Media Execs: To Grow Online Ad Revenue, Discard Old Business Models

by: Jeff Jarvis

I was talking with a media exec who started a blog ad network — bless him — but who I thought was taking too high a share of the revenue: at least half. That’s a natural reflex, perfectly understandable: Get what you can. Other networks do that. But the problem for me is that by taking too much, he excluded me from the network — I’m sticking with BlogAds, which takes only 20 percent — and the problem for him, then, is that this slows the growth of his network and a smaller network is a less valuable network. He understands this will because he’s a smart media guy. He wants a large network.

I was actually just trying to channel the network wisdom of Yochai Benkler, author of The Wealth of Networks, and Tom Evslin, who had talked about how to grow networks at a Union Square roundtable about collaborative production more than a year ago. I wasn’t sure I was getting it right, so I went to Evslin’s blog and asked him for a reprise, which he has just provided, brilliantly. I’ll summarize:

The first counterintuitive lesson: Companies that build large networks on the web don’t charge users what the market would bear; they charge as little as they could bear. That is how they maximize growth and value for everyone in the network on top of the platforms they provide.

In his blog post, Evslin takes this a step farther, pointing out that if you run a network that depends on scale, such as an ad network, then the more pages you have to sell, the bigger and better advertisers you can attract and the more you can charge. So if you take a smaller commission for each ad in the network, more sites will join it with more pages, which can now be sold at a higher value.

It gets even more head-scratching: Evslin argues that if you are too profitable, then you will attract competitors who will undercut you and steal market share. “If you’re doing well but running at or close to breakeven,” he explained, “you’ve made it impossible for anybody to undercut you without running at a deficit, which is hard to get funding for.”

So, to sum up: Take the minimum value out of the network to make it grow to maximum size to enable its members to charge more for their value while keeping costs and margins low to block competitors.

That’s not how old networks operate. Cable companies wrap their wires around you and squeeze maximum fees out of you. Ditto phone companies, newspapers, and retailers. But they all face competition from next-generation networks.

Craigslist is the Evslin poster child. It forgoes revenue for most listings in most markets—charging just for job ads and for real estate in a few markets—and that turned it into the critical-mass marketplace for most listings. “If Craig now attempted to maximize revenue by charging for a substantially higher percentage of ads, a door would be cracked open for competition,” Evslin writes. “There is no chance at current rates for a competitor to steal Craig’s listings (and readers) by charging less.”

I’m writing about the network model in the book and this will also be a key topic of discussion in our event at CUNY on new business models for news; that’s why I’m talking about it.

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