Why the Internet Still Doesn’t Have a Business Model For Content

Boston Globe TruckTimes are tough for media companies. One newspaper after the other slides into bankruptcy, and most other sectors of the media industry are suffering too. This recession seems to hit media companies harder than expected as consumers migrate to the Internet and advertisers are cutting their budgets more than ever.
Most media companies still hope that revenues from their new digital channels will replace much of the lost sales volume in their traditional businesses. But so far, digital revenues have stayed far below expectations. It looks like “digital pennies” are replacing “analog dollars”, as NBC CEO Jeff Zucker recently put it.

Why is there still no really viable business model for content on the Internet? All the big Internet success stories — Google, Amazon, eBay, Facebook … — are based either on commercial transactions or on context-creating technologies, i.e. services that help users make sense of the vast jungle of information on the web. There are a few somewhat successful web-only content plays — the Huffington Post comes to mind — but their size and profitability is very modest compared to the kings of the Internet.

I think the biggest misconception in this discussion is that traditional media companies are all about content. They’re not.

The most important (and expensive) asset that a media company has is its distribution channel(s). It costs hundreds of millions to build and run the production and distribution infrastructure of a major newspaper. TV networks are even more expensive, and even somewhat simpler media like radio require very large investments.

It’s actually interesting to talk to owners of regional newspapers after a glass of wine or two. Many still see their companies primarily as a printing business. Their newspaper is just a monetization strategy, and the content they distribute is just an input factor they need to attract advertising. But the core of the business and the real pride of its owner is typically the printing press and the capability to bring printed matter into every household in their area.
The huge capital outlay for distribution is the main barrier to entry in the media industry and the reason why so many traditional media companies enjoy a cushy oligopoly or even a regional monopoly. Of course there are some companies that produce content independently of a distribution network — independent movie producers or record labels for instance. But these smaller companies often struggle to survive or have to enter into agreements with a big distributor.

In other words: For traditional media companies, content is just the bait. The real, defendable and profitable business is in distribution.

The Internet is fundamentally different. There are no comparable barriers to entry for content producers. Content distribution on the Internet is almost free. Sure, the infrastructure in the background still costs many billions, but this cost is shared by so many participants that access to the net is affordable for everybody. Every Internet user is not only a consumer, but can be a producer of content, even if it’s just one Tweet at a time.

The result is a huge abundance of readily available content. Of course, much of it is of terrible quality, as you can immediately tell from a brief visit to Youtube. But there’s more great stuff out there — literally just one mouse click away — than a single human being could possibly ever consume.

Since distribution is not a barrier anymore in the digital age, the only way for a media company to differentiate itself is through the superior quality of its content (and maybe through its brand, but that’s secondary). Unfortunately, that’s not necessarily the core competence of old media. Let’s be honest: How much of the stuff that you get on TV or read in a newspaper is really, truly great? Exactly. Not that much. The main reason we put up with inferior content in old media is because it’s more complicated or expensive to get to the really good stuff. That’s not the case anymore on the web.

But even for producers of really great online content, it’s difficult to stand out and get compensated for their work. For several reasons, both cultural and technical, it’s difficult to charge people directly for web content. And the volume of Internet advertising still hasn’t reached the level it would deserve given today’s consumer behavior. There’s another simple reason for this: Advertising agencies (in particular their media arms) don’t have a real incentive to sell Internet advertising. They make far more money pushing TV and newspaper ads.

Media agencies are a bit like financial advisors: Theoretically, they only have the best interest of their clients in mind, but in reality they will of course always prefer to sell the products that give them the highest commission. At some point, online advertising could grow to a point where it can finance many more content sites, but it will take a lot of time to overcome the ad industry’s inertia.

Until then, the way to profitability will be to try to control content distribution even under the particularly difficult circumstances of the digital world. Interestingly, a technology company (not a media conglomerate) has managed to do this for music: Apple with its iTunes store. And another tech company is trying the same for e-books: Amazon with its Kindle e-book reader. Both companies are following a similar strategy: Control the whole chain from content licensing to the end-user device — not the content itself, but its distribution. Old media companies have failed with similar projects because rivaling conglomerates were never able to agree on a common platform. Old rivalries sometimes destroy new opportunities.

To summarize: The Internet doesn’t have a business model for content because the world of old media didn’t have one either. The media industry has always extracted its profits from the control of distribution channels, not content itself. And it’s unfortunately not clear yet what will replace this model on the open Internet.

6 thoughts on “Why the Internet Still Doesn’t Have a Business Model For Content”

  1. This definitely is an example of excellent digital content. Now control its distribution and be the king… 😉
    Thanks for reorganising my mind on this topic.

    And: “The main reason we put up with inferior content in old media is because it’s more complicated or expensive to get to the really good stuff. That’s not the case anymore on the web.” I think this is quite good news. To summarise, one could say in the web we could have a better incentive system for producing great content because that content is easier to find. D’accord?

  2. I like your thesis! But I dont agree with it to 100%.
    1) The brand is build on matching quality of the content with the target group (and marketing). Having a wildely known brand is existential for the internet -when we are talking mass media.
    2) Content itself doesnt aggregate revenue. Its distribution to the man does. So, imo, the old media has to rethink its distribution channels and adapt its corporate structure to the new situation. The business model stays the same. It should evolve but not change.

    PS: Sorry for my bad english!

  3. Like Prof. Dr. Dueck of IBM is always saying: “An old technology has to die first before a new one can succeed.” So true!

    Let’s wait for the old media to die.

    Although this won’t solve the problem that the new media will face difficulties in monetizing due to the (as you mentioned) lack of a distrubution barriers and therefore wide split of revenues.

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