming Jane", for example -- is largely determined by high tightly the content owner can control its distribution.

In all likelihood, your inability to rent "Becoming Jane" online is a result of Disney's agreement to provide DIsney/Buena Vista releases exclusively on Starz for a prescribed period of time. (For more information, although not much, since " the terms of the settlement preclude any public comment." see www.multichannel.com/a...)

This agreement supplies Starz with a steady stream of movie titles and Disney with the ability to pre-sell a multi-year release slate to a premium cable movie channel. Back in the day before Amazon, Netflix, Roku, Vudu, TiVo, etc. these exclusive deals served to create islands of value for Disney, Starz and your cable or satellite TV provider. Today, these exclusive deals largely serve to frustrate consumers who expect to find all content readily available on-demand for rent or purchase.

There is a lot of infrastructure being supported by legacy video distribution channels, including your local multiplex, local retailers who sell DVDs, your Blockbuster store and the premium movie channels to which you might subscribe. Hollywood will not (and in some cases cannot) unwind this thicket of distribution channels and release windows and their associated infrastructure overnight. There are legal, economic and infrastructural obstacles, but overall is the fear of exchanging "digital pennies for analog dollars" in Jeff Zucker's memorable phrase.

I think the folks at Disney understand that you can either watch "Becoming Jane" or something else or nothing at all on Saturday night. What keeps them up at night is the impact on all those other distribution channels when your expectation of going online and instantly renting the title from the cheapest provider becomes a reality.

Similarly, I think newspapers fully understand what online news and classifieds are doing to the newsPAPER business. But it's not as simple as saying "let's just reduce the cost of a subscription by the cost of the newsprint and supply the paper exclusively online." In the good old days, the only way to get your morning dose of in-depth international news was the newspaper. And it came bundled with local news, TV listings and classified ads, which you paid for even if you didn't care about the local news that day, or used TV guide to decide what to watch on TV, and weren't currently in the market for a used car or new job. Bundling content you really want with content you want less passionately is a time-honored way of optimizing revenue and allowed the newspaper to provide a paper product that satisfied the various and shifting needs of a large community of diverse readers. It also conveniently supports the press room, printing plant, truck-drivers, newsstands and paper-carriers who make up the distribution chain. Finally, the resource commitment and the attractive marginal economics led to oligopoly or monopoly market structures in many cities. For these reasons, I recall a time when Warren Buffet himself thought newspapers were one of the world's greatest businesses.

A consumer's ability to disaggregate news sources -- international news from nyt.com, local news on sfgate.com, classifieds on craig's list -- unravels the local newspaper's bundling strategy. And the shift to online consumption undermines the physical and human infrastructure involved in the delivery of the paper product, leaving the local newspaper with stranded costs.

Again, I think the newspaper companies understand this phenomenon all too well. The challenge is how to surrender the surplus economics associated with bundling content and physical delivery before an obvious economic model based on unbundled, digital delivery has emerged to cover the costs of newsgathering.

So while it's undoubtedly true that many major media companies are struggling to ADAPT to "new" media economics, I believe most of them fully understand the issues. And the fundamental issue is that much of "content" economics have historically been related to effective restrictions on the channels of distribution. "New" media economics may be simply be synonymous with "lower" media economics. Like most businesses, media companies and their shareholders will struggle to cope with lowered expectations.

Jan 13 02:16 PM