SCN: Web content

[Steve]

x-no-archive: yes

===========================

Just ran across this posting from the early days of Slate - still looks 
pretty accurate...

===========================

The crazy economics of Internet content

by Nathan Myhrvold 9/19/96

(Slate)---Content is king on the Internet--or that's what people say. 
But the business of supplying Internet content--the business of 
Slate, among others--is more like Prince Charles at the moment: an 
iffy, wannabe king. 

The business faces two obstacles. First, it has no model for 
collecting revenue: It lacks even a plausible theory of how it can pay 
for itself. Second, the business must overcome a peculiar crisis of 
confidence: not because confidence is too low, but because 
confidence and expectations are far too high to be sustainable. 

Of all the problems a business may face, the lack of a revenue 
model is a rather surprising one. How could an enterprise that lacks 
a way to finance itself even be a business? It's as if biologists 
discovered a population of animals that have no way to reproduce. 

Yet, if you start clicking your way around the Internet, you find scads 
of content with no viable economic model. How did it get there? 
Vanity is one explanation, along with its complement, voyeurism. 

The Internet is the ultimate vanity-publishing medium, and therefore, 
the ultimate place for those of us who like to watch. The Internet can 
reach an audience at lower cost than any medium before it. It's an 
ideal outlet for personal vanity (I confess to a personal Web site 
myself). It's likewise ideal for the dissemination of material by 
individuals and groups with various axes to grind. 

And then there's corporate vanity and promotion. Anybody who can 
afford a box of business cards can afford a Web site. Any company 
with an 800 number can move its services to the Web for peanuts 
by comparison. The extreme case of corporate promotion is to strip 
away all other aspects of your business and sell goods or services 
via the Net alone, as amazon.com has done with books.  

In each of these cases--which cover most of what's on the Web right 
now--the economic dynamic is the same: Content is chasing 
customers, not visa versa. (No one but I was hankering for me to set 
up my personal site.) In each case, the content needn't pay for itself 
because the creator has an ulterior motive. There's no denying that 
perusing this material on the Net can be fascinating, at least for the 
moment. But as the medium matures, the fascination will fade. 

All this stuff has its equivalents in the traditional print medium: self-
published poetry, thick foundation studies, annual reports, 
brochures, catalogs, and so on. It would be a dull world indeed if 
that's all we got to read. 

The older media of print, radio, TV, music--all kinds of intellectual 
property, really--are based on the premise that the creation of 
content should, at the very least, be economically self-sufficient and 
ideally, be profitable. This premise is what produces quality content. 

Time magazine wouldn't have anything like its current resources if 
the editor and a few buddies put it out as a hobby. We pay for 
content that we like, and we like the content we pay for. It's a lot 
more satisfying to pay $7.50 for Steven Spielberg's next epic than it 
is to watch my home movies for free. Even for me.   

There is no lack of content claiming to be this sort of Grade A 
material on the Internet these days. In fact, Slate claims to be an 
example. But precious little of it is self-supporting. And the 
economic question is how quality content can become self-
supporting, because otherwise, it won't survive. 

This key question has been obscured by how fast the Internet is 
growing. Growth for its own sake can be mesmerizing. Millions of 
people already have personal computers. Getting on the Net is 
relatively simple for these folks--all you need do is agree to a free 
trial offer. Plus, you have the old peer-pressure thing going. If your 
friends all have e-mail, you need it too. Once everybody is talking 
about the Internet, you'll feel like a fossil unless you get with it too--
hell, everybody's doing it. Go ahead and inhale. 

The astounding growth in users (estimated at 20 percent a month) 
stimulates growth in the sort of content that chases them, ensuring 
the newbies have something to see. The cost barrier is higher for 
setting up Web pages than it is for using them, but it is trivial 
compared with the noncyberspace equivalents.   

To understand the challenge of getting people to pay for Internet 
content, imagine trying to sell subscriptions to HBO back in the 
1950s. People were still fascinated with the sheer miracle of 
television. They clustered around their primitive sets to watch the 
damnedest things (Milton Berle for instance). 

Before people would pay money for premium content, they had to 
get so bored with TV that they'd say, "Damn it, there's nothing on I 
want to watch!" Yet, they'd also have to be so addicted that it 
wouldn't occur to them to turn the machine off. This transition didn't 
really occur until a large part of the adult audience consisted of 
people who had grown up with TV. Folks who met the TV as adults 
would never have as strong a relationship with it--they had other 
hobbies--they knew, for example, how to read.   

Why pay a fee for Internet content when a million free sites are just 
a click away? There's no incentive until people are too addicted to 
the Net to turn off their computers, yet are bored with what's 
available. In the very long run, addiction and boredom seem as 
inevitable as death and taxes, and user fees will then be viable, at 
least in some cases. 

Customers who pay for some specialty sites may come sooner, but 
the mainstream is apt to be slow--exactly how slow is hard to 
predict. A year? Five years? Must it wait until a generation has 
grown up with the Web? Maybe not, but there is no reason for the 
transformation to happen on the same rapid time scale that users 
join the Web or free sites proliferate. Not everything happens in 
"Internet time" or is destined to explode at 20 percent a month. The 
timing isn't driven by technology and how fast we adopt it--it is about 
shifts in human behavior. 

Advertising is the other Holy Grail for Internet-content revenue. The 
TV analogy seems more cheery in this case--at first. Companies 
selling everything from soap to pickup trucks pump billions a year 
into television. Before TV, these same companies were big 
advertisers in other media. Burma Shave, for example, was a strong 
brand based on cute little roadside signs. 

The transition to TV transformed consumer-product marketing, and 
changed the rules. Poor Burma Shave stuck to its signs and lost its 
pre-eminent position, and many of the national brands that we know 
today rose to prominence. But the shift took decades. 

In order for Internet advertising to become a big revenue source, 
consumer-product companies must decide to put billions of dollars 
into Net advertising. There are only two ways to do that--shift money 
away from other media, or substantially increase the ad budget. 
Both things happened with the arrival of TV. Newspaper ads are 
down by about 50 percent from 1950 levels (in constant dollars) 
mainly because national ad accounts were lost to television. 
Consumer-product companies also spend a larger share of their 
revenues on all sorts of ads now than they did before TV.   

Over time, as marketing executives learn to use the Internet 
effectively, they will shift billions to it. Companies that sell directly 
on the Internet save money compared with retail stores and, 
ultimately, will pass some of those savings back as increased 
advertising. 

How long before this adds up to billions? Once again, it is hard to 
say. But there is no reason to think that corporate spending 
decisions must happen in Internet time. Indeed, there is every 
reason to think they won't. 

Why play this crazy game in the meantime? Visions of sugarplums 
dance in our heads. If you start early, you might make zillions later. 
This logic is sound, and can sensibly justify businesses that lose 
money in the short run. 

Alas, the same logic is also behind financial disasters. Investors 
see wild 20 percent-a-month growth in one area of the Net, and 
proceed, willy-nilly, to project revenue and profit for content, 
forgetting that it is gated by fundamentally different forces. 

Rising expectations soon take on a self-fulfilling life of their own, 
fueling new waves of speculation. Early entrants make out like 
bandits, and nobody wants to be left behind. Meanwhile, the 
resulting overinvestment only makes the economics worse, as too 
few paying customers and ad dollars are chased by too much 
desperate content. 

The gap between wild expectation and sober reality may be a bump 
in the road, or it may be a Grand Canyon-sized chasm. Predictions 
of an Internet wipeout seem overblown, because e-mail and free 
content are perfectly sustainable. Still, the word that usually goes 
after "manic" is "depressive," and this cycle may well be played out 
for Internet content companies. In the long run, the fundamentals 
seem good. But how long is that?   

Copyright 1996 Microsoft Corporation





* * * * * * * * * * * * * *  From the Listowner  * * * * * * * * * * * *
.	To unsubscribe from this list, send a message to:
majordomo at scn.org		In the body of the message, type:
unsubscribe scn
==== Messages posted on this list are also available on the web at: ====
* * * * * * *     http://www.scn.org/volunteers/scn-l/     * * * * * * *